It is evident that in our current political and corporate climate, GHG reporting and environmental laws have increased at an exponential rate. There are now over 1,200 climate change or climate change-relevant laws worldwide, a twenty-fold increase over 23 years. One of the most prominent trends to develop within the last two decades has been GHG reporting, with at least 40 countries—both developed and developing—currently using mandatory emissions reporting programs. With this increased importance placed on climate transparency and disclosures, carbon benchmarking will be of utmost importance in understanding a company’s Scope 1, 2 and 3 emissions.
A carbon benchmark is a standard of performance, representing the impact a unit of a particular activity has on carbon emissions. These activities can be characterized as outputs such as products/services or inputs such as fuel consumed.
It is clear that as GHG reporting programs become more widely utilized, corporate entities will begin to institute carbon benchmarking in their practices. However, one of the largest hurdles for companies making this benchmarking transition is the lack of a universal carbon benchmarking standard. Without a universal standard, companies comparing themselves across industries, sectors, and geographic regions will be comparing “apples to oranges” instead of “apples to apples.” Until a universal tool is implemented, it will be necessary in this transition for companies to find workaround solutions to this problem. Yet, no current carbon emissions assessment methodology has developed such an initiative.
Tremendous Impact of Carbon Footprint Methodologies
Carbon emissions methodologies such as the CDP and Science Based Targets initiative have shown an increased awareness present in the private sector regarding carbon disclosures and environmental action. For CDP alone, total suppliers who disclosed to CDP were less than 1000 in 2008 and have increased to 5,455 suppliers in just ten years.
Furthermore, Paris Agreement-aligned corporate goals are becoming a de facto standard, and over 800 companies to date have committed to setting science-based targets. These initiatives, paired with standards such as the GHG Protocol and ISO 14064, have allowed for increased disclosure engagement. However, the need to effectively implement tools to easily compare carbon footprints of companies with different backgrounds (e.g., size, sectors, markets, products, etc.) still remains. These are issues that the carbon benchmarking approach hopes to solve.
A Benchmarking Approach: What Is It and How to Use it?
So what exactly is the carbon benchmarking approach, and how are companies meant to incorporate this approach into their practices and supply chain?
As the World Bank outlines, carbon benchmarking takes a five-step approach:
Step One: Planning involves the initial considerations necessary for developing benchmarks. This includes planning the scope of the benchmarking exercises and critical parameters that will characterize the standard.
Step Two: Data Collection to inform benchmarks. In this step, companies can specify data requirements, choose a data collection approach, and implement data collection approaches through engagement.
Step Three: Data Analysis addresses processes and analytical approaches for using the data
to establish values for benchmarks. Following this, ex-ante assessments of the measure can be performed.
Step Four: Integration of benchmarks and the use of benchmarks to determine system targets and thresholds.
Step Five: Monitoring and Improvement involve benchmark reviews and updates to ensure continued relevance and stringency of benchmarks.
New Carbon Approaches Bring New Challenges
The approaches mentioned above do not come without their own sets of challenges and contestations. Setting up carbon benchmarking analytics presents various limitations that can make a universal benchmarking system virtually impossible.
One of the largest challenges facing carbon benchmarking is the data collection of Scope 3 emissions, i.e., those resulting from activities in the entire value chain. A key issue is a lack of personnel resources and know-how in companies to calculate such complex data. Standards such as the GHG protocol may provide calculation guidance, support, and orientation but may leave many practical questions unanswered. Another issue is the absence of transparency present in companies calculating Scope 3 data, which requires different management approaches compared to Scope 1 and 2. Scope 3 data collection involves interaction with different departments and external suppliers to gather activity data and find suitable emission factors, thus managing Scope 3 emissions is evenly complex as emissions generally arise from a large variety of sources and need to be tackled in cooperation with external actors along the supply chain. The final issue in calculating Scope 3 is a lack of ability to influence and induce cooperation along the value chain. Successful management of Scope 3 requires a certain extent of collaboration among third parties, such as suppliers. If a company does not have sufficient market power to challenge them on GHG emission calculations, data collection would no longer be possible.
These Scope 3 calculation issues are only exacerbated when it comes to small and medium-sized enterprises. A 2018 analysis of 73 members of the German Global Compact Network by sustainable AG showed that there is hardly any accounting of Scope 3 emissions in companies with less than 1,000 employees, and only roughly half of non-listed German companies engage in accounting and reporting of Scope 3 emissions. These companies frequently lack the ability to allocate human resources to manage GHG inventory, have less power to engage with their own suppliers, and as suppliers themselves have little incentive to actively monitor their GHG emissions.
Apart from Scope 3 calculations, other issues in benchmarking include the use of different boundaries to report upstream emission intensities and different units of measurement. Different system boundaries make it impossible to assess which activities are included in emission reporting. While the differentiation of units of measurement makes benchmarking incomparable.
These limitations pose a roadblock for the configuration of a universal carbon benchmarking standard. Yet, there are various ways to circumvent these challenges and work around carbon footprint comparison.
3 Steps to Address Carbon Benchmarking Challenges
In order to work around and address the challenges of benchmarking and create a solution to compare carbon intensities of various companies, many steps must be taken into consideration:
- Improving primary data availability and quality: This option includes coupling data requests to supply chain partners (via programs like EcoVadis).
- Focusing on supply chain and emission hotspots: Rather than improving data quality in the entire supply chain, a focus on significant hotspots may be much more manageable.
- Creating an opportunity database: The implementation of a database by a third-party outlining carbon emission intensities can serve as a point of orientation for the comparison of companies. Apart from functioning as a source of emission data, the database could highlight global supply chain hotspots and best practice approaches.
A New Carbon Action Tool on the Horizon
With these criteria in mind, EcoVadis is working on a Carbon Action Module, which will allow 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 carbon rating is to evaluate the ability of a company to manage GHG emissions within their organizations. The carbon rating is not directly benchmarking the GHG emissions intensity level of the companies but instead 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 a sound and aggressive GHG reductions target, running a sophisticated GHG monitoring system to track their performance, and conducting regular reviews to check their performance and propose necessary improvements. The initial product roadmap includes:
- Carbon Ratings and Scorecards that rate suppliers based on carbon and GHG emissions performance and help prioritize the suppliers that will make the biggest impact based on carbon and GHG emission reduction potential. A precursor of the carbon scorecard, dubbed the ‘carbon maturity assessment KPI bundle’, is already being deployed by EcoVadis’ pioneer customers. Based on data in the existing EcoVadis sustainability scorecards, 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 indirect and upstream carbon and GHG footprint.
- 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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