For many companies that produce physical products, supply chains are one of the largest sources of greenhouse gas emissions and environmental impact. Such industries ranging from apparel and consumer goods to electronics and food, invest in supply chain transparency, supplier engagement, and carbon accounting to calculate their Scope 3 emissions, achieve climate targets, and reduce business risks.
However, what many physical products companies may not understand is that their indirect emissions (regarding supply chain emissions) can be 5 to 25 times higher than their direct emissions. So, how can finance, supply chain, and substantiality teams approach supply chain carbon calculations, emissions reduction, and reporting?
We’ve created this short guide with information your company can use to reduce supply chain carbon emissions and reporting.
What are Supply Chain Emissions?
The definition of supply chain emissions is extremely important in carbon accounting, as well as how to categorise supply chain emissions. It can be confusing and challenging even for experienced sustainability professionals. So, here’s a definition of supply chain emissions to make it more clear for your organisation.
In carbon accounting terms, a company has upstream and downstream supply chains. The upstream supply chain is the value chain that creates your products, including:
Purchased goods & services: includes the extraction, production, and transportation of materials and services that go into making your products.
Capital goods: the extraction, production, and transportation of capital goods purchased or acquired by your business. Capital goods can include machinery, equipment, vehicles, and tools used to make finished products.
Upstream transportation & distribution: the transportation of goods and materials in vehicles not owned or controlled by the company.
Upstream leased assets: leased assets from your upstream supply chain can include a rented factory or facility.
Waste: generated from operations, including supply chain waste.
Business travel: emissions from travel by employees for business purposes.
Employee commuting: emissions created by travel due to employees commuting to and from work.
On the other hand, the downstream supply chain includes products going from your business to customers, all the way to the product’s end of lifecycle, including:
Downstream transportation & distribution: transportation of goods and materials in vehicles not owned or controlled by the company and not included in the accounting for the upstream supply chain.
Processing of sold products: processing of any intermediate products sold.
End-of-life treatment of sold products: waste disposal and treatment of products sold by your organisation at the end of their lifecycle.
Downstream leased assets: leased downstream assets, such as a rented warehouse or distribution centre.
Franchises: emission from any franchise (if applicable).
Investments: any investment-related, indirect emissions in a company’s supply chain.
The sum of your upstream emissions plus your downstream emissions equals the total carbon footprint of your supply chain.
Carbon Accounting of Supply Chain Emissions
This may all sound extremely complicated so far. However, carbon accounting of supply chain emissions is similar to financial accounting. Financial accounting adds up income and expenses into a budget; carbon accounting works in a similar way. Your company’s emissions are its carbon inventory, which can be reduced or netted against carbon improvements of offsets.
Here’s the equation for carbon accounting of supply chain emissions:
Upstream carbon emissions + downstream carbon emissions = total Scope 3 greenhouse gas emissions
That’s all there is to it! Of course, there are also supply chain carbon accounting boundaries to consider. These help you determine how to calculate supply chain emissions.
How to Calculate Supply Chain Emissions
The first method to calculate supply chain emissions is the spend-based carbon accounting estimate. This accounting method takes the financial value of a purchased good or service and multiplies it by an emission factor (the amount of emissions produced per unit or monetary value of the goods) to calculate an estimate of emissions.
There’s no universal source of emissions factor; these will be obtained from government agencies, academic research, company reports, and third-party standards organisations.
You need three data sources to calculate spend-based emissions: your purchases, your suppliers, and the corresponding emission factors. This data usually comes from your accounting department.
The spend-based method is best if the most accurate data you have is financial purchasing orders or similar data. Because this method relies on industry averages, this method will not be as accurate.
The second calculation method is an average data carbon accounting estimate. This method is similar to the spend-based method; however, rather than using financial data, this method relies on material weight data. This method can also not be as accurate as it relies on averages.
The most accurate supply chain carbon accounting method is the supplier-specific method. This method collects product-level “cradle to gate” greenhouse gas data from each supplier using sustainability surveys and data collection workflows.
The information in supplier-specific data is a form of activity-based estimation and can be used with suppliers of all kinds, including water usage, electricity, use, transportation vehicles, shipping, and more. The data must be gathered and then it’s necessary to identify the right emissions factor and convert the activity to carbon emissions.
Gathering this data can take time, and there may be gaps. In that case, a hybrid emissions calculation approach is necessary, which uses supplier-specific and activity-based data to fill in the gaps.
Improving Supply Chain Transparency & Emissions Accounting Maturity
Each supply chain is different, and every company starts at a different point in its sustainability journey. If you’re calculating your supply chain’s footprint for the first time with limited data, you may want to use the spend-based estimate. As your resources and capabilities, and supplier engagement grow, it will be possible to improve your calculation accuracy with more direct supplier data.
Software can also make the process much more manageable when collecting and calculating supply chain emissions.
Summing It Up
No matter which method your company uses, supply chain transparency and carbon accounting take investment. It also gives you a chance to improve your company’s climate performance and reduce risk.
If you’re just starting out and need some assistance with supply chain emissions calculations, it may be beneficial to seek out the help of an environmental consultancy. They have the knowledge and experience to help you get started on supply chain emissions calculation. And they can ensure you start out correctly in this essential process of reducing your company’s carbon emissions.
