Typical corporate greenhouse gas (GHG) reduction strategies often focus on emissions from direct operations (Scopes 1 and 2), which are clearly visible under the company’s directive and often show immediate results. However, to achieve the substantive carbon reductions our planet desperately needs, companies must start tackling emissions embedded within their supply chain, which may account for up to 95% of their total carbon footprint.
Initiatives such as the Task Force on Climate-Related Financial Disclosures (TCFD) have shown that financial stakeholders are starting to demand more comprehensive GHG emissions data and action from corporate supply chains. Thus, carbon reduction strategies across the company will be of the utmost importance to investors managing climate-related risks and their financial impacts.
To meet growing expectations and deliver on carbon action, corporate leaders must take a closer look at setting up their organization, structure and stakeholder relationships by placing carbon governance at the heart of their operations. Through concrete carbon governance, companies can achieve their reduction targets while collaborating with others to motivate, enable and inspire carbon action within broader networks and communities.
Organizational Challenges
Integrating carbon action into corporate strategies comes with its own set of challenges and limitations. Two key factors, in particular, can jeopardize carbon reduction initiatives: a lack of internal alignment and problems processing Scope 3 data.
Internal Alignment
In a recent survey of 700 businesses conducted by CSR consultancy 2degrees, 65% of respondents said convincing senior leadership and management to stand behind sustainable practices was the most significant challenge facing carbon action. Furthermore, 47% of respondents also mentioned engaging colleagues and employees to execute sustainable practices as a substantial hurdle to initiating a carbon strategy.
Scope 3 Data Collection
The absence of transparency present in companies’ calculations of indirect emissions data (Scope 3), which require different management approaches compared to those of direct emissions (Scopes 1 and 2), is another pressing problem facing carbon procurement strategies. Scope 3 data collection involves interaction with various departments and external suppliers to gather activity data and find suitable emission factors, and thus, presents a great variety of hurdles. A high-visibility barrier to Scope 3 reporting and action is the limited leverage companies have over upstream suppliers and their emissions data. Individual upstream suppliers may be responsible for carbon-intensive products and services or have the influence to connect high-impact suppliers through a cascading approach. If a company does not have strong value chain/supplier relationships, data collection on GHG emissions is not possible.
Standards such as the GHG Protocol and SBTi may provide calculation guidance, support and orientation, yet implementation capability may vary per user. Thus, some companies lack the know-how and resources to engage in GHG accounting processes, especially through complex tools such as comparative life cycle analysis. With rapidly changing industry expectations and best practices, training staff on the skills needed to keep pace with these ever-evolving tools presents a true challenge.
Carbon Governance
Even though challenges exist in enacting carbon action procedures, companies will need to create structures and oversight within their company to ensure these organizational challenges are recognized and rectified. Investors, lenders, insurance underwriters and other stakeholders of climate-related disclosures are increasingly interested in understanding the role an organization plays in overseeing climate-related issues, as well as management’s role in assessing those issues. Carbon governance is crucial to a company’s success and must structurally evaluate the current and potential impacts of climate-related risks and opportunities, operationally move from rhetoric to action, and organizationally ensure C-suite level buy-in and management accountability.
As the World Economic Forum elaborates, there is an urgent call to action for companies across the globe to enact corporate carbon governance, which can be implemented through the following set of guiding principles:
Principle 1: Climate accountability within senior management/board
Senior management is ultimately accountable to shareholders for long-term stewardship of the company. Accordingly, these personnel should also be held responsible for the company’s long-term resilience concerning potential shifts in the business landscape that may result from climate change.
Principle 2: Command of the subject (climate know-how)
The company should ensure that its composition is diverse in knowledge, skills, experience and background to make informed decisions based on an awareness and understanding of climate change-related threats and opportunities.
Principle 3: Material risk and opportunity assessment
The company should ensure that management assesses the short-, medium- and long-term impacts of climate-related risks and opportunities for the company on a continuous basis. The company should ensure that the organization’s actions and responses to climate are proportional to the materiality of climate to the company.
Principle 4: Strategic and organizational integration
The company should ensure that climate systemically informs strategic investment
planning and decision-making processes and is integral to the management of risk and opportunities across the organization.
Principle 5: Incentivization
The company should ensure that executive incentives are aligned to promote the long-term prosperity of the company. The company may consider including climate-related indicators in its executive incentive schemes. A similar approach can be undertaken In markets where it is commonplace to extend incentives to non-executive directors.
Getting Up To Speed
Corporate carbon governance can also get up to speed by creating engagement structures and carbon action targets across the organization and supply chain. It is imperative to discover which set of tools works best for an organization today and in its future operations. To tailor their approach, companies can set goals and targets in various areas, including:
- Supplier engagement: Obliging suppliers to set carbon reduction targets. Such targets allow companies to shift responsibility for direct emissions reductions to actors along their supply chain. However, this carbon reduction strategy requires solid supply chain management and structures for monitoring compliance.
- Product/material substitution: Substituting purchased products or materials with lower-emission alternatives is an effective strategy to decrease GHG emissions.
- Primary data availability and quality: This option includes coupling data requests to supply chain partners (via programs like EcoVadis).
- Supply chain and emission hotspots: Rather than improving data quality across the entire supply chain, a focus on significant hotspots may be much more manageable and effective.
- Internal Carbon Pricing: Develop guidelines to standardize the pricing methodology and define minimum pricing levels for achieving the required carbon reductions.
Carbon Action Solutions
It is evident that effective carbon action requires strong carbon governance within a company’s organizational structure, operations and strategy to manifest substantial GHG reduction and sustainable procurement results. Fortunately, there is no need to reinvent the wheel when it comes to companies looking to create effective carbon action programs. EcoVadis launched the Carbon Action Module that allows for easy carbon comparability among all companies while also enabling buyers to understand their supply chain and engage with their suppliers to further reduce carbon emissions.
One of the objectives of the Module’s carbon rating is to evaluate the ability of a company to manage GHG emissions within its supply chain. The carbon rating gauges a company’s maturity in achieving emissions reduction targets: A high maturity rating indicates that the suppliers are applying best practices such as setting sound and aggressive GHG reduction targets, running sophisticated GHG monitoring systems to track their performance, and conducting regular reviews to evaluate progress and make necessary improvements. The Module’s components include:
- Carbon ratings and scorecards that rate suppliers based on carbon and GHG emissions performance and help prioritize suppliers that will make the most significant impact based on carbon and GHG emission reduction potential. A precursor to the carbon scorecard, the “carbon maturity assessment KPI bundle”, is already being deployed by EcoVadis’ pioneer customers. Based on data in the existing EcoVadis Scorecard, this KPI bundle enables buyers to baseline supplier GHG and carbon management systems and provides guidance for performance improvement.
- A carbon calculator that enables assessed organizations to measure both their direct and indirect carbon footprints.
- Enhanced CSR metrics that expand the data collection tools required to capture the depth and breadth needed for the Carbon Action Module.
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