A Sneak Peek at the New Rules for Supply Chain Footprinting

A Sneak Peek at the New Rules for Supply Chain Footprinting

Image CC licensed by Flickr user sєαttlєчє

The art and science of carbon footprinting is about to take a step forward: The long-awaited launch of guidance for managing network and product lifecycle impacts is just around the corner.

If that's news to you -- and you have anything to do with managing a business with a significant supply chain -- here's your chance to get up to speed.

First, a little background. Carbon footprinting took off in 2001, when the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) established the GHG Protocol Corporate Standard. This standard outlined a practical way to quantify the greenhouse gas (GHG) emissions produced from materials and energy use in business operations.

It did this by offering an accounting framework with three GHG emissions "scopes:" Scope 1 is a sum of emissions from fuel, refrigerants, industrial gases, and other materials combusted or used at sites the company owns or controls; Scope 2 adds up emissions linked to electricity used by those facilities; and Scope 3 encompasses all other emissions in the business value chain.

Measurement of the "internal," or "operational," emissions of scopes 1 and 2 has always been straightforward, and thus those standards have been rapidly adopted. Today, a significant majority of the Global 500 companies report on operational emissions.

Scope 3, however, has incited many debates over interpretation. Originally referring to emissions from supply chains, including products, waste, distribution, and travel, Scope 3 outlined a much larger and more complex set of issues than those that characterize emissions from internal operations.

While Scope 3 has always been recognized as important, and indeed reporting has been growing, companies have been clamoring for more detailed guidance. Many companies have focused on addressing more easily measured Scope 3 activities, such as business travel and employee commuting. Also, business networks, such as the Clean Cargo Working Group and the Electronics Industry Citizenship Coalition, have begun developing shared approaches for issues very focused on their industries.

But there has not been a common language for measuring Scope 3 impacts in detail across industries. That's about to change.

By summer 2011, WRI and WBCSD will finalize the Scope 3 standard and the related Product standard. This will be the result of a three-year project involving more than 1,500 diverse stakeholders from governments, research institutions, businesses, and civil society, all contributing to various discussions and drafts. BSR and many of its member companies have been represented in a technical working group.

Unofficially, this has been even longer in the making. A year after the 2001 launch of the first edition of the Corporate standard, a working group explored ways to flesh out Scope 3 with lifecycle assessment tools, finding that significant time and effort would be needed to produce an effective framework.

What led us to this final chapter? Brian Glazebrook, a senior manager of social responsibility at Cisco Systems who has been involved with Scope 3 efforts from the start, says that lifecycle and supply chain information is becoming more commoditized and therefore less expensive, while at the same time there is more demand for transparency. We have crossed a threshold that is making Scope 3 management undeniably more attractive to companies, and the case to do more will only become stronger.

Next Page: A Q&A on the Scope 3 standard with Pankaj Bhatia, director of the GHG Protocol at WRI

Following are highlights of a recent discussion I had with Pankaj Bhatia (pictured below), director of the GHG Protocol at WRI, offering a preview of what's to come.

Ryan Schuchard: Pankaj, how will the Scope 3 standard help companies?

Pankaj Bhatia: It will enable them to develop an organized understanding of the impacts, risks, opportunities, and considerations from energy and other sources of GHG emissions throughout business networks and relationships. As a comprehensive accounting and reporting framework, it will facilitate identifying GHG reduction opportunities, setting reduction targets, and tracking performance in value chains. In turn, it will provide a sophisticated framework for reporting to the Carbon Disclosure Project and the Securities and Exchange Commission, in annual CSR reports, and for other GHG transparency programs and B2B initiatives. It also may lead companies to develop stronger relationships with suppliers by reducing waste and improving efficiency through GHG management in their supply chains.

RS: What kinds of companies should utilize it? Pankaj Bhatia

PB: The Scope 3 standard is written for companies of all sizes in all economic sectors. It is especially applicable to three types of companies: (1) those with significant emissions in their upstream or downstream activities, (2) those that would like to engage and inform their stakeholders about their value chain emissions and performance, and (3) those wanting to identify business risks and opportunities in their value chain and develop strategies to minimize risks and leverage opportunities.

RS: Is it a full "standard" -- in the way the GHG Protocol Corporate Standard is a standard?

PB: Yes. A GHG Protocol publication qualifies as a standard if it provides verifiable accounting and reporting requirements. The standard uses the term "shall" (e.g., "Companies shall account for and report all Scope 3 emissions and disclose and justify any exclusions.") to indicate what is required for a GHG inventory to be in conformance with the Scope 3 standard.

Companies may use the inventory information to identify, prioritize, and guide innovative emissions reduction activities within and across Scope 3 activities. For example, a company whose largest source of value-chain emissions is contracted logistics may choose to optimize these operations through changes to product packaging to increase the volume per shipment, or by increasing the number of low-carbon logistics providers. Additionally, companies may utilize this information to change their procurement practices or improve product design or product efficiency, resulting in reduced energy use.

RS: Will there be any completely new ideas?

PB: Yes. Scope 3 emissions are now categorized into 15 distinct, mutually exclusive categories that avoid double counting. These categories are intended to provide companies with a systematic framework to organize, understand, and report on the diversity of Scope 3 activities within a corporate value chain.

Also, there is more guidance on characterizing confidence in data. This guidance was requested by stakeholders, since Scope 3 emissions data may be relatively less accurate and precise than Scope 1 and Scope 2 emissions data. Additionally, the Scope 3 standard allows for a range of data collection and calculation approaches, with a varying range of data quality. Scope 3 data may include reliance on value chain partners to provide data, broader use of secondary data, and broader use of assumptions and modeling (such as for downstream emissions categories, such as the use of sold products by consumers).

Higher uncertainty for Scope 3 calculations is acceptable as long as the data quality of the inventory is sufficient to support the company's goals and the information needs of key stakeholders such as investors, while providing transparency on limitations of the Scope 3 data to avoid potential misuses. Companies are therefore required to provide a description of the accuracy and completeness of reported Scope 3 emissions data and a description of the methods and data sources used to calculate the inventory. The standard provides descriptions of accuracy and completeness, guidance on describing data quality, and guidance on uncertainty. The standard doesn't require companies to provide a quantitative confidence level or confidence interval associated with the reported emissions data -- though this is optional.

RS: Will the standard provide a good tool to compare companies against each other?

PB: No and yes. First, it is important to understand the limits. Companies' selection of one or more Scope 3 categories and their choice of whether to base measurement on operational control or financial investment is based on considerations that aren't easily comparable across companies, like corporate vision and business risk. That means even companies that seem like peers may not prioritize the same things, so it would not be meaningful to uniformly prescribe what should "count." Also, within categories, the level of data quality and control will vary with the level of vertical integration and the public data infrastructure where sites are located.

What it will enable is comparison of the level of depth that companies measure and report on. This will help to clarify that a larger footprint doesn't necessarily mean a company is worse off, but rather, that it might be examining its networks in more detail. Also, while the standard won't provide a robust way to directly compare GHG performance between companies, it will let a company measure performance against its own baseline, which potentially could be compared between companies.

As companies take up this type of reporting, there will be opportunities to develop more specific norms and benchmarking for better comparability among more specific situations. In many ways, that's what this standard provides—a platform that creates unified language across industries for going deeper on comparisons of key applications through development of sector-specific rules.

RS: What kind of data will companies need to gather to measure Scope 3?

PB: The standard asks that companies select data that is most representative in terms of technology, time, and geography; most complete; and most precise. We have categorized data needed to calculate Scope 3 emissions into two types: primary data and secondary data. Primary data means specific data provided by suppliers or other companies in the value chain related to the reporting company's activities, including primary activity data, and emissions data that is calculated using primary activity data (e.g., primary activity data combined with a secondary emission factor). Primary data does not include financial data (e.g., spend) used to calculate emissions.

Secondary data refers to industry-average data (such as from published databases, government statistics, literature studies, and industry associations), financial data, proxy data, and other generic data. Primary data and secondary data each have advantages. For example, primary data best enables performance tracking of individual value chain partners and supply chain GHG management, while secondary data can be a useful tool for efficiently prioritizing investments in primary data collection and for tracking emissions from minor sources.

Choosing the appropriate type of data depends on the company's business goals. The standard asks companies to make sure that the data quality of the Scope 3 inventory is sufficient to ensure that the inventory is relevant -- both internally and for a company's stakeholders -- and that it supports effective decision making.

Companies may find that for a given activity, secondary data is of higher quality than the available primary data. In this case, if the company's primary goal is to maximize the data quality of the Scope 3 inventory to improve decision making where accuracy is important, it should select secondary data. If the company's primary goal is to set reduction targets and track performance from specific operations within the value chain, or to engage suppliers, the company should select primary data.

RS: What does the Scope 3 standard have to do with the Product standard?

PB: While the Scope 3 standard covers measurement and accounting to characterize the many broad types of corporate networks and relationships, the Product standard focuses on a view of the whole lifecycle of individual products. These two standards, which have been developed in parallel, share many features in common: accounting principles, approach to data allocation, approach to data collection, and treatment of confidence. A key difference is that a Scope 3 inventory is structured by organization-wide business activities, such as leased operations and employee travel, while a Product inventory is organized by key stages in the lifecycle of a product, like processing and recycling. These two different tool sets reflect two different needs: on the one hand, characterizing products' lifecycles, especially from the view of the customer; on the other, examining the administration of organizational interrelationships and networks, something investors in particular are concerned about.

Watch for the release of the final Scope 3 and Product text next spring, and contact Ryan if you have questions.

Image CC licensed by Flickr user sєαttlєчє.