The Strong Business Case for Measuring, Reporting, and Reducing Scope 3 Emissions

In simplest terms, a corporate value chain is a series of activities involved in delivering value to customers. Since the phrase was coined over 30 years ago, business experts agree that, by understanding and maximizing efficiencies in its value chain, a business can add value to  its products and services and, ultimately, its bottom line. Companies that work to minimize risks and maximize opportunities up and down this value chain– including with their suppliers and consumers who aren’t under their direct control-–stand to gain a competitive advantage. 

For many companies, their value chain is a key source of climate risk. The greenhouse emissions (GHG) from everything from the transportation and distribution of raw materials and final products, to the growing, raising, and producing raw materials, to the impact suppliers operations have on forests and land—these are just some of the activities that explain why scope 3, or the indirect emissions associated with a company’s value chain, are on average over 11 times larger than the emissions that stem from a company’s own operations, according to the CDP.

By contributing to climate change, these GHG emissions pose physical, financial, and regulatory risks to companies. So, just as value chains can be optimized to increase value to the finished products or services, they can and must be optimized to reduce climate risk and realize opportunities to create and offer new products and services that support a lower emissions future. 

For years, investors have been calling for mandatory, standardized disclosure on companies’ GHG emissions. Investors want standardized, decision-useful information so that they can understand the full exposure that a company has to climate risks, evaluate investment opportunities, and make informed financial decisions. That is why, just this week, 532 institutional investors representing $39 trillion in assets under management issued the most ambitious investor call for government action on climate risk, including a clear call for mandatory climate disclosure. Indeed, with the U.S. Securities and Exchange Commission (SEC) proposing to strengthen financial disclosure requirements for scope 1, 2, and 3 greenhouse gas emissions by public companies to their investors, measuring and managing supply chain emissions are a critical priority for publicly-held companies in the U.S.

The SEC’s proposed rule will enable the U.S. to join peer regulators in Belgium, Canada, Chile, France, Japan, New Zealand, Sweden, and the United Kingdom who have mandated TCFD-aligned climate-related financial disclosures. The SEC’s effort also complements the International Financial Reporting Standard’s fast-moving workstream to create a global climate disclosure standard that will influence 140 jurisdictions.

Investors globally are calling for disclosure of material Scope 3 emissions – upstream and downstream – with companies providing context and specificity about the most significant Scope 3 emissions. This information is necessary for investors to develop a full picture of transition risk exposure to inform effective investment decisions and capital allocation.

Investor pressure aside, forward-looking and business-savvy companies are realizing that climate risks in the value chain cannot be ignored. In the push to ensure their operations are resilient in the face of climate-related financial risk, many companies say the business case is stronger than ever for tackling their scope 3 emissions. In just the past five years, nearly 20% of Fortune 500 companies have set ambitious targets for reducing GHG emissions across their entire value chains including emissions from their suppliers and consumers using their products. This creates market pressure for companies within supply chains to follow suit or risk losing out on contracts and market share if they are unable to show their business customers that they are addressing their own GHG emissions.

This year, Ceres interviewed executives at Mars and McCormick, two of the world’s leading food and consumer brand companies, about this latest and perhaps most challenging frontier in corporate efforts to address climate risks and opportunities. Both disclose scope 1, 2, and 3 emissions to the Carbon Disclosure Project (CDP), have 1.5°C aligned near-term targets set and verified through the Science Based Targets initiative (SBTi), and have committed to a net zero target through SBTi, which requires emission reductions by more than 90% across their value chains by 2050 at the latest.

Armed with the data showing where their emission hot spots are along their value chain and targets showing them how much they need to reduce, they have begun to take action. Not surprisingly, this requires significant focus on scope 3. While acknowledging the enormity of the task – curbing emissions from tens of thousands of suppliers scattered worldwide – the executives are in strong agreement about the urgency and imperative. 

“It’s an enormous challenge and strategic imperative,” said Adrienne Gifford, who co-leads McCormick’s sustainable sourcing efforts, noting that scope 3 emissions account for 96.5% of the spice company’s total emissions, including 63% for raw materials alone. “But if we want to achieve our overall climate goals and be a good steward of the planet, then we have to address emissions in our supply chains.” 

McCormick and Mars are working to better engage with suppliers on reducing carbon emissions. They have partnered with nine other global consumer brands on the Supplier Leadership on Climate Transition (LoCT) consortium, an initiative that is funding the engagement of their biggest global suppliers on carbon emissions foot printing, goal setting, and on-the-ground education and training. 

The partnership makes good sense because the member companies, including Coca-Cola, PepsiCo, and Nestle, use many of the same suppliers. By working together, they can develop shared expectations on how suppliers should be measuring, reporting, and reducing their emissions. Over time, they can move in lockstep in raising those expectations.

“There’s only a finite number of suppliers that are growing all our food and processing all our food,” Gifford said. “Forming an alliance with other companies with whom we share a common supply space is really helpful.” 

“We really need suppliers’ whole businesses to be on the same page, moving in the same direction towards net zero,” says Autumn Fox, who is leading sustainable sourcing efforts at Mars, a privately held company that sells dozens of candy products including Snickers and M&M’s. 

Five years into its scope 3 work, Mars is assuredly making progress. The company is already working with major suppliers that account for a third of its total emissions, primarily raw material and logistics providers. It has reduced its scope 3 emissions by 6% compared to 2015 levels over a period in time where the company has seen significant growth. Still, the company is well short of its interim goal of a 27% reduction by 2025. “It is a challenge, let’s not sugar coat it,” Fox said. 

While the task at hand can seem daunting, these companies believe measuring, reporting, and reducing their scope 3 emissions is possible and makes good business sense whether they are publicly listed or private.

In addition to identifying ways to reduce scope 3 emissions, this increased visibility into supply chains can help companies mitigate future business vulnerabilities, ensure the long-term stability of their supply chains, and support their suppliers’ ability to respond to escalating climate risks. 

That is why, helping growers in their value chain, especially smallholder farmers, strengthen their climate resilience and overall living conditions is another key priority for these two companies. For example, McCormick is partnering with development agencies, the U.S. Agency for International Development and GIZ, the German office of international development, to help vanilla growers in Madagascar, a global vanilla hub that has been devastated in recent years by cyclones. 

By understanding which raw materials have the most climate risks, companies can ensure these efforts are focused in the right places.

Longer term, the companies see enormous value in aligning their business strategies with global climate objectives. “Recognizing that all of our carbon footprint matters and that it needs to be reduced now will help us build the right business plan and be competitive compared to others that don’t [reduce their emissions],” Fox said.

Whether it’s improving farmer livelihoods or reducing their scope 3 emissions, the companies are committed to working collaboratively – and patiently – with their global suppliers, while maintaining a sense of urgency toward mitigating climate change.