Hybrid LCAs help companies size up Scope 3 emissions

More than 180 Fortune 500 companies now report on some portion of their supply chain and product greenhouse gas (GHG) emissions, also known as Scope 3, from virtually none a decade ago.

This type of assessment has become easier and streamlined through the use of a life cycle assessment (LCA) technique called hybrid LCA, which is supported by the Greenhouse Gas Protocol and has long been considered best practice in academia. Using hybrid LCA, Honda made headlines last year by becoming the first company to report on all 15 categories of the Greenhouse Gas Protocol.

Many Fortune 500 companies across all industries are going down the same track. These include Bank of America in the banking sector, Sprint Nextel in telecom services, Cisco in technology, Lockheed Martin in aerospace and defense and Kraft in food processing, to name a few.

The main advantage of hybrid LCAs is that they combine detailed process LCA data with existing and extensive government and industry databases known as input-output databases, which track the average emissions of the various industries across the entire supply chain.

But there is a potential downside of using input-output-based approaches. If companies only use these databases of industry average emissions, results can end up too high-level and not specific enough for strategic decision-making. It is important that these estimates of supply chain impacts be refined by drilling down on hotspots and collecting additional data in areas material for the analysis.

Leveraging such databases for hybrid LCAs shortens the time to perform Scope 3 assessments from two to four years to around three to five months, with dramatically reduced requests for information going out to suppliers. Scope 3 assessments that used to cost between $1 million and $2.5 million can now be performed at about a 10th of the cost.

This is crucial at a time when companies face growing societal and financial pressure to focus sustainability budgets on what truly matters environmentally and financially. The increasingly savvy public can see through anecdotal feel-good stories in glossy annual reports, and most environmental rating agencies now look at the full value chain to assess and rank companies. At the same time, CFOs need a good answer internally for why sustainability resources are being spent and how these reduce both environmental and financial risks.

For example, an initiative to reduce water consumption in employee facilities may make for a nice story, but will likely pale from both an environmental and financial standpoint when compared to the benefits of a better-designed product that saves customers money through reduced energy consumption. Most impacts and risks are generated upstream in the supply chain and downstream in the use of products, with less than 2 percent of impacts and risks generated internally at a typical Fortune 500 company.

Categories of greenhouse gas analysis. Source: World Resources Institute

Stephen Stokes, Gartner's vice president of Research, noted in a recent best practice paper some of Lockheed Martin's findings when using hybrid LCA to analyze how much was at stake in its supply chain. The company discovered that environmentally, the supply chain represented 98 percent of cradle-to-gate impacts, while financially, supply chain energy spending alone equaled about 35 percent of the company's earnings before interest and taxes. Scope 3 impacts are becoming hard to ignore, even for financial folks.

Even industries with limited direct impacts like banking are now under increased scrutiny from the Securities and Exchange Commission (SEC) to report both direct and indirect climate change-related risk to investors. This makes financial sense: Last January, HSBC issued a report (PDF) showing that oil and gas companies could lose 40 to 60 percent of their value in a low carbon scenario. Note that a low carbon scenario is not based on a radical green agenda but rather on what the International Energy Agency estimates is needed for a 50 percent chance of limiting temperature rise from pre-industrial levels to 2 degrees Celsius.

Last January, PNC Bank learned this the hard way when the SEC insisted that it report climate change-related risks linked to its investments. A decade ago, while most banks were at best trying to reduce the energy expenses of their offices, it would have seemed inconceivable that the SEC, not EPA, would have requested banks to report to shareholders the environmental and financial risks of various activities, such as investing in coal-fired power plants.

A robust Scope 3 assessment that is compliant with the GHG Protocol standard is an important foundation for any company operating in this business climate and trying to effectively report and reduce its environmental impacts.

It not only reveals what matters environmentally and financially in a company's value chain but also helps ensure that scarce sustainability resources get allocated to areas with the largest reduction opportunities.

Chain image by Kris Krug via Flickr.