With a flood of climate regulations already starting to pour in across the globe and more to come, businesses who fail to get a grip on their supply chain emissions will leave themselves vulnerable to reputational damage and non-compliance penalty charges. This could be particularly detrimental to businesses during such uncertain economic times, with the Russian-Ukraine war, climate change, and the combined effects of the pandemic and inflation causing great instability in global supply chains.
If businesses want to protect their bottom line, it is therefore vital that they gain strong visibility over their suppliers’ emissions, which make up around two-thirds of an average company’s carbon emissions. This will help them to make smarter procurement decisions when it comes to their suppliers, allowing them to tackle incoming regulations more effectively and gain a competitive advantage in their industries.
The challenge of tackling Scope 3 Emissions
Scope 3 emissions, many of which stem from the supply chain, account for more than 70% of a company’s emissions and need to be effectively measured and managed if companies want to achieve climate targets. These notoriously hard-to-measure emissions are indirect greenhouse gas emissions that come from sources not directly controlled by a company but that are still a result of its products or services sold.
Understanding and managing these emissions is a vital part of every company’s sustainability efforts and can futureproof companies from a number of potential risks, as well as providing them with several benefits. According to the World Economic Forum, over 50% of the world’s carbon emissions come from only eight supply chains: food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services, and freight. Tackling emissions across these industries will therefore significantly help the world achieve our goal under The Paris Agreement of limiting climate change to 1.5 C above pre-industrial levels.
Identifying carbon hotspots and preventing greenwashing accusations
A key benefit for companies that understand and effectively track their carbon data is the relative ease in which they can identify carbon hotspots across their supply chain. This can help build plans to improve energy efficiency or eco-friendly product innovation, reducing both costs and emissions.
By taking a collaborative approach to carbon accounting, companies can determine which suppliers are committed to taking action and work with them towards joint climate goals. Today’s consumers are becoming increasingly conscious of sustainability and brands’ action – or inaction – and the ability to demonstrate climate-minded purchasing decisions can help prevent greenwashing accusations and protect a company’s reputation.
Futureproofing operations against climate regulations
Effective carbon management across supply chains also allows companies to futureproof their operations against incoming regulations, which are already coming into force in several parts of the world. The US Security Exchange Commission (SEC) is set to finalize upcoming climate-related disclosure rules in the near future. The proposed rules would require US companies to provide an assessment and plan to address climate-related risks, as well as a report of their GHG emission data across Scopes 1, 2, and in some cases Scope 3. They would also require companies to submit details about their measurement process and sources of metrics and data, reinforcing the importance of accurate carbon data collection and management for businesses.
Under the SEC’s proposed rules, companies that have material scope 3 emissions or that set scope 3 related targets will be subject to mandatory partial scope 3 disclosures. Seeing as a huge proportion of Scope 3 encompasses supply chain emissions, businesses that do not have the right tech infrastructure in place to effectively manage these emissions will be exposed to non-compliance fees and reputational damage. Given the complex nature of scope 3 emissions management, getting a hold of all emission data early will give businesses a head start to act on them and anticipate regulations.
Outside of the US, the UK requires large companies to report on their climate-related risks under the Taskforce on Climate-related Financial Disclosures (TCFD) framework, and in Canada, large suppliers to the government will be compelled to disclose their GHG emissions as soon as 1st April this year. Similarly, the EU’s Corporate Sustainability Due Diligence Directive (CSDD) will require large companies and SMEs across Europe to identify “adverse environmental impacts” along their supply chain and put pressure on their suppliers to meet net zero.
The shaping of the CSDD is likely to be influenced by Germany’s Supply Chain Due Diligence Act, which became operational in January this year and is the first law that prohibits German companies from acts of environmental degradation across global supply chains, with non-compliance resulting in fines of up to €8 million. These regulations are just the tip of the iceberg, and companies need to brace themselves for an avalanche of further supply chain and climate-related regulations in the near future.
A competitive edge
As well as ensuring companies can stay ahead of incoming regulations, companies with a strong grasp of their supply chain emissions will be better placed to thrive in the low-carbon economy and gain a competitive edge in their industry. These companies, for example, will be much better prepared for the introduction of Carbon Border Adjustment Mechanisms (CBAM), such as the one currently being implemented in the EU. CBAMs aim to put a fair price on the carbon emitted during the production of carbon-intensive goods that enter a country, meaning that companies with lower carbon emissions will benefit from reduced costs compared to competitors. The EU’s CBAM is likely to reignite the debate over whether to create similar mechanisms in other countries such as the US, which has grappled with the idea for a while and could transition to a CBAM in the future. Europe’s carbon border will also have an impact on US firms exporting to the EU, who will be forced to comply with the new reporting requirements. These companies will lose a competitive edge if they cannot manage and reduce their supply chain emissions in the long term.
Understanding supply chains is an economic necessity
Ultimately, a clear understanding of supply chain emissions should be the first port of call for businesses trying to decarbonize. This will help companies to accelerate climate action in the most efficient way possible, facilitating a smooth transition to a low-carbon future. Companies must realize that effective management of their supply chain emissions is no longer a question of ethics, but an economic necessity, driven by consumer demand and government regulation.
Rachel Delacour is the Co-Founder and CEO of Sweep, Europe’s leading carbon management and reduction platform. With a background in finance, she was rewarded with Berkeley’s Fisher Center for Business Analytics – Project of the Year 2022 and selected to join FT120, France’s tech program for most-promising tech companies. In 2009, she cofounded BIME Analytics, a pioneering business intelligence SaaS which was acquired by US customer service company Zendesk six years later. Rachel worked there as General Manager until she decided to use her talent to help clean the climate mess with Sweep.
A leading female figure in European tech, Rachel was elected co-President of France Digitale in 2018 and her thought leadership has been featured in The Economist and The Wall Street Journal. An advocate for women in tech, she has backed several female-founded US and French startups.
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