Sourcing's Big Opportunity in 2022: Reducing Scope 3 Emissions

Posted: 12/10/2021 - 09:00
Scope 3 includes all other indirect emissions that occur in a company’s value chain.

Sourcing's Big Opportunity in 2022: Reducing Scope 3 Emissions

Sustainability: It’s a word that certainly needs no introduction and one with global implications that reach far beyond that of the supply chain crisis we’re experiencing. Some devastating impacts of climate change are now unavoidable, and the topic of sustainability in procurement is heating up, too.

Without immediate and drastic action, the landmark Paris COP21 (2015) target of capping global warming at 1.5C will slip out of reach. Greenhouse Gas Emissions (GHG) – a by-product of how we’ve been making, shipping, and/or providing energy-intensive products and services – are a significant contributor to negative environmental impacts.

At the time of writing, outcomes from the recently concluded COP26 negotiations have gravely warned that without ramping up pressure on polluters, the climate crisis is on track to making large areas of the planet uninhabitable.

It’s a formidable challenge to ensure this doesn’t happen, and industries across all sectors have a part to play. Procurement is at the forefront of this challenge because it directly influences trillions of dollars of spend and can pivot supply chain practices onto a more sustainable path.

Freight transport and logistics account for a significant amount of annual global GHG emissions. Yet remarkably few Logistics Service Providers (LSPs) have made forthright commitments to report on or reduce these. For those who have, this rarely spans beyond their own controlled sources (Scope 1 and 2) to include Scope 3, the indirect emissions in a company’s value chain that result from their suppliers’ activities. Let’s cover Scope 1, 2 and 3 in more detail.

>>SIG Members: Dive deeper into Scope 3 Emissions in this on-demand webinar with Keelvar CEO Alan Holland, SIG CEO and President Dawn Tiura, and Sustainable Logistics and Supply Chain Management expert John Muncey.<<

The Inside Scope

The global methodology for measuring and managing GHG emissions, the GHG Protocol, categorizes them into three specific groups. Scope 1 covers direct emissions from equipment or processes owned or controlled by the organization, while Scope 2 addresses indirect emissions from the generation of purchased electricity, steam, heating and cooling.

However, here’s where the biggest challenge of all lies: Scope 3 includes all other indirect emissions that occur in a company’s value chain – not those with the company, but those arising from sources that they do not own or control.

According to research by environmental sustainability advisory firm Carbon Trust, for many companies, Scope 3 emissions can represent as much as 65% to 95% of a company's carbon footprint.

Thus, the decisions made by sourcing teams – such as positively engaging suppliers that implement strong sustainability initiatives and calling out laggards that fail to reduce or report emissions – can have a substantial impact on their enterprise’s sustainability improvement journey.

Murmurings of the significance of implementing such initiatives are gradually increasing in procurement circles: a 2021 survey of sourcing professionals conducted by Keelvar revealed almost three-quarters of respondents see sustainability as the supplier attribute that will increase the most in importance within five years.

The Implications for Procurement

Procurement professionals may not have always fought directly on sustainability’s front lines, but with sales increasing rapidly for solar panels, clothes made from recycled or sustainable materials and electric cars, customers are signaling their conscious inclination to favor brands committed to the environment in practice.

The C-Suite can’t afford to ignore these trends and is increasingly making sustainability a business imperative with clearly stated goals, lest they be accused of “greenwashing.”

Therein lies a potential problem. When a business decides to optimize for sustainability, they must implement a mechanism that prioritizes sustainable suppliers over others. But with so much at stake in the here and now of today’s competitive supply chain marketplace, factoring tracked GHG emissions data as part of supplier award criteria could see time and resource-strapped sourcing employees having to make cost trade-offs in favor of meeting emission reduction targets.

In many cases, the sourcing team member is not making this decision alone; they are collaborating with the spend category managers and also with their leadership to determine which award scenario should be selected given all of these different goals.

It’s also important to note that while most large, sustainability-focused organizations will have a clear picture of their Scope 1 and Scope 2 emissions, Scope 3 data tends to be much more elusive. Fortunately, however, e-Sourcing technology is perfect for such data capture and can make the process of analyzing trade-offs between cost and non-cost objectives much more manageable.

Scoping out Sustainability, Intelligently

To achieve all of this complex analysis and transparency, the right tooling is needed especially as this increasingly must occur at scale. While basic spreadsheet tools can support simple analysis of an organization’s expected emissions, they fall short on the ability to analyze trade-offs between multiple objectives. Solutions in sourcing optimization are ideally suited for such work, as they are designed to collect a wider variety of data from suppliers and then compare various scenarios as different constraints and objectives are applied.

Within sourcing optimization, scenario analysis can let sourcing teams quickly assess the balance between CO2 reduction and cost, then bias in favor of suppliers with more sustainable approaches that suit their budget allocations. Then with the advent of sourcing automation, sourcing best practices can be consistently applied from end-to-end so there is a clear path to scalable operationalizing of sustainability with human oversight at key points of the process.

By working in partnership with suppliers to leverage key data, and with the help of intelligent optimization tools, companies are able to make informed decisions about their environmental impact. That helps them to meet regulations and satisfy customer preferences, without excessively burdening their purchasing team.

As Sustainable Logistics and Supply Chain Management expert John Muncey warns, “we have no time to lose in the battle to reduce GHG emissions.” Ultimately, it will be the agile and accountable companies who act to incorporate sustainability into their procurement processes today who will thrive the most in the business environments of tomorrow.


About The Author

Alan Holland's picture

Previously a lecturer in Artificial Intelligence at the University College Cork (Ireland) Computer Science Department, Alan Holland founded e-sourcing software company Keelvar in September 2012 when he left the University to commercialize advances in AI for procurement teams. ‍He specializes in optimization, game theory, and mechanism design. He is a frequent speaker and contributor to supply chain and procurement conferences and publications.