The Overlooked Giant in Supply Chain Emissions

In 2023, corporates reported that their Scope 3 supply chain emissions were, on average, 26 times greater than their direct operations emissions (Scopes 1 and 2). According to the new report "Scope 3 Upstream: Big Challenges, Simple Remedies" by Boston Consulting Group (BCG) and CDP, upstream emissions from the manufacturing, retail, and materials sectors were 1.4 times the total CO2 emitted in the EU in 2022.

Notably, the manufacturing, retail, and materials sectors reported upstream emissions of 1.4 times the total CO2 emitted in the EU in 2022. Despite this disproportionate scale, these emissions continue to be overlooked, with corporations twice as likely to measure operational emissions and 2.4 times more likely to set targets for them than supply chain emissions. Alarmingly, only 15% of corporates disclosing through CDP have set upstream Scope 3 targets.

Catalyzing Action: The Role of Corporates and Investors

Two groups share the onus of action and accountability: corporates (management and the board of directors) and investors. Corporates must drive change internally, while investors must reinforce it through the capital market.

Corporates: Catalyzing a Step Change in Scope 3 Upstream

Three factors can catalyze action:

• Climate-Responsible Board Climate oversight by a board is central to fulfilling fiduciary responsibilities. Accountability for climate-positive actions starts with the board and cascades through the organization. Notably, corporates with a climate-responsible board are 4.8 times more likely to set upstream Scope 3 targets. However, only 1 in 3 corporates disclosing through CDP have such a board. Strengthening climate competence in boardrooms is imperative.
• Supplier Engagement Corporates engaging with suppliers are 6.6 times more likely to have a Scope 3 (upstream) target with a 1.5°C-aligned transition plan. Delayed engagement leads to steeper reduction trajectories and higher supply chain risks. Despite this, only 4 in 10 corporates engage with suppliers on climate issues, and just 1 in 10 collaborate with them. Corporates must ramp up supplier engagement and account for risks in the supply chain.
• Adoption of Internal Carbon Pricing (ICP) Setting ICP drives climate-aligned decisions through financial metrics, ensuring climate cost transparency across an organization. Corporates with an ICP integrated into business decisions are 4.1 times more likely to have a 1.5°C-aligned transition plan. However, only 14% of corporates reporting through CDP use ICP. Boards must mandate a fair internal price for carbon to drive low CO2 decisions effectively.

Investors: Measuring Climate Risk

There is a dichotomy in how risk is priced by corporates and investors, leading to significant supply chain risks that can adversely impact business performance. Only 1 in 2 corporates evaluate the financial risks from upstream emissions and a third of those that do acknowledge the risk to profit. Disclosed upstream emissions from the manufacturing, retail, and materials sectors in 2023 alone imply a carbon liability of over $335 billion.

Investors are responsible for pricing in risk from Scope 3 appropriately, yet they are not adequately pricing in upstream risks. As part of investment policies, fewer than 1 in 10 require investees/clients to disclose Scope 3 upstream emissions. Investors must demand disclosure on upstream risks and climate risk prices as a surrogate force to drive transparency and action. Without company-specific data, investors can leverage a “climate-adjusted” Capital Asset Pricing Model (CAPM) to embed risk into valuations.

Immediate Priorities for Corporates and Investors

Board:

• Nominate at least one climate-competent board member and set up a board climate committee (leveraging independent members or advisors).
• Articulate positive climate impact in the board’s Terms of Reference.
• Mandate financial quantification of upstream Scope 3 risks and report to the Audit and Risk Committee.

Governance:

• Launch holistic supplier engagement programs – measure and set upstream targets.
• Pilot and embed internal carbon pricing in decision-making.

Investors:

• Embed climate risk in CAPM to ensure fair market valuations
• Drive emissions transparency and Scope 3 action.

Despite the disproportionate scale of supply chain Scope 3 emissions, they remain overlooked. With only 15% of corporates having set a supply chain emissions target, there is an urgent need for action. A climate-responsible board, supplier engagement, and internal carbon pricing are three significant drivers of action in supply chain emissions.

In 2023, disclosed upstream emissions from the manufacturing, retail, and materials sectors alone suggest a carbon liability of over $335 billion. Scope 3 emission blind spots drive significant unreported risks for investors and corporates.

Upcoming Event

Transitioning to clean energy often overlooks the supply chain’s role in emissions reduction. Scope 3 emissions from the entire value chain often surpass direct carbon footprint, so addressing greenhouse gas emissions across the value chain is essential. Join Enel’s webinar with sustainability experts Alvaro Pereira and Adrian Dietz to learn about promoting sustainable practices in your supply chain and developing effective engagement strategies for emission reductions.

• Title: Decarbonization decoded: Unleash the power of supplier engagement
• Date: 6/26
• Time: 11:00 A.M. ET
• Registration Link