Is Your Company a Greenhouse Gas Culprit?

FTI Consulting

With investors so focused on the E in ESG, now is the time to root out the unexpected sources of pollution coming from your supply chain and elsewhere.

Conversations about industries that contribute heavily to greenhouse gas (GHG) emissions tend to point toward familiar suspects, such as energy and transportation. But a company doesn’t need to own an aging oil rig to be part of the problem. When you take into account a company’s entire value chain and the life cycle of its products — how its raw materials are shipped, how its customers dispose of its products, even how its employees get to work — some unlikely industries emerge as major GHG culprits.

The EPA has a name for these sorts of “hidden” pollutants: Scope 3 emissions (see sidebar). For years, Scope 3 emissions, which are produced indirectly by a company, flew under the radar as regulators focused on more obvious sources. But with global attention on environmental, social and governance (ESG) investing, indirect emissions are coming under greater scrutiny.

The EPA categorizes GHG emissions by “scopes”

  • Scope 1 emissions are those a company directly produces through its own facilities or assets (think dirty smokestacks or that leaky fracking site).
  • Scope 2 are indirect emissions from the generation of energy purchased by the company (heat, electricity and cooling).
  • Scope 3 are indirect and cover everything else, such as employee travel, solid waste disposal and losses associated with purchased electricity.

Today, investors, regulators and even consumers are taking an interest in the carbon footprint of a company’s entire supply chain and product life cycle. To attract ESG investment dollars —which now account for one-third of total U.S. assets under management, or USD$17.1 trillion —companies must not only account for their Scope 3 emissions, but demonstrate how they’re working to reduce them.

Just because emissions are indirect doesn’t mean they are invisible — or beyond your control. There are ways to work with suppliers and buyers to reduce Scope 3 emissions. The first step is to measure them by taking an inventory of all your GHG emissions. Surveying your value chain for life cycle emissions could be ideal but isn’t always practical, at least when starting off. There are then multiple models that can help you estimate emissions along your value chain. Scope 3 emissions inventorying is a multistep process that can be improved over time, but establishing the effort now will have enormous payoff in years to come.

Once you have an understanding of where your Scope 3 emissions are coming from, here are some ways to help reduce them.

Appeal directly to your suppliers

In 2017, Walmart launched Project Gigaton, an ambitious effort to remove 1 gigaton of GHG emissions from its value chain by 2030. The retailer identified six areas where suppliers could meaningfully reduce their emissions (energy, agriculture, waste, product, forests and packaging) and even built a platform its suppliers could use to chart their progress. So far, 2,300 suppliers have signed on.

Yet even Walmart, with its massive resources and influence, has acknowledged the challenge of getting other companies to take action. "Because success depends on the collective efforts of many,” the retailer said in a 2019 report, “there may be times where we fall short.”

But companies don’t have to be a Walmart to hold sway with suppliers. Once you’ve done your GHG inventory, you should know where the bulk of your Scope 3 emissions are coming from —and where you’re spending the most money. The cross-section of those two data points is a good place to start identifying solutions.

To increase the likelihood of cooperation, your request can be framed not in terms of cost reduction, but in customer acquisition: If your suppliers reduce their emissions, it will help your company attract more customers, which will ultimately mean more business for them.

Switch suppliers

If your current suppliers are unable or unwilling to decarbonize, consider switching to others that use more sustainable practices. This can take some legwork: attending trade shows, reading sustainability reports, seeking recommendations from others. But if your current suppliers have not yet begun their journey to reducing emissions, it could be the most expedient way to reduce your own.

Integrate more sustainable raw materials into your supply chain Nearly all raw materials will have some impact on the environment. But today, every industry has sustainable or recycled sourcing options that can reduce a manufacturer’s carbon footprint with little discernible impact on the final product.

For apparel companies, that can mean shifting to organic cotton. Grocery manufacturers can swap out palm oil for sunflower oil. Consumer packaged goods companies can adopt packaging that is recycled or made from cornstarch or seaweed. Coffee retailers can make a big dent by trading in their plastic-lined paper cups — which consumers are often surprised to learn are not recyclable — with fully paper ones.

Engage your buyers to reduce waste

Many Scope 3 emissions occur after your product has left your hands, like the energy that end users consume when cleaning, caring for or operating your product, as well as the waste produced by disposing of it. Educating your customers on more responsible ways to care for and dispose of your products can reduce your carbon footprint.

Key Insights:

  • Scope 3 emissions come from unexpected sources up and down your value chain and are increasingly under scrutiny from investors, consumers and regulators.
  • There are several tools available to help companies calculate their Scope 3 emissions, a multistep process that can pay off for years to come.
  • Methods for reducing Scope 3 emissions include cutting down on employee travel, switching suppliers, substituting sustainable raw materials and instituting product buyback programs.

Quick wins include attaching a label to your product with ecofriendly washing instructions, which can cut down on emissions from maintenance. Clearly labeling recyclable elements can reduce waste.

Some companies have introduced innovative buyback programs that turn potential landfill into usable materials. In 2019, J. Crew launched a denim buyback program through which the retailer buys back its used jeans and recycles them as insulation material for Habitat for Humanity.

Encourage low-carbon commuting and business travel

Then there’s supporting employees to continue to take advantage of the remote working option so prevalent now, as it would cut back on emissions related to commuting. Bike racks outside of work can incentivize transportation alternatives, as can subsidizing fuel and parking fees for those who carpool and having adequate charging stations for electric vehicles. Similarly, encouraging corporate travelers to rent or rideshare with low-emission vehicles will lower emissions.

Regardless of which steps you take, remember that reducing Scope 3 emissions is a long-term endeavor. Start by focusing on those aspects of your supply chain and product life cycle that you can best control, as well as things that are of greatest concern to your primary stakeholders. It may be years before you see a significant difference in your carbon footprint, but the adjustments you make now will become plainly visible to those most invested in your company, making a world of difference where it matters most.

Written by:

FTI Consulting

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