From large corporations to local businesses, companies worldwide are accelerating their transition to sustainability. Starting from implementing basic "good" practices to create awareness, large companies and emerging SMEs are now paying attention to their ESG scores, Scope 1 and Scope 2 carbon emissions. More and more are beginning to implement more ambitious and concrete climate actions.
Patagonia leads the way, by implementing the most radical solutions to reach net zero and protect the environment. A few examples: the “Don’t buy this jacket” ad campaign, closing stores between Christmas and New Year's Eve, or even making nature the first stakeholder of the company.
Even Amazon is investing in less carbon-intensive delivery solutions, slowly transitioning from van deliveries to cargo bikes where possible in New York.
However, despite all these efforts and awareness, companies often underestimate their carbon emissions and, therefore will most probably never reach net zero. In fact, the University of Amsterdam recently stated that: “at least tens of thousands of Dutch companies won’t achieve climate goals”. This is highly worrying as our window for action to contain global warming to 2°C is closing. Therefore, to accelerate the transition to a low-carbon economy, companies must pay more attention to emissions coming from their supply chains and apply effective methods to speed-up decarbonization.
According to the UN Global Compact, Scope 3 emissions account, on average, for more than 70 percent of an organization's carbon footprint, meaning there is increasing pressure to integrate sustainability and drive decarbonization in supply chains to achieve zero.
This Coolset Academy article will go over 9 effective methods to decarbonize businesses’ supply chains. Understanding these methods and frameworks is also crucial for SMEs without complex supply chains, as they will probably face pressure from customers willing to reduce their Scope 3 emissions.
How to prepare for net zero carbon emissions
Engaging in sustainability and achieving net zero emissions isn’t something that happens overnight, it is a long-term challenge. Like for any other long-term goal, this means business leaders need to build the right approach. Before diving into the 9 decarbonization methods to reduce supply champion emissions, let’s take the time to prepare.
Here are the 3 steps that will make all supply chain decarbonizations successful.
1. Gaining visibility over the supply chain
This first step is key to accelerating carbon reduction through a company’s supply chain. By understanding their supply chains, businesses can identify “quick wins” for decarbonization, implement the most effective methods and plan ahead for those harder to implement.
- Start by identifying your company’s Tier 1 suppliers. Tier 1 suppliers provide almost end-products or services to your supply chains. For instance, Continental is a common Tier 1 supplier of the automobile industry.
- Move down to Tier 2 suppliers (where Tier 1 suppliers source materials) and lower. Clearly identifying these companies and their activities will be more difficult, but you should assess what visibility you can get.
- Last step: group your suppliers. This grouping can be by sector, spending, emissions, or any other strategic metrics. Also, try to identify your key suppliers in terms of decarbonization opportunities.
2. Measuring scope 3 emissions throughout the supply chain
Scope 3 emissions (also known as supply chain emissions) are any indirect emissions that occur in a company's value chain that aren't covered by scope 2. These emissions result from the company's operations but come from sources it does not own or control.
On average, 70% of organizations' emissions come from Scope 3, meaning it is difficult for companies to directly understand their actual climate impact. Therefore, estimating Scope 3 emissions is vital to achieving net zero emissions. This helps understand where emissions come from and identify carbon emissions hotspots. This is where Coolset comes in.
Measuring one’s carbon footprint and, more precisely, Scope 3 emissions, can be a headache for SMEs. It often requires a lot of financial and human resources, to complete the manual process of providing all the necessary data and completing endless Excel sheets.
Coolset offers an autonomous carbon accounting platform, requiring minimal human input to measure any company Scope 1, 2, and 3 emissions.
Our data-driven carbon insights will identify emissions hotspots by suppliers or spending categories.
3. Setting a carbon reduction target
Once you have access to a detailed assessment of your company’s carbon footprint, you must set long-term and interim targets that will correlate with your sustainability action plan.
Some organizations like the Science-Based Target Initiative (SBTi) produce resources for companies to create zero-emissions strategies and set science-based targets, which is critical to align with the Paris Agreement and to take your suppliers with you in the decarbonization journey.
What is a science-based target? Emissions (GHG) reduction targets are considered 'science-based' if they are consistent with what the most recent climate science indicates is required to meet the Paris Agreement's goals of limiting global warming to 1.5°C above pre-industrial levels.
9 decarbonizations levers to make your supply chain sustainable
Your company may influence its industry: competitors look at which suppliers you source your products from or how you managed to succeed in certain markets, and your customers appreciate your values and pay attention to your company’s image.
Offer your suppliers the opportunity of benefiting from this spotlight. Condition some public recognition, like press releases, ad-campaign, or co-branded products, to carbon reduction achievements.
WARNING: Learn how to avoid unintentional greenwashing.
Business leaders and their teams who undergo at least a little training on sustainability usually achieve their goals at a lower cost while demonstrating more credibility with investors and talents.
Share resources and training materials with your suppliers and organize dedicated workshops to encourage them to build awareness.
Your suppliers probably work in a competitive environment and keep an eye on their competition. Provide them with a scoring system that compares their performances to their competitors’ on a carbon emissions basis. This will motivate them to implement a decarbonization plan to remain competitive.
Pay for performance
Offer financial incentives to your suppliers when they reach specific emissions reduction targets. Generally, financial rewards encourage more rapid decarbonization of the supply chain; however, it can take time to implement this method through large supply chains.
Longer term investment
Decarbonization is a long-term process, and companies won’t reach net zero emissions overnight. Therefore, providing long-term rewards and reassurance to your suppliers, conditioned by their decarbonization success is vital.
These can take many forms: direct investments in suppliers, joint ventures, preferential payment terms, or advance payments.
Decarbonization criteria in procurement
It is highly recommended that the Sustainability and Procurement teams work closely together to increase the chances of decarbonization success. This method perfectly embodies this principle.
Introducing a criterion into the supplier selection process that rates suppliers based on their carbon reduction achievements provide a clear incentive to decarbonize the supply chain. More than just encouraging suppliers to reduce their emissions, by making this practice widespread, you will ensure that your supply chain emissions will naturally decrease over time.
Mandatory carbon reporting
Requiring mandatory carbon reporting from suppliers, even in the absence of performance base contracts, is an effective way to set a high standard for climate reporting and decarbonization across the industry. It is an effective technique that needs to be more generalized.
After estimating the carbon footprint of your suppliers' products, apply a carbon cost that penalizes the supplier when their products are carbon intensive. This method shifts the responsibility for decarbonization to the suppliers and forces them to reduce their carbon emissions. However, it can be more challenging to implement.
Suppliers are encouraged to reach their decarbonization goals or face losing their contracts. If they fail to meet decarbonization requirements, terminate agreements with suppliers.
How to concretely implement decarbonization through your supply chain
Choosing the right decarbonization levers
Each decarbonization method requires different resources to implement and will vary in impact from the others. In addition, the impacts and ease of implementation will vary by industry. Knowing which levers to implement and when is crucial in transitioning to net zero emissions across the supply chain.
Because SMEs don't have the time and resources to experiment and find the right lever for them, here is a chart showing estimates of ease of implementation and impacts by decarbonization method:
To effectively reduce emissions through their supply chains, companies must implement the decarbonization methods from the green area as soon as possible. We observe that most of the levers from this area, “Easiest to implement, Most impactful” are procurement-related levers, reminding the importance of Sustainability and Procurement collaboration.
Methods such as "Upskilling" are considered "quick wins" because they are among the easiest to implement and build awareness and transparency throughout the supply chain, helping to build a solid foundation for future decarbonization.
Finally, companies should pay more attention to the harder-to-implement methods to plan ahead and anticipate how they will be implemented in the near future, as they are essential to achieving zero emissions.
WBCSD, PwC. “Incentives for Scope 3 supply chain decarbonization: accelerating implementation”. November 2022