Navigating the Complexity of Scope 3 Emissions
Developing Strategies for Conquering the Most Challenging Emissions in Manufacturing Today
We read about Greenhouse Gas Emissions (GHGs), Corporate Carbon Footprints and the overall journey towards Net Zero almost every day. Many companies now have entire departments and/or executive direction to achieve some lofty goals on sustainability. However, what we hear most from our customers, partners and prospects is that the Scope 3 emissions are by far the most daunting.
Scope 3 emissions, in the context of corporate sustainability, refer to indirect greenhouse gas (GHG) emissions that are associated with a company’s activities but occur from sources not owned or controlled by the company. Unlike Scope 1 and Scope 2 emissions, which are directly generated from a company’s operations and energy use, Scope 3 emissions are more challenging to identify, quantify, and manage because they encompass a broad range of activities across the entire value chain, including suppliers, customers, and end-of-life product disposal.
To understand the magnitude of harnessing Scope 3 emissions, it’s necessary to understand all three categories. So, let’s take a quick look at Scope 1, 2 and 3 emissions.
The three scopes are as follows:
Scope 1 Emissions
Direct emissions from sources owned or controlled by the company, such as on-site combustion of fossil fuels or emissions from company-owned vehicles.
Scope 2 Emissions
Indirect emissions from the generation of purchased electricity, heating, or cooling consumed by the company.
Scope 3 Emissions
All other indirect emissions that occur in the value chain, including both upstream and downstream activities. Scope 3 emissions are further lumped into up to 15 different categories depending on the source reference (e.g., purchased goods and services, transportation, waste generated, etc.).
Scope 3 emissions can include a wide range of activities and sources, such as:
- Emissions from the production of raw materials and components used in the company’s products (e.g., emissions from steel, rubber or plastics production for an automobile manufacturer).
- Emissions from transportation and distribution of products to customers. So, all of your company cars, transport vans and heavy haulers.
- Emissions generated by the use of the company’s products. This sounds a lot like the previous point, but is vastly different. Emissions from your company vehicles for distribution is limited to your owned or leased assets that move people/products to and from your locations and destinations. Emissions generated by your products include the lifetime emissions from use. A good example is a car manufacturer. The product emissions include the use of the vehicle over its lifespan. So, a luxury sedan that stays on the road for 15 years, is essentially “taxed” for GHGs for that entire product life. This is a double-edged sword as the higher quality, longer life vehicles will tally much higher emissions for the manufacturer.
- Emissions associated with the disposal and end-of-life treatment of products (e.g., recycling, landfilling).
The Importance of Scope 3 Emissions in Corporate Sustainability
Scope 3 emissions are crucial in the context of corporate sustainability for several reasons:
- Comprehensive Impact: They often represent the largest portion of a company’s total GHG emissions, especially in industries with complex supply chains. We at Heartland partner with many manufacturers from plastics to building products to automotive, and we see firsthand how unnerving the Scope 3 landscape can be. It’s not uncommon for a firm to see 70, 80% or more of their total emissions classified as Scope 3, in fact, one partner has shared that over 90% of their emissions are not only Scope 3, but are comprised of their raw material spend!
- Responsibility and Accountability: Companies are increasingly held accountable for the emissions associated with their products and services, even if those emissions occur outside their direct control (Case in point, the emissions generated by your products over their lifetime).
- Supply Chain Management: Managing Scope 3 emissions requires extensive collaboration with suppliers and customers to reduce the carbon footprint throughout the entire value chain. Much more on this later in the article.
- Sustainability Goals: Many companies set ambitious sustainability goals, and addressing Scope 3 emissions is essential to achieving these targets and demonstrating commitment to environmental stewardship. We encounter this quite a bit, as those ambitious goals are set with only a firm understanding (and outlined programs) for Scope 1 and 2 emissions only. We work with many manufacturers who did not know the extent of their Scope 3 emissions when setting those lofty goals!
Why So Challenging?
Managing Scope 3 emissions can be challenging due to factors like data availability, data accuracy, and the need for collaboration with multiple stakeholders. Think about this – if you purchase raw materials from two-step distribution (very common in the U.S.) you need to account for not only the raw materials emissions (polymers, metals, mined products, etc.), but also the logistics emissions to get them to your dock. If a material such as magnesium is sourced in China, then the effort to dig, transport, store, package and distribute all contribute to the Scope 3 emissions, and if you purchase this material, you also inherit the total GHGs associated. This means you need cooperation and accurate emissions reports from every link in the supply chain!
For this to work, then companies need to work closely with suppliers and partners to collect and analyze relevant emissions data and develop strategies for emissions reduction. The challenge is that this requires all parties in the supply chain to not only participate but have parallel data collection methods to ensure accurate reporting.
This represents the main thrust of the challenge. Today, there are few standardized reporting systems in use on a wide scale. However, there are new products and services out there to help you in your Scope 3 efforts.
Here are some examples:
- Ecochain: Ecochain is a sustainability software platform that helps companies, including manufacturers, measure and reduce their Scope 3 emissions. It provides supply chain analysis and life cycle assessment (LCA) capabilities to assess environmental impacts.
- EcoVadis: EcoVadis is a platform that helps companies assess the sustainability performance of their suppliers. It provides a Supplier Sustainability Rating and covers various sustainability criteria, including GHG emissions. EcoVadis also publishes a annual Carbon Action Report that outlines in detail how their clients are using the service, and capitalizing on the results.
- PRé Sustainability: PRé offers software solutions like SimaPro, which enables manufacturers to conduct life cycle assessments and calculate carbon footprints. It can be used to assess Scope 3 emissions associated with products.
- EcoAct Carbon Intelligence Platform: EcoAct offers a platform that helps organizations measure and report their carbon emissions, including Scope 3 emissions. It includes supply chain assessment and reporting features.
- Thinkstep ANZ: Thinkstep is a life cycle assessment (LCA) and sustainability software solution that can help manufacturers analyze the environmental impacts of their products and supply chains, including GHG emissions.
- Carbon Trust Supply Chain Certification: Carbon Trust offers a certification program that helps companies measure and reduce their Scope 3 emissions. They provide tools and guidance to assess and manage supply chain emissions.
- Sphera: Sphera offers sustainability and EHS (Environment, Health, and Safety) software solutions that include modules for GHG emissions reporting and supply chain analysis. Sphera also offers very robust LCA data by product, industry and materials.
All of the above solutions show that there is a lot of attention getting paid to Scope 3 emissions, and GHG reporting in general. Each has a specialization that may align with your manufacturing business – the more specialized the solution to your operations, the easier and faster the process will be. However, be assured that you cannot simply “purchase” the solution and your Scope 3 challenges are solved. It will take time to coordinate the evaluation of emissions for your business, and the more complex your manufacturing operations, the more complex the examination of emissions will be. Scope 3 evaluations for manufacturers will include the following:
- Purchased goods – The main contributor here for manufacturers is raw materials and sub-assemblies. As mentioned above, some manufacturers measure over 70-90% of all emissions in their raw materials, especially with high-carbon materials like plastics.
- Purchased services – Typically not as comprehensive as goods and materials, but the emissions can include services like data centers and IT services.
- Transportation and distribution – Do you have a fleet of vehicles moving goods up and down the supply chain? Then the associated emissions need to be included as part of your Scope 3 reporting.
- Business travel and employee commuting – The pandemic of 2020-2022 showed us that employee travel could be negated somewhat, but these elements tie to our emissions.
- Waste generated in business operations – Another win-win scenario like business travel; by eliminating waste, we save operational dollars, and also reduce Scope 3 emissions.
- Leased assets and investments – If you operate a parent company, then all of the collective emissions from subsidiaries add up more emissions. Here again, operational efficiencies will contribute to your overall reduction of GHGs.
The Importance of Tackling Scope 3 Emissions for Manufacturers
- Comprehensive Carbon Footprint: Scope 3 emissions often represent a significant portion of a manufacturer’s total carbon footprint. Addressing these emissions is essential for a comprehensive understanding of the environmental impact of the company’s operations.
- Regulatory Compliance: Many regions and countries are implementing regulations and carbon pricing mechanisms that require companies to report and reduce emissions, including Scope 3 emissions. Tackling Scope 3 emissions helps manufacturers comply with these evolving regulatory requirements.
- Market Access and Customer Expectations: Increasingly, customers, investors, and partners expect transparency and sustainability from manufacturers. Demonstrating a commitment to reducing Scope 3 emissions can enhance the company’s reputation and competitiveness in the market.
- Supply Chain Resilience: Manufacturers are exposed to supply chain risks related to climate change and resource scarcity. Addressing Scope 3 emissions can lead to a more resilient and sustainable supply chain by identifying vulnerabilities and opportunities for improvement.
- Cost Savings: Identifying and reducing emissions often goes hand in hand with improving resource efficiency. Manufacturers can achieve cost savings through energy efficiency measures and waste reduction initiatives associated with Scope 3 emissions reduction efforts.
- Risk Mitigation: Manufacturers face risks related to climate change impacts, such as extreme weather events, disruptions in the supply chain, and increased operating costs. Reducing Scope 3 emissions can help mitigate these risks and enhance business continuity.
- Access to Green Markets: As sustainability becomes a focal point for consumers, manufacturers with lower Scope 3 emissions may gain access to green markets, eco-conscious consumers, and environmentally certified supply chains, which can open up new business opportunities.
- Investor and Financial Considerations: Institutional investors are increasingly factoring environmental, social, and governance (ESG) criteria into their investment decisions. Manufacturers that address Scope 3 emissions may be more attractive to ESG-focused investors and lenders.
- Innovation and Competitive Advantage: Investing in emission reduction technologies and sustainable practices can drive innovation within the company. Manufacturers that lead in sustainability may gain a competitive advantage and capture new markets.
- Long-Term Resilience: Climate change poses long-term risks to manufacturing operations. By addressing Scope 3 emissions, manufacturers can build resilience to climate-related challenges and ensure the sustainability of their operations over the long term.
- Global Reputation: Demonstrating commitment to sustainability and Scope 3 emissions reduction can enhance a manufacturer’s global reputation, potentially opening doors to international markets and partnerships.
- Employee Engagement: Employees are increasingly drawn to companies with strong environmental values. Tackling Scope 3 emissions can boost employee engagement and retention, contributing to a positive corporate culture.
A quick look at this list and it’s easy to see why Scope 3 emissions represent such a challenge compared to the relatively simple, power-based Scope 1 and 2 varieties.
Strategies for Manufacturing Supply Chain Collaboration
Alignment along our supply chain is absolutely essential, however, this is the most difficult, and most complex step. Manufacturers must develop partnerships and collaborations with all suppliers and customers, hence the attention to the terms “upstream” and “downstream” in Scope 3 nomenclature.
Developing partnerships and collaborations with suppliers and customers can significantly enhance operational efficiency, minimize costs, improve product quality, and drive innovation. In addition, by collaborating closely with one another, businesses can achieve heightened levels of agility and responsiveness to swiftly meet the demands of the market. By adopting a collaborative approach, companies can swiftly adapt to changes in the market and maintain a competitive edge. This proactive strategy enables businesses to stay one step ahead of their rivals and seize new opportunities as they arise.
Tactics such as setting emission reduction targets and timelines help your supply chain partners understand the roadmap towards sustainability. Along with creating data collection and management protocols, this will help forge your (and your suppliers’) emissions goals. We at Heartland have experienced this first-hand with manufacturers working with suppliers, logistics partners, packagers, resellers and even customers to create a synergistic emissions reduction program.
One of the key advantages of supply chain collaboration is its ability to foster trust among all stakeholders involved. We’ve seen co-implementing of robust data collection and reporting systems that all partners share in the cost and benefit of. Through open communication channels and shared goals, manufacturers can build strong relationships that enable them to collectively tackle challenges and seek mutually beneficial solutions. This will actually increase supplier engagement and encourage your suppliers to adopt more sustainable practices.
In addition to operational benefits, collaborating with suppliers and customers also opens doors for innovation and continuous improvement. By leveraging collective knowledge and expertise from diverse perspectives, organizations can drive product development, process optimization, and sustainability initiatives.
While it may be a complex endeavor requiring careful planning and coordination, the rewards of successful supply chain collaboration are substantial. Companies that invest in building strong partnerships with their suppliers and customers position themselves at the forefront of industry trends while fostering a competitive edge that drives growth.
It’s no secret that supply chain collaboration is a challenging task, but it is absolutely crucial for businesses aiming to excel in today’s rapidly changing market landscape. By effectively working together with suppliers, partners, and stakeholders, companies can gain a competitive edge and ensure their success in this dynamic environment. By nurturing relationships with suppliers and customers through open communication channels, trust-building efforts, enhanced visibility, innovation-driven initiatives – companies can unlock a myriad of benefits that ultimately contribute to their long-term success.
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