Regulatory Developments and Customer Expectations
Regulatory developments and customer expectations are accelerating the sustainability agenda of companies throughout the world, especially high carbon-intensive companies. Decarbonization strategy development and implementation require that a company first has a visibility of all of their emissions, meaning Scope 1 and Scope 2, as well as scope 3 emissions. While companies can fairly easy gather data on Scope 1 and Scope 2 emissions, Scope 3 emissions still represent a challenge even for very mature companies.
The Challenge of Scope 3 Emissions
In carbon- intensive industries Scope 3 emissions, i.e., those generated in the upstream and downstream value chain, typically account for between 75% and 90% of all emissions. Recent research by PwC puts the average percentage of upstream Scope 3 emissions at 89% of the total within manufacturing enterprises. While the challenge of Scope 3 decarbonization may therefore seem very complex the key is first gain visibility in the upstream value chain and calculate the emissions coming from this activities. A comprehensive emissions reduction plan must be based on a reliable baseline. Since we are talking about emissions in the supply chain, it is obvious that procurement plays a pivotal role in the entire process.
While reducing costs and adding value have always been key strategic mandates for procurement, with supply chain resilience coming to the fore during the pandemic and beyond, decarbonization is now joining these as a top priority. It’s already recognized as such in leading manufacturing corporations from consumer durables to automotive, but the pressure will be increasingly felt in medium-sized companies as well in the years to come. So, what do you need to meet the challenge? One thing’s for sure. The best available procurement technology, from source to pay, is essential.
Here’s why:
Full Transparency:
Drawing up an emissions reduction plan requires complete visibility and transparency over the organization’s carbon footprint, screening and identifying all carbon emission sources and conducting detailed footprint modeling for those sources. This enables companies to track the origin and environmental footprint of the materials and components they use. Improved traceability ensures that sustainably sourced materials are prioritized, which is crucial for meeting decarbonization and broader ESG objectives.
In order to gain full visibility of your supply chain emissions you need supplier-specific measurement of Scope 3 emissions. This can be highly challenging in the manufacturing industry. Standard measures such as spend-based averages give an indication of a supplier’s emissions, but represent an estimate that can deviate significantly from the activity-based method or using emissions data directly from the supplier. In order to help you gain visibility of your Scope 3 emissions JAGGAER partnered with carbmee, one of the leading providers Scope 3 emissions calculation solutions
Based on this data you will identify emissions hotspots with the highest carbon reduction potential. This information will give you the insight you need to base future sourcing and purchasing decisions on a supplier’s ability and willingness to initiate or participate in joint emission reduction projects. Energy is a particular hotspot. You could, for example, define parameters for the procurement of renewable energy, setting targets that enable you to reach 100% renewable sources by 2030 with a specific mix of wind and solar and a preference for power generation within a certain radius of production sites.
For highly complex categories such as logistics and transportation, JAGGAER can help you pursue sourcing strategies that reduce the associated greenhouse gas emissions, for example by employing less air and road transport and adopting transportation lanes that make increased use of railways and waterways.
Supplier Onboarding and Management:
The PwC study finds that “prioritizing sustainable suppliers can achieve emission reductions of 10% to 30%”. It is therefore best practice to embed certain rules and criteria in your sourcing and supplier onboarding and management processes to ensure that you only buy from suppliers that meet your sustainability strategy objectrives. Ideally these should be aligned with an internationally recognized standard, notably the Science Based Targets initiative (SBTi). According to the research cited above by PwC, “as of March 2024, 4,858 global companies and financial institutions have approved Science Based Target initiative (SBTi) targets, which corresponds to an increase of approximately 60% since the beginning of 2023”.
Having onboarded suppliers, you need to monitor and engage with them to ensure that they not only adhere to sustainable practices but collaborate on efforts to reduce emissions. According to PwC “engaging suppliers in sustainability efforts can reduce emissions by 5% to 25%, turning suppliers into strategic partners in combating climate change.” Supplier management will play a huge role here to encourage, incentivize and measure collaborative decarbonization efforts.
Circularity:
The circular economy also provides massive opportunities to reduce Scope 3 emissions in the value chain. According to the Circularity Gap Report, GHG emissions could be cut by 39% by 2032 if we doubled global circularity. Upstream, manufacturers can bring products that would otherwise be discarded back into the economy. Packaging is one area where designers and manufacturers are already getting creative: natural products can be used to replace plastic packaging. But in automotive, too, there are many initiatives, some of them supported at EU or national level, to increase the use of recycled materials in components such as EV batteries. The key here is to have access to as wide a pool of suppliers as possible within all categories, but especially when we look at GHG emissions hotspot categories.
A bigger challenge for many manufacturing companies is how to reduce Scope 3 emissions in the downstream value chain. How do you manage waste and end-of-life (recovery, recycling etc.) for your products? In automotive, with ten million vehicles being scrapped in Europe every year, circularity presents massive untapped business opportunities, according to research by Deloitte, as well as scope for reducing carbon footprint. Manufacturers would do well to identify suppliers that can recover key materials that have a major impact such as aluminum, steel and plastics.
Risk Management:
Proactive risk management is essential for long-term sustainability, and this requires real-time visibility across the entire supply chain. By combining your own data, JAGGAER supplier data and data from real-time monitoring by third-party partners such as prewave you can get early warning of risks that may impact your Scope 3 emissions targets. With the right technology, a procurement team can automatically monitor non-compliance issues and ensure that their organization follows industry, local, national and international regulations. Drawing on these third-party data streams and using artificial intelligence, JAGGAER enables you to track compliance concerns holistically and automatically gives you alerts of non-compliance issues across the procurement process.
Compliance and Reporting:
Procurement technologies facilitate compliance with environmental regulations and support the reporting of sustainability metrics. This is especially important to meet the growing demands of regulatory bodies and stakeholders. In the European Union, the progressive introduction of the Carbon Border Adjustment Mechanism (CBAM) imposes a particularly urgent regulatory challenge, but also an opportunity. Designed to reduce carbon leakage through the substitution of goods produced in the EU by more carbon-intensive imports, or the relocation of EU production facilities abroad, CBAM will increasingly provide a financial incentive for companies to decarbonize their supply chains. Rules are constantly being introduced or amended so it is also a good idea to integrate a legislation checker into your procurement processes to ensure that you meet all the current requirements and future expectations for carbon reporting.
Efficiency and Cost Control:
Finally, let’s be clear. Not only is it a mistake to regard cost management and spend reduction as antithetical to the pursuit of decarbonization; as carbon emissions become financially penalized and decarbonization efforts incentivized (e.g., through CBAM, see above), the two are merging into one. That said, companies need to remain financially sustainable as well as environmentally sustainable, and efficient procurement processes are critical to ensuring that the two are always aligned. Automated systems and data-driven decisions give procurement teams the agility to achieve their objectives across the multiple dimensions of cost efficiency, value, resilience and decarbonization.
