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Understanding Carbon Emissions Risks Across the Supply Chain

November 20, 2023

Article

As your company strives to reduce its carbon footprint, you can’t ignore the supply chains that are part of your business. Reducing corporate carbon emissions gets plenty of attention, but what about all the production of purchased parts and materials that go into a company’s products and services?

All businesses must understand the risks associated with their carbon emissions — including emissions tied to all purchased materials — and the challenges of assessing them to remain competitive and maintain their reputation. It’s not enough to simply have an awareness of these potential risks; companies must also be proactive in managing them.

In this article, we will explore why understanding carbon emissions risk across the supply chain is so important and how to assess and mitigate these risks. We’ll also discuss solutions that involve continuous monitoring for product or materials changes, geographic impacts, and supplier investments to make informed decisions.

What is Carbon Emissions Risk, and Why Does It Matter in Supply Chains?

While many companies have made progress in greenhouse gas (GHG) reduction through internal programs, awareness campaigns, and more, most of those efforts address Scope 1 (direct emissions from controlled or owned sources) or Scope 2 (indirect emissions from the purchase of controlled energy) emission levels, as defined by the GHG Protocol.

Carbon emitted by suppliers is part of Scope 3 — all the indirect emissions that occur in the value chain of the reporting company, both upstream and downstream emissions. This area is often the most challenging for organizations in meeting their sustainability goals, but is critical to address, as supply chains often account for more than 90% of an organization’s total GHG emissions.

Such goals are increasingly important for meeting thresholds mandated by at least 40 countries, including the United States. But they’re also necessary to meet consumer demands:

78% of U.S. consumers prioritize sustainability in their purchases
69% of Canadian consumers expect companies to participate in solving sustainability issues
Over 80% of UK customers would pay 10% more for products that were considered sustainable.

Graphic showing scopes 1, 2, and 3 — the types of carbon emissions associated with an organization.

Image source: GHG Protocol report on Scope 3 accounting and reporting

Understanding Scope 3 Carbon Emissions

Scope 3 carbon emissions originate from activities outside of the direct control of a company, but they have the largest impact on operations for companies selling goods to consumers. These emissions come from energy use in the supply chain, manufacturing and processing of parts and materials, shipping and waste disposal. It’s important to understand these emissions in order to make informed decisions about how to reduce them.

Due to the lack of data, many companies have been reporting scope 3 emissions taking a spend-based accounting approach, meaning a certain amount of dollars spent on goods is estimated to be a given carbon emission output. This method has two disadvantages: 1) it is very inaccurate; 2) strategies to reduce the carbon emissions must relate to spend reduction which is not feasible for growing companies.

However, just as supply chain transparency is required for comply with regulations such as modern slavery statutes or general operational and competitive business needs, this same technology can be used for visibility into supplier sub-tiers to gain accuracy about overall emissions.

An Overview of ESG Risks in Supply Chains

Understanding and mitigating the environmental, social, and governance (ESG) risks associated with supply chains is essential to remain competitive in today’s market. In order to effectively reduce their exposure to these risks, businesses should conduct ESG due diligence — with regular audits of their suppliers — and strive to develop partnerships with those who are dedicated to sustainable practices.

One way you can achieve this is by investing in information-gathering tools such as life cycle analysis; this data can be used to measure Scope 3 emissions and devise strategies for reducing them. Additionally, investing in technology solutions like the 1Exiger platform can provide end-to-end supply chain visibility to better assess risks in all supplier tiers and geographies.

Overall, ESG risk management has numerous benefits — not just for the environment but also customers’ trust levels as well as employee morale — making it an important issue that must be addressed holistically. Taking proactive steps toward managing carbon emissions risk across your entire supply chain will ensure that all parties involved benefit from improved sustainability outcomes.

Assessing Carbon Emissions Risk Across the Supply Chain

Your business can face a considerable challenge to assess carbon emissions risk across the supply chain. Not only must you identify sources of emissions and develop strategies to reduce them, but also to remain competitive in their industry while doing so. To succeed in this endeavor, invest in understanding all sources of emissions — from direct to indirect — and implement strategies that will help them reduce those emissions quickly and efficiently.

What’s more, it’s important to address sustainability initiatives when evaluating potential suppliers and partners. This can include emissions-focused questions in RFPs as part of the procurement process. Managers should consider implementing supplier training programs as part of the onboarding process or setting up joint sustainability initiatives with key suppliers to help reduce overall carbon emissions risk across the entire supply chain network.

These steps can ensure that you are prepared for any future climate-related events while protecting your brand reputation in the process. For more assessment ideas, see the Scope 3 Inventory Guidance from the U.S. EPA.

Mitigating Carbon Emissions Risk in the Supply Chain

Your business should introduce regulations and standards for all suppliers within the supply chain to ensure they’re adhering to sustainability initiatives. Regular audits of supplier operations can ensure compliance with company standards; third-party certifications should be required; and renewable energy sources should be mandated whenever possible. Buyers and suppliers should have open communication about sustainability goals, where possible.

Another tool some companies use is a lifecycle assessment (LCA). An LCA evaluates the environmental impacts of a product or service throughout its entire life cycle, including raw material acquisition, production, transportation, use phase, end-of-life treatment and disposal. This method takes into account all activities related to a product or service and their associated emissions.

You can also survey suppliers and work with them to identify opportunities for reducing their own carbon footprints. Such actions could include investing in renewable energy sources, switching over to green technology, using shared resources such as cloud computing, and introducing more sustainable packaging materials like paper or bioplastics.

Surveys and data-gathering tools that measure Scope 3 emissions can help detect hotspots of emissions, but they aren’t cost-effective or scalable to be a comprehensive solution. Conducting due diligence when selecting new suppliers or entering into new relationships with third-parties is also essential: assessment of potential partners’ commitment to sustainability initiatives is necessary as part of third-party risk management.

The Solution Starts with Multi-Tier Supply Chain Visibility

Reducing your company’s carbon footprint requires transparency into multi-tier supply chains to see emissions trends and reveal potential high-impact strategies and actions.

The suite of tech tools in the 1Exiger platform can deliver these capabilities. What would ordinarily require significant manual research can be done within minutes using 1Exiger’s easy-to-use interface. The benefits of leveraging Exiger’s technology include:

Project-level monitoring. You can create individual views for every project and team across the supply chain’s portfolio.
Integrated risk profiles. Add and review suppliers’ carbon emissions as part of their overall ESG risk profile and vendor qualification.
Continuous analysis. You can adjust Scope 3 estimations based on changes to product materials, supplier investments or changes to the supply base.

The end-to-end supply chain visibility with 1Exiger includes due diligence and third-party risk management capabilities to help your business achieve sustainability goals and comply with many ESG-related regulations, like CBAM. It can also deliver strategic benefits, like identifying high-impact interventions and opportunities to reduce carbon emissions and reduce costs.

By taking these steps towards minimizing carbon output across supply chains, your business can remain competitive while contributing to a more sustainable future for everyone.