The Climate of Business #46: The messiness of indirect emission accounting

Climate Change Reality

How machine learning could help save threatened species from extinction (The Verge)

Boreal forest on the move (Nature)

Congo peatlands, which slow climate change, bigger than thought (Bloomberg)

The psychology of inspiring everyday climate action (Wired)

How are floods and droughts happening at the same time? (Vox)

Young activists have pushed Florida to set clean energy goals (NPR)

Over half of known human pathogenic diseases can be aggravated by climate change (Nature)

New Zealand releases its first national plan to protect against climate-driven disasters (The Guardian)

Great white sharks are thriving in Monterey Bay thanks to warming waters (LA Times)

Rainwater everywhere on Earth unsafe to drink due to ‘forever chemicals’ (Euronews)

Business Climate Reality

Lawmakers in India pass energy conservation bill (AP News)

Trillions of dollars at risk because central banks’ climate models not up to scratch (The Guardian)

ESG’s ‘social license’ will endure even if the letters don’t (Bloomberg)

Seaweed is a vital source of income and independence for women in Fiji. Climate change is washing it away. (CBS News)

The US could stop one cause of heat wave deaths tomorrow (Vox)

Climate change and scarcity chip away at de-growth taboo (The Japan Times)

Solar power opens the door to banking for rural Indians (Thomson Reuters Foundation News)

India approves climate change commitments to UN ahead of COP27 (Bloomberg)

As Europe hunts for gas, where do the emissions go? (Politico Pro)

Billions pour into bioplastics as markets begin ramping up (AP News)

Reality Check

Calculating the carbon emissions of a business could be messy. Different data points that need to be assessed sitting in various databases, hiding in invoices, or simply not accounted for anywhere.?

The complexity goes up a notch when you start calculating emissions associated with your Scope 3, the indirect emissions created by activities of your suppliers, employees, and investments.

Now imagine all of these calculations conducted for a company with a supply chain spread across the globe.?

Carbon emissions from within supply chains account for more than 80% of greenhouse gas emissions and are related to more than 90% of the impact on air, land, water, biodiversity and geological resources.

Today I talk about the challenge of assessing supply chain emissions in effort to encourage leaders to dedicate the necessary resources, time and importance to this topic to prepare for the confirmed future that involves regulations on assessing and decarbonising your value chain.?

Why assessing supply chains emissions is such a challenge for companies??

Two reasons: complexity and uncertainty.?

Complexity

A company in itself has in most cases a clearly defined structure. If you put this reality into the context of emission accounting - such structure would allow for an emission assessment to be straightforward. But businesses, for the most part, are not closed identities. They are dependent on other businesses and entities to function - they are a network of individuals, organisations, resources, activities.?

Assessing such networks can be quite complex, as in some cases they can be ever progressively multiplying, leading to chains of impact. Not only such networks can be vast in scale but also be highly diverse crossing different industries, meaning they can be topically detached from the original industry in which the company seeking to understand its emissions is sitting.?

Let’s take the examples of a computer producer, a supermarket chain and a logistics company.?

If you are a company that produces computers, it might be easy to account for the emissions of your own factories and offices, but usually many of the components for the computer come from third parties (see below). It is likely that you know your logistics and manufacturing partners as you are in a contractual relationship with them, but what about the suppliers of your suppliers, who sourced the raw materials for the components?

In the case of a supermarket chain the company usually has under direct management transportation and logistics, but it doesn't produce the apples and the bananas it sells (see below). The complexity further increases by the fact that the apple and the banana farms do not solely sell to one single supermarket chain. How do you know how much of the emissions created by the farms are associated with your supermarket and how much is with your competitor?? How do you identify as well as engage with the land use or animal feed required to produce the product??

Another example of such complexity related to the "suppliers of suppliers" issue is in the freight and transport industry as yet again one company will be the supplier of many. Who is responsible for the company's emissions as it serves hundreds of different businesses and sometimes for optimisation purposes transports with the same truck the products of multiple companies??

Uncertainty

The second key challenge is uncertainty.?To assess the emissions of a company with a complex supply chain, a business needs to engage its suppliers in the process - educate them about the importance of this ongoing exercise, invite them to share data and collaborate with them to improve this data as the business achieves its net zero target. This requires collaboration between different departments as well as a level of trust, especially on the topic of sharing data. Some suppliers might be hesitant to open up their books, as granular carbon data can be used to deconstruct cost structures putting their business and margins in a vulnerable position.

And even if you do get access to the data, it needs to be properly translated and analysed in order to be useful. Figures will also have different meanings - you cannot transfer the same value of emissions from a manufacturing process and associate it for example with the transport of raw materials, as there will be granular emissions to take into account among other factors. Further, not every industry uses the same methodology which creates challenges around capturing, verifying and communicating the data across different stakeholders to align them around one common goal.

And if all these obstacles have been overcome, then comes the actual goal: decarbonisation. How do you align across your supply chain a common sustainable agenda?

How does a business with a complex supply chain respond to this??

Despite all these challenges, more and more companies are taking action on assessing, reporting and acting to improve their emissions.?This is in part due to investor pressure, a lot of new climate policies across the globe, but also due to the $120B cost estimated to occur in the next five years from environmental risks within supply chains. Such costs are further reinforced by events such as COVID-19 and the War in Ukraine.?

But the good news is that taking action to avoid such costs doesn't mean unattainable investment for your business. A study showed that around 40% of all supply chain emissions could be eliminated affordably, with less than €10 per tonne of CO2 equivalent. Actions which can lead to such a vast reduction involve projects on circularity, energy efficiency and renewable power.?

The key learning in all of this for a business leader in a company with a complex supply chain is that your supply chain emissions are key to assess and develop a plan to decarbonise as such actions will save your company money, help be compliant and strengthen your relationship with your suppliers, as your sustainability agenda makes them more resilient for the future.?A more in-depth analysis on this topic, could be found here.

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