Supply chain decarbonisation in the chemical industry – Tackling the next frontier

"Emissions accounting and abatement across the value chain cannot be achieved by any one company in isolation. Continuous dialogue and close collaboration with suppliers along the decarbonisation trajectory are key to achieving high degrees of supply chain transparency and developing sustainable solutions."

Supply chain decarbonisation is an intricate task, but it can galvanise meaningful and comprehensive climate action. Climate-related disclosure requirements and statutory emission reduction targets are therefore being enacted and/or tightened by more and more jurisdictions. The following legally binding and voluntary frameworks all demand or at least recommend the collection of Scope 3 emissions data (not exhaustive):

• The European Sustainability Reporting Standards [4] of the Corporate Sustainability Reporting Directive (CSRD), a key pillar of the EU Green Deal. They apply to approximately 50,000 companies.
• The global baseline standards of the International Sustainability Standards Board (ISSB) [5]. They are likely to become mandatory in many jurisdictions, including in developing countries [6].
• The proposed climate-related disclosures of the Securities and Exchange Commission (SEC) [7] in the US, which apply to public companies. Scope 3 emissions are to be disclosed if they are material or if a registrant has set an emissions reduction target that includes Scope 3. [Note that the SEC proposal is yet to be finalised and may still be subject to changes (as of 30 May 2023)]
• The proposed Californian Corporate Climate Data Accountability Act [8]. It will affect large public and private companies operating in the state. [Note that the proposal is yet to be adopted (as of 30 May 2023)]
• The Science Based Targets initiative (SBTi) [9], which is regarded as the gold standard of target setting grounded in science. Scope 3 emissions must be included for certain near-term targets and are compulsory for compliance with the initiative’s Net Zero Standard.
• The framework of the Task Force on Climate-Related Financial Disclosures (TCFD) [10] has been widely adopted by companies. It strongly recommends the disclosure of Scope 3 emissions. TCFD-aligned reporting has become compulsory in several countries.

The chemical industry is also heavily affected by policy regimes, such as the European ‘Fit for 55’ package. Several of the planned legislative measures will have profound implications for companies [11]. The Carbon Border Adjustment Mechanism (CBAM), for instance, an integral element of the European Emissions Trading System (ETS), will impose emission reporting obligations and a carbon price on specified imported products. While not being part of the initial CBAM scope, organic chemicals and polymers, hydrogen and ammonia may be included at a later stage of the transition period until 2026. At the very latest, chemicals are expected to be added by 2030. The move will undoubtedly impact chemical sourcing practices and supply chains in various ways.

Overall, pressures are clearly mounting for chemical companies to decarbonise not only their own operations but also their supply chains. They will have to apply a multi-pronged approach to rise to the challenge, depending on their specific business models and location in the value chain. Potential levers include the shift to bio-based feedstocks, process and energy optimisation and renewable energy procurement, among others.

The data conundrum

Companies face many pitfalls when elaborating ambitious decarbonisation pathways. There has been a proliferation of corporate net zero targets, frequently aiming for carbon neutrality by 2050 in keeping with the goals of the Paris Agreement. Still, numerous companies fail to disclose interim milestones and detailed roadmaps, give undue weight to emission offsetting as opposed to abatement or base their strategies on erroneous assumptions and data.

A particularly widespread shortcoming of many GHG targets is an over-reliance on Scopes 1 and 2 [12]. As the world needs to shift to a net zero economy, companies must above all rein in their Scope 3 emissions.

However, they often struggle to determine emissions for their fragmented supply chains. In a recent SBTi survey, 85% of respondents identified data access as a major impediment to developing robust Scope 3 emission inventories [13]. In total, only 6% of the companies were found to use primary supplier-specific data for baselining. Most companies resort to average emission factors, estimates or other proxies. The use of such secondary data is fraught with challenges [14].

This is where primary measured emissions data can help:

• It can enhance emission inventory accuracy;
• It can improve comparability;
• It can reveal high-impact emission reduction levers;
• It can enable more meaningful target setting; and
• It can facilitate the monitoring of decarbonisation actions and progress.

Going forward, business leaders will need more precise, granular and comparable data, not least to meet upcoming auditing requirements. Within the scope of the CSRD, for instance, sustainability disclosures will initially be subject to limited, and subsequently to reasonable, assurance checks. In other jurisdictions, regulators are also increasingly cracking down on greenwashing.

Companies need to be mindful of the fact that some Scope 3 emission categories carry more weight than others. Across industries, categories 1 – purchased goods and services – and 11 – use of sold products – are considered to be the main sources of emissions [15]. This also holds true for chemical companies and was corroborated by CDP research: More than 90% of 146 surveyed businesses confirmed the relevance of ‘purchased goods and services’ for their business models [16]. Overall, the category comprised approximately 44% of the companies’ carbon footprints, by far the largest source of value chain emissions. Further upstream, Scope 3 categories deemed pertinent by the companies included ‘upstream transportation and distribution’ (more than 3% of the total carbon footprint) and ‘fuel-and-energy-related activities, not included in Scope 1 and 2’ (approx. 2%).

In 2022, Together for Sustainability (TfS), a member-driven association in the chemical industry, published a detailed Product Carbon Footprint (PCF) Guideline [17]. It allows companies to calculate their PCFs with a particular focus on Scope 3.1 emissions from purchased goods and services, the most impactful Scope 3 category.

In the beginning, companies should prioritise and concentrate on the emission hotspots in line with their business models. While the initial focus of companies’ decarbonisation efforts should be on carbon-intensive tier 1 suppliers, the lower tiers eventually also need to be addressed. Still, supply chain emissions quantification and monitoring are no mean feat and it has become apparent that many organisations largely rely on manual processes, including using Excel, when compiling and managing Scope 3 data [18]. Such approaches are typically little effective and efficient, especially when dealing with large datasets. It is therefore, little surprise that companies consider investments in analytics and IT solutions as important levers to improve data collection and reporting [19].

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Stakeholder engagement

Emissions accounting and abatement across the value chain cannot be achieved by any one company in isolation. Continuous dialogue and close collaboration with suppliers along the decarbonisation trajectory are key to achieving high degrees of supply chain transparency and developing sustainable solutions.

Supplier engagement needs to be a long-term and continuous process. It should take into account that companies can be at different stages of maturity on their ESG journey. There are some best practice tactics to make the most of supplier relationships [20]:

• Ensure the process is meaningful for suppliers: Highlight what they can gain from collaborating with you.
• Avoid one-size-fits-all approaches: Tailor your engagement to the experience, available resources and needs of your suppliers.
• Apply more carrot, less stick: Treat your suppliers as partners. Attempt to incentivise and reward their participation in your initiatives.
• Promote mutual knowledge-sharing: Learn from your suppliers and spread valuable lessons throughout the supply chain.
• Keep it simple: Do not overwhelm your suppliers, they also have to cater to other customers’ needs.

Capacity-building is an integral element of supplier engagement strategies and benefits all parties involved. Supplier-specific data, for instance, is not without fault. As many suppliers attempt to get to grips with carbon accounting and measurement, companies may want to support them in data collection and methodology development so as to ensure data consistency and alignment with their own approach. In the end, any supply chain decarbonisation effort is only as sound as the foundation it is built upon, which is the underlying data.

Ideally, chemical companies should also join forces across the value chain in pre-competitive collaborative initiatives to develop low-carbon chemicals and ensure sufficient demand for novel production methods, for example, via off-take agreements. Industry coalitions can equally help to address the lack of influence of single entities over upstream suppliers when delivering on science-based Scope 3 targets, commonly perceived to be the main barrier to value chain decarbonisation [21]. The consistent exchange of information among value chain partners is particularly crucial in such efforts.

All in all, Scope 3 emissions mitigation is challenging. Ultimately, companies must strive to enhance the visibility of their supply chains. By working closely with their suppliers and competitors, they can quantify (baseline) emissions more accurately and harmonise calculation approaches across the industry to bring about meaningful decarbonisation. In doing so, the chemical industry can create positive knock-on effects for many other sectors and become a critical enabler of sustainable development.

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How IntegrityNext can help

Regulators continue to raise the bar on emission disclosures and target setting. The first and one of the most crucial steps of any supply chain decarbonisation exercise is to measure and compile sufficiently accurate baseline emissions data.

The IntegrityNext platform helps you to get started and enhances the visibility of your supply chain. Collect Scope 1, 2 and 3 emissions data directly from your suppliers with minimal effort, monitor their progress over time and implement SBTi engagement targets. Going forward, IntegrityNext will also allow you to track upstream emissions so that you can calculate the carbon footprint of your products.

For more information: 

www.integritynext.com

[email protected]

FOOTNOTES

[1] https://www.systemiq.earth/wp-content/uploads/2022/10/Main-report-v1.22.pdf

[2] https://www3.weforum.org/docs/WEF_Net_Zero_Challenge_The_Supply_Chain_Opportunity_2021.pdf

[3] https://cdn.cdp.net/cdp-production/cms/guidance_docs/pdfs/000/003/504/original/CDP-technical-note-scope-3-relevance-by-sector.pdf

[4] https://www.efrag.org/Assets/

[5] https://www.ifrs.org/news-and-events/news/2022/12/issb-announces-guidance-and-reliefs-to-support-scope-3-ghg-emiss/

[6] https://www.ifrs.org/news-and-events/news/2022/11/issb-at-cop27-frc-of-nigeria-to-adopt-ifrs-sustainability-disclosure-standards

[7] https://www.sec.gov/news/press-release/2022-46

[8] https://www.greenbiz.com/article/california-its-time-all-big-businesses-report-climate

[9] https://sciencebasedtargets.org/

[10] https://www.tcfdhub.org/metrics-and-targets/

[11] https://kpmg.com/xx/en/home/insights/2022/11/decarbonizing-the-chemical-industry-in-europe-and-beyond.html

[12] https://www.climateaction100.org/wp-content/uploads/2022/04/March-2022_Benchmark-assessments_public-summary_Final_.pdf

[13] https://sciencebasedtargets.org/blog/scope-3-stepping-up-science-based-action

[14] https://www.mckinsey.com/capabilities/operations/our-insights/making-supply-chain-decarbonization-happen

[15] https://sciencebasedtargets.org/resources/files/SBTi-The-Scope-3-challenge-survey-results.pdf

[16] https://cdn.cdp.net/cdp-production/cms/guidance_docs/pdfs/000/003/504/original/CDP-technical-note-scope-3-relevance-by-sector.pdf

[17] https://www.tfs-initiative.com/app/uploads/2023/04/TfS_PCF_guidelines_2022_English.pdf

[18] https://insight.reuters.com/sustainable-business/articles/how-improve-quality-scope-3-emissions-data-reporting-2023-02-13

[19] https://insight.reuters.com/sustainable-business/articles/how-improve-quality-scope-3-emissions-data-reporting-2023-02-13

[20] https://www.sustainablebizconsulting.com/blog/supplier-engagement-scope-3-emissions

[21] https://sciencebasedtargets.org/blog/scope-3-stepping-up-science-based-action