A Growing Focus on Scope 3 Emissions
In recent years, there has been a growing focus on reducing greenhouse gas (GHG) emissions, and many retailers are now well across this topic and are addressing emissions on their home front, from operational sources like lighting and energy used in their stores and facilities.
What is important though, is looking beyond those direct operational emissions to address the emissions produced throughout a retailer’s supply chain. Those so-called Scope 3 emissions refer to indirect emissions from a company’s value chain, including impact from materials and production of goods, transportation, the use of products by customers, as well as product end of life. They can make up more than 95% of a retailer’s total emissions and measuring and managing them is crucial for retailers to address business risk and truly achieve the impact reduction required to reach Net Zero.
Not Managing Scope 3 Emissions Presents a Growing Supply Chain, Regulatory and Financial Risk
Climate change has the potential to dramatically impact retail supply chains, increase pricing of and restrict the ability to source raw materials (we have already seen the impact of extreme weather on sourcing geographies in the past years). Likewise, regulatory risk is growing with disclosure legislation being implemented around the world. Europe and the US are leading here, but also in Australia, the freshly launched International Sustainability Standards Board’s disclosure standard will definitely be made mandatory for larger entities from 2024, but it is now under consultation to also make reporting mandatory for private and public unlisted companies beginning as early as July 2024 with a phased rollout. This reporting standard will require for the first time reporting of Scope 3 emissions and is already making waves in the retail industry.
What are Retailers Doing to Address These Risks?
Data visibility is a prerequisite to compliance and risk management - you can’t manage what you can’t measure, so getting an accurate handle on your emissions data is clearly the first step.
As a matter of example, Tesla recently disclosed its carbon footprint which is vastly different to last year. It rose from 2.5 million metric tonnes to 30.7 million metric tonnes of Co2e. Previously, their carbon footprint only looked at emissions from direct operations and customers charging their EVs while it now includes indirect emissions from raw material extraction, production, logistics and customer use and end of life.
This is quite the jump, showing the importance of considering Scope 3 emissions, and just how huge Scope 3 can be. Given Elon Musk is clearly not everyone’s cup of tea, let us briefly look at some other examples. Consider outdoor retailer REI in the US, or IKEA, for example.
For REI, total reported emissions across all scopes are 1.3 million tonnes of CO2e, with Scope 3 making up 98% of total emissions, for IKEA, the total is 25 million tonnes of CO2e, with Scope 3 also making up 98%. This aligns with the Scope 3 emissions footprint for most home and fashion retailers.
The latest supply chain report from CDP, a not-for-profit charity that runs a global disclosure system for environmental reporting, and carbon emission in particular, finds only 41% of companies are reporting on at least one Scope 3 category. McKinsey continues: “When it comes to target setting to reduce emissions, in 2016, there were only a small handful of major retailers—including Walmart—with a science-based target (a target validated by the reputable Science Based Targets Initiative) to reduce carbon emissions… Five years later, around 65 global retailers set such targets.” (McKinsey, 2022)
While this is showing progress, this is clearly a miniscule fraction of the number of retailers out there. That being said, momentum is building, given many companies have hired or engaged with experts around the topic, who are starting to do the work.
What is crucial, however, is continuing on from ambition to action.
A recent BCG study (BCG, 2022) shows the amount of work still to be done in the retail industry to achieve targets. The survey finds that only 18% of surveyed retailers are on track to meet their Scope 3 targets. Another 18% are engaging in activities but are not meeting their schedules. 24% of retailers have Scope 3 targets but no set strategies on how to achieve them, and 6% have not made any plans. 35% have a strategy but aren’t progressing at all towards their targets. In turn, this leads to the conclusion that around two-thirds of surveyed retailers are making zero progress on Scope 3.
Finally, to prepare for and manage the financial risk around emissions due to the liability through introduction of a price on carbon, leading businesses have started implementing an internal shadow price on carbon aligned with the pricing in carbon markets.This means adding a hypothetical surcharge to any pricing that involves the creation of carbon in their decision making about investment and sourcing decisions.The goal is to encourage employees to seek out initiatives to reduce emissions and drive R&D to prevent possibly high liabilities.
What can Retailers Actually Do to Measure and Reduce Scope 3 Emissions?
Amazon has just announced in their sustainability report, that, starting in 2024, the company will require its suppliers to report on emissions and set ambitious climate goals. This focus on supplier engagement and supplier reporting around emissions is the only way forward on the journey to meet their climate targets. Following Amazon’s example, retailers need to gain insight into their entire value chain and collaborate with supply chain partners, service providers and also customers to identify areas where carbon emissions are highest, where and how they can be reduced and work together to achieve the desired change.
Key steps for retailers for targeted engagement in the value chain include:
1. DATA SHARING: Engage with suppliers to leverage their data to gain insights into Scope 3 emissions and key levers to reduce them.
2. JOINT TARGET SETTING: Jointly set emissions reduction targets with suppliers to create a shared commitment and increase the likelihood of suppliers taking action and implementing sustainable practices.
3. SUPPLIER SELECTION: Consider environmental criteria when choosing new suppliers to drive progress and encourage the overall supplier base to improve their sustainability practices.
4. SOURCING COLLABORATION: Work with suppliers to improve energy efficiency, reduce packaging waste, switch to greener and lower carbon materials, or develop a more circular system for products.
5. TRANSPORTATION OPTIMIZATION: Reduce the carbon footprint of transportation activities through using more fuel-efficient or low-emission vehicles, different use patterns, optimizing route planning, and using alternative modes of transport (such as rail or water).
6. CUSTOMER EDUCATION: Encourage sustainable consumption behavior, such as reducing waste, recycling, different use patterns, and promoting more sustainable products through campaigns that educate customers about the impact of their choices.
Successfully Managing Risk Around Scope 3 Emissions Can be Achieved Through Transparency, Education and Most Importantly, Collaboration
Managing Scope 3 emissions is crucial for retailers looking to reduce their carbon footprint and manage regulatory, supply chain and financial risk. Momentum has been growing in the industry around target setting and measuring of emissions, but action is still lacking. Working with supply chain partners, service providers, and other actors, including customers, is essential for achieving reduction goals, as it allows for a shared commitment to sustainability and increased accountability on emissions to enable the implementation of solutions that benefit everyone involved. Key to driving the required change and truly achieving the impact reduction required to reach Net Zero are transparency, collaboration, and education across the entire value chain.