How to extend science-based targets along the supply chain?
This article was originally published on ECOFYS and is republished with permission.
Today, there are already 179 companies that have committed to science-based targets. These companies are setting themselves climate targets in line with the Paris Agreement of limiting global warming to well below 2°C. Each week, approximately two more companies join the call of the initiative (sciencebasedtargets.org) by CDP, UN Global Compact, World Resources Institute (WRI) and WWF.
This is all good news. But in order to keep the Paris Agreement in reach, corporate climate action has to expand rapidly. Many of the 179 signatories to the Science Based Targets initiative are big brands and established sustainable frontrunners while the heavy emitting industry or small and medium sized enterprises remain a minority. How can we scale up commitment and convince more crucial actors to take ambitious climate action?
In this blog we present two powerful tools that companies can use to engage with suppliers to accelerate the uptake of science-based targets, and especially climate actions along their supply chain. Before we present these tools, let’s firstly look at how companies currently account their GHG emissions and engage with suppliers. For some companies, the GHG emissions arising from the use of sold products is dominant. This requires a different approach which is not covered in this blog.
ACCOUNTING OF GHG EMISSIONS OF SUPPLIERS (SCOPE 3 UPSTREAM)
The Science Based Targets initiative requires companies to set science-based targets covering company-wide Scope 1 and Scope 2 emissions, as well as an ambitious and measureable Scope 3 target. The latter does not necessarily have to be science-based, but provide a clear time-frame when Scope 3 emissions cover a significant portion (greater than 40% of total scope 1, 2 and 3 emissions) of a company’s overall emissions. The target boundary must include the majority of value chain emissions as defined by the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard:
Currently many multinational front running companies have assessed the GHG emissions of their full value/supply chains (Scope 3), according to this GHG Protocol. By working for various companies in multiple sectors, we have experienced three approaches or a mix of these approaches to assess the GHG emissions of upstream activities, depending on the level of maturity of GHG footprinting within the company and the ambition level to decrease the upstream emissions:
For many companies, the Scope 3 Upstream GHG emissions cover the majority of their emissions. We believe that companies have the possibility and even responsibility to drive climate actions across their supply chains and to reduce these emissions. They have the power to convince their suppliers to also set targets in line with climate science. The main questions arising are: how can companies align the GHG emissions of their suppliers with the 2oC threshold? And how can they monitor and report their progress using the different accounting approaches?
CURRENT PRACTICES ON SUPPLIER ENGAGEMENT
Supply Chain Initiatives (SCIs) are structured interventions by companies that are able to exert significant leverage with their suppliers. For the Institute for Industrial Productivity, we’ve conducted an analysis of ten SCIs and found that most SCIs have a straightforward design and use very limited innovative mechanisms, except for the SCI of Prorail (a procurement approach called the CO2 Performance Ladder). Both in scaling up to reach a large number of companies (especially SMEs) and to increase the level of climate actions, the CO2 Performance Ladder really stands out. Recently, the 750th participant to the Ladder was registered and research has shown that construction companies in the Netherlands achieve an annual 3.2% reduction in CO2emissions due to the ladder. The OECD also highlighted the CO2 Performance Ladder as best practice for sustainable procurement.
THE BEST OF BOTH WORLDS: SCIENCE-BASED TARGETS APPROACH TOWARDS SUPPLIERS
Building on the GHG emissions accounting practices and the design of an effective supply chain initiative (like the CO2 Performance Ladder), we suggest two powerful tools that companies can use to engage with suppliers and scale up science-based targets and actions along their supply chain: an intensity and a ladder approach.
1. INTENSITY APPROACH
Looking at the Scope 3 upstream emissions of companies with a select group of suppliers and/or a set of specific products, the main part of the emissions are in the Scope 3 category “Purchased good and services” and mostly related to the sourcing of raw materials. The emissions intensity of these materials (like aluminium, iron and steel, cement, paper, beef, dairy etc.) could be used to influence the supplier to reduce their emissions intensity according to the emissions intensity pathways of the Sectoral Decarbonization Approach, developed by CDP, WRI and WWF with technical support from Ecofys.
Requesting these emissions intensities of raw materials from suppliers also improves the data that feeds into the Scope 3 GHG emissions accounting (either in the LCA or in the supplier emission inventory). Simultaneously, the progress of reaching a science-based target on Scope 3 upstream can be tracked.
Example on intensity approach
2. LADDER APPROACH
When the supply chain is more complex and multiple suppliers exists, an innovative supplier engagement programme could work to stimulate the uptake of science-based targets.
However the supplier engagement programme should be well designed to generate maximum impact. In our work for the Institute for Industrial Productivity, we developed design criteria enabling to meet this objective. Building on the effective CO2Performance Ladder, we propose a Ladder approach to influence multiple suppliers.
The Ladder approach is a procurement approach in which the supplier with the highest level on the ladder scheme gets the highest procurement benefits. These procurement benefits can be of any kind, like more procurement volume, discount, fast payment etc. A smart design of the Ladder approach, like in the simplified scheme shown on the left, enables the desired “chain reaction” as in level 5 also the suppliers of the supplier (tier 2 suppliers and further) need to set science-based targets. This will help to increase science-based targets along the supply chain and among small and medium sized enterprises.
Tracking the level of multiple suppliers in the Ladder approach can easily be integrated in the dedicated software of company, like SAP or Sourcemap. Using these types of software allows to monitor the progress on a science-based target on Scope 3 emissions upstream as well.
JOINING FORCES FOR GREATER IMPACT
Companies who have set science-based targets can use the recommended tools to stimulate science-based targets along their supply chain. Convincing heavy emitting industry and SMEs to take more ambitious climate action will result in a win-win: future-proof climate strategies for all players along the supply chain and greater mitigation impact.
Since there is a strong need for more well-designed, innovative supplier engagement mechanisms, companies should disclose their supplier engagement practices and results in a more transparent fashion. This would enable them to improve the design of their supplier engagement programme, eg by using the design criteria we identified in our SCIs analysis.
Companies should consider joining forces per sector to yield yet another win-win: by developing and implementing supplier engagement schemes together, buyer and supplier can limit the costs of the SCI development and the compliance costs.
 The selected SCIs comprise the following ten organisations: BASF (chemical company), British Gypsum (plaster and plasterboard manufacturer), Ford (automobile manufacturer), General Electric (providing a wide range of energy, industrial and technology solutions), IKEA (furnishings and home ware), Home Depot (hardware store), Prorail (construction and maintenance of the Netherlands rail network), SKF (manufacturer of bearings, seals and engineering solutions), Walmart (grocery and general store) and China’s city government-led Suzhou Energy Efficiency Star Scheme.
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