Regulation, along with a drive to improve efficiency and enhance corporate reputation, has encouraged the majority of large organizations to look at how they can measure and reduce carbon in their own business. As this becomes standard business practice, leading businesses are now focusing on how to make continual, ongoing improvements to their carbon footprint and taking steps to understand the wider impact of their indirect emissions.
Indirect, or “scope 3,” emissions are a consequence of the activities of the reporting company, but occur at sources owned or controlled by another organisztion, for example raw materials extraction, distribution by a third party or from a customer’s use of a particular product. An important part of tackling scope 3 emissions is to understand which parts of a company’s operations are responsible for the greatest proportion of emissions.
Our research found that 40 percent of multinationals have taken steps towards addressing the indirect carbon emissions resulting from their extended value chain. Over the next three years, we expect this to increase to 84 percent and impact business of all sizes. If 2011 saw organizations starting to address this area, 2012 will see more widespread action as companies recognize that reducing carbon in supply chains is an effective way to improve business efficiency as well as enhance environmental performance.
To put this in context for an individual company, GlaxoSmithKline revealed in its 2010 Sustainability Report that 80 percent of its overall carbon footprint comes from indirect emissions – with 40 percent through the sourcing and manufacturing of its products and 40 percent resulting from the use phase of its products, such as propellants in inhalers.
As well as GSK, Carbon Trust Advisory is also working with other forward thinking companies including BT, Taylor Wimpey and Whitbread to help them identify carbon hotspots within their supply chains, to uncover reduction opportunities and quantify the value at stake, and to set targets for the reduction of their indirect carbon emissions. These companies recognize the business rationale for reducing indirect emissions, for example, security of supply, resource scarcity, commodity inflation, waste reduction, supply chain optimization, and enhanced customer value proposition.
As these leaders take action, public awareness and expectation of other businesses to do likewise is increasing, and becoming a factor in product differentiation and consumers’ buying decisions. Therefore, companies must be proactive in order to stay ahead of the competition.
If the world’s leading companies see an opportunity to reduce their environmental impact, enhance their reputation, and boost sales by acting on indirect emissions, this will have implications for the many other businesses which supply them. Multinationals will increasingly seek partners who can support their environmental goals, especially as consumer demand for low carbon products continues to grow. New regulations and the move to consumption-based accounting, together with voluntary schemes such as the Carbon Disclosure Project, are also encouraging companies to seek advice on addressing their indirect carbon emissions.
Our research also found that 50 percent of multinationals expect to select their suppliers based upon carbon performance in the future and 29 percent of suppliers could lose their places on “green supply chains” if they do not have adequate performance records on carbon. Conversely, 58 percent of multinationals will be prepared to pay a premium for lower carbon supplies in the future.
Addressing indirect emissions is a significant challenge and a complex topic, and the next three years will see a much greater focus on this area. Now is the time to start evaluating how this will affect your business – as it will play an increasing role in purchasing decisions and in financial and risk planning. It will also be a key factor in distinguishing brands, building reputations and enhancing consumer loyalty.
Hugh Jones is Managing Director at Carbon Trust Advisory. Hugh works with companies to identify their sustainability needs and aspirations, tailoring the advice in order to help these companies become sustainability leaders while deriving economic benefit and reducing carbon emissions themselves and along their supply chains. Carbon Trust Advisory helps large businesses to harness opportunities and manage risks in the move to a green economy. Its paid-for professional services include strategic business advice, carbon footprinting, new product and service design, and value chain decarbonization.