Scope 3: In the Spotlight of Climate Action

Scope 3 has come to the fore, and it is here to stay.

There is a strong consensus that we must reduce our emissions as much as possible to get the world on the right path and prevent the destructive consequences of global warming from expanding beyond the 1.5° Celsius trajectory. But until recently, the guidance was more clear about the trading of carbon credits than corporate climate action within businesses’ own value chains. This relative lack of clarity in guidance in the Scope 3 inset space (compared to the more mature guidance and certification structure of the Scope 1 offset space) has left businesses deeply committed to climate action within their supply chains expanding energy on seeking clarity and direction, rather than investing time and resources into climate action.?

Even for those who have been closely following the rise of corporate climate action, the spotlight on “value chain investment / Scope 3 climate action has come almost out of nowhere. Of course, it has its own history with pilot projects and industry collaborations that, until recently, have not been able to compete with the spotlight of the voluntary carbon market. What has changed is the urgency to reduce emissions, along with the clarity that 80-90% of those emissions for agrifood businesses sit in the “purchased goods” category, i.e., the companies’ Scope 3. These changes have also brought increased visibility in the public eye higher expectations from corporate investors, and probably most importantly, the emerging guidance for Scope 3, making the rules of engagement clearer and enabling bolder action.

With the GHG Protocol Land Sector and Removals Guidance, CDP, and SBTi’s FLAG (Forest, Land and Agriculture) Guidance coming into play, the space is gaining more direction, and the rules of engagement are being established. The emerging guidance is currently a work in progress and is being tested by businesses in pilots to assess its fit to the Scope 3 space in agriculture in particular (not forestry, where it takes a lot of its inspiration). While the guidance is being piloted and improved to make it more suitable for supply chain climate action in agriculture, new co-investment models and partnerships must be developed to get the supply chain players ready to engage once the “rules” are released.

What are the key challenges in the Scope 3 space in agriculture?

Why are the partnership and co-investment models so important? Scope 3 is fundamentally different from Scope 1. By definition, Scope 3 emissions result from the complex systems that make up an integrated supply chain of many partners. In contrast, Scope 1 emissions are directly under the control of a single player and, in theory, can be directly accounted for by a simple 1:1 transaction. Scope 3 is inherently about supply chain partnerships and finding new win-win business models with your suppliers and customers. It is not about “jumping” the supply chain steps to secure the insets/offset for yourself, and cutting out others. Scope 3 requires cost-sharing from the parties that are linked in the supply chain, and it’s through such co-investment and proportional allocation of benefits that truly collaborative and catalytic climate action can be achieved. In fact, it is the potential of such action that makes agriculture such an appealing place for climate action!)?

Traceability conundrum. The challenge with the emerging guidance is that there is an explicit need to prove that a climate action investment made by a business led to a reduction in emissions within their supply chain for the investment to be “claimable.” This need to prove the causality between investment and the environmental outcome is understandable, as in principle it should lead to all climate action activity being traceable and verifiable. In practice, such guidance pushes businesses to establish traceability across their supply chain - from farms to the products on the shelf, or at least the ingredients in their processing facility.?

This may be achievable for “vertically integrated” supply chains, where the brand purchases raw commodities from farmers or aggregators that can easily demonstrate traceability to the farm. In larger commodity supply chains this requirement for traceability comes at odds with what makes the commodity supply chain resilient - the flexibility of sourcing from multiple locations to meet the purchasing volume requirement balancing out the climate effects on the yield across all the sourcing locations. Value Change Initiative Systems Lab, convened by SustainCERT and Gold Standard, is looking to take this on and to examine alternative methods of accounting in supply chains, where direct traceability is hard to achieve or can have undesirable effects.

Co-investment challenge. What is unique to agriculture is the opportunity for multiple players sourcing from the same areas to partner up and jointly catalyze investment into the resilience of their supply chains. What also comes with this opportunity is the need for the allocation of climate benefits among the crops that are grown in rotation (to take an example from the cropping space), which is not something we have frameworks or guidance for yet. (But we are working on it!) Ecosystem benefits (GHGs/carbon, water, biodiversity) are shared by all products of the farm, and it is not easy to allocate the benefits and determine the amount of investment that needs to be put in by a company that procures soy vs. the one that procures corn or wheat grown on the same field over the years.

What’s our outlook?

How is the industry addressing the lack of clarity on regulations and cost-sharing? Several well-qualified industry groups are developing the frameworks for co-investment, and they can not come soon enough. In the meantime, a few key players are investing forward into the generation of ecosystem benefits and are recruiting their suppliers and customers to share the costs of such environmental outcomes, leveraging the current guidance and the understanding of how it might evolve in the near future.?

Can we get “there” with the current regulatory framework? Maybe? Not fully? Is “there” the right destination, and is this framework the right path? What is an alternative way for making corporate climate action verifiable and credible?

There is new thinking that is emerging which looks at a contribution-based framework, where companies would make investments into their supply sheds without needing to prove that the product that received the environmental benefits from their investment will indeed end up in their processing facility. Why is this potentially better? Because the commodity supply chains can remain resilient and flexible, without having to reinvent themselves for traceability. This alternative approach to allocating and making contributions also seems to be bypassing the problem of “rotational attribution,” making co-investment easier and thus potentially accelerating climate action.

Where to go from here?

We will likely continue somewhat down the track with existing “traceability” requirements around ag climate action, but it is also likely that a “group of the willing” (those corporate sustainability leaders who are willing to change the status quo and explore alternative models and frameworks) will form and be strong enough to at least give good consideration to the alternative method for allocation and accounting for business contributions.

What should you do with this information?

Let’s talk about it!

Let’s ideate and see if we can find better ways and better answers!

Take it as food for thought, and not a reason to “stall” your climate-smart programs. Investing in resilience on the farm is one area of climate action that leads to both ecosystem and community benefits, no matter how you look at it and no matter how you would like to account for it.