To keep the global temperature increase to well below 2⁰C and meet the goals laid out in the Paris Agreement, everyone must take bold action to reduce their share of emissions as soon as possible. Companies are responsible for the majority of global emissions and therefore play an integral role in meeting these goals.
To date, over 400 companies have joined the Science Based Targets initiative (SBTi), committing to reduce their greenhouse gas (GHG) emissions in line with climate science. Over 100 of these companies already have targets approved by the initiative, and approximately 90 percent have scope 3 targets. Scope 3 emissions are all indirect upstream and downstream emissions that occur in the value chain of the reporting company, excluding indirect emissions associated with power generation (scope 2).
In this second blog in a series of two (see part one), we explore how companies can successfully achieve their value chain targets.
Addressing different scope 3 categories
Based on the criteria and guidance available, a company can first conduct a scope 3 screening to determine where the emissions lie in its value chain before setting targets. This process can reveal hotspots that a company was previously unaware of. Understanding the sources of these emissions can help a company know where to focus its reduction efforts.
According to CDP’s 2016 report, ***Tracking Progress on Corporate Climate Action***, nearly all emissions are either in category 1 (purchased goods and services) or category 11 (use of sold products). This is based on the modeled emissions of over 35,000 companies in 2014 (as shown in the figure below).
About 40 percent of the global GHG emissions are driven — or influenced — by companies through their purchases and the products they sell.
Using Supplier Engagement to Reduce Emissions
Following the SBTi’s updated target validation criteria, companies may address relevant upstream categories by setting supplier engagement targets. These supplier engagement targets commit the company's suppliers to setting science-based emissions-reduction targets. Setting science-based, as opposed to other types of GHG reduction targets, ensures that the targets are meaningful and that their ambition is in line with climate science.
The preferred order for types of targets is: absolute targets in line with approved methods by the SBTi, then intensity targets in line with approved methods by the SBTi or supplier engagement targets. Companies may set one or more of these types of targets to cover at least 2/3 of their scope 3 emissions.
Effective supplier engagement programs are usually directed to suppliers with a high emissions impact or, if this information is not available, to suppliers that make up a significant portion of the company’s spend. Some programs are obligatory and others voluntary, depending on the type of relationships the company has with its suppliers, and its purchasing power.
Companies can look to platforms that facilitate the data collection and engagement, such as CDP’s supply chain program. Resources such as the Sustainable Apparel Coalition’s Higg Index provide similar tools to assess supplier performance, albeit with an industry focus. Companies could apply these practices to their downstream emissions by having their customers set science-based targets, as well; although they may have less leverage with customers compared to suppliers. However, the door remains open for innovative companies to distinguish themselves as leaders and create best practices that others will follow.
For example, products that consume electricity have substantial potential to reduce emissions due to the expected decarbonization of the power generation sector. However, beyond those reductions, companies can illustrate innovative approaches to increase their product efficiency.
Science-based target setting is fast developing as a business norm. However, until it becomes one, the leading companies that set ambitious goals will reap the benefits of engaging with and managing their supply chain. Such companies are less susceptible to unforeseen disruption and climate risk. Analyzing the S&P 500 in 2014, CDP found that corporations that actively manage and plan for climate change secure an 18 percent higher ROI than companies that do not — and a 67 percent higher ROI than companies who refuse to disclose their emissions. These compelling figures suggest that addressing value chain sustainability will further contribute to corporate financial and societal success.
Navigant works with several companies to develop supplier programs and Science-Based Target strategies. It is currently working with the University of Utrecht and CDP to produce a white paper on mechanisms for reducing emissions through supplier engagement programs. If you have any questions please send an e-mail to [email protected] or [email protected].