The Latest CDP Results Reveal the Rise of Scope 3 Reporting

[Editor’s note: This article was authored by BSR, a global business network and consultancy focused on sustainability.]

Last month’s release of the Global 500 Report, Carbon Disclosure Project’s (CDP) annual summary of climate reporting by the world’s 500 largest companies, gives the most insight to date on corporations’ reporting about climate change and their supply chains.

What does it tell us?

First, the number of companies reporting on their supply chains continues to steadily grow. Two years ago, only about a quarter of the world’s top 500 companies reported on “Scope 3” greenhouse gas (GHG) emissions, or the emissions from activities they have influence over, but are beyond direct ownership or control, such as in supply chains.

Last year, the reporting share climbed to 42 percent, and this year it grew to nearly half. That’s a steep change compared to reporting overall, which rose only a few percentage points this year to 82 percent.

At the same time, the quality and scope of reporting is improving dramatically. This year, for example, Kraft Foods said physical risks linked to climate change are not material, but they still described a whole set of supply chain and other issues that potentially matter. Kraft also clarified that they are closely examining supply chain issues to anticipate emerging enterprise risk and opportunities. The provision of this depth of information is a new development in CDP reporting, and has been aided in part by the more systematic ways that CDP is asking questions.

This relates to a third development: CDP made Scope 3 reporting more robust by expanding definitions this year. In following the Greenhouse Gas (GHG) Protocol’s Scope 3 Guidance under development, CDP transformed last year’s five categories into eight more specific ones, and then added nine more (see sidebar).

This helps transparency by increasing the comparability of reported figures. It also foreshadows the increasing sophistication of supply chain reporting to come. Indeed, Frances Way, CDP’s Head of Supply Chain, told me that CDP will continue working to ensure reporting requirements are aligned with the standard once finalized. Meanwhile, CDP is taking public comments on the design of the next survey.

Scope 3 emissions have taken center stage and turned out to be every bit as significant as we thought they would be. This raises an important question: Just how big are they?

In the summary report, CDP tallied aggregate figures by industry, finding Scope 3 to be on average about two times the amount of Scopes 1 and 2 emissions, which are sometimes called “internal” emissions. It will take a little digging, however, to get a representative number since 50 percent of companies don’t report Scope 3 at all. Of those that do, 40 percent only publish just one convenient category, such as transportation.

The companies to watch are the 10 percent that reported supplier emissions, and the even smaller 5 percent that reported supplier emissions beyond direct purchasing relationships.

For these companies, the Scope 3 multiple is much higher — more like five times greater for those reporting on direct suppliers, and 10 times more for those providing a comprehensive assessment. Some companies were much higher still: Kraft and Danone reported Scope 3 emissions that were more than 15 times the amount generated from their internal operations, and Unilever’s are more than 50 times greater.

As companies disclose their climate change and business interrelationships more fully, higher multiples like these are likely to become more common.

How to Open the Door to Supplier Disclosure

To learn more, I spoke to Kraft, which this year CDP named to its Climate Change Leadership Index, a designation for the most transparent companies taking action. Kraft is an interesting case because as recently as two years ago it had not reported Scope 3 emissions at all.

I asked Francesco Tramontin, associate director of global issues management, why Kraft is interested in managing and reporting supply chain emissions. Tramontin said that it is a logical extension of the company’s approach to climate change, and a natural step following Kraft’s achievement of GHG reduction targets within its own operations.

But, he said, Kraft’s increased CDP reporting didn’t begin with a reporting effort. Rather, the company’s R&D team leads its Scope 3 management efforts with the aim of collecting and interpreting data for strategic perspective and internal decision making. The reporting is a byproduct of these efforts, and Kraft began sharing it as management became aware of partners’ and stakeholders’ increasing interest.

One of the main benefits of Scope 3 management, Tramontin said, is that it provides an impetus to take a more careful look at internal management systems. It also enables Kraft to take part in important forums, such as the development of GHG Protocol Scope 3 Guidance.

Currently, Kraft is involved in testing a draft version of the guidance, and the company recently submitted feedback for it. According to Tramontin, participating in this governance-building effort has been beneficial. It has helped them exchange methodologies with peers and given them confidence in measuring and reporting in an environment where many communication standards are lacking.

One of Kraft’s main challenges has been deciding what types of information to publish. When Kraft set out to report Scope 3 emissions for the first time last year, the company had more information than it ended up reporting, but wanted to share the data in which it had the most confidence. The company published information in just two categories, business travel and logistics, which then represented about 40 percent of operational emissions. As Kraft did so, Tramontin said, it used a “lead with results” approach that emphasized progress against goals while remaining cautious about prognosticating. 

This year, Kraft not only expanded the categories it reported on, it also found a way to provide more information on topics where there is more uncertainty. Kraft did this by disclosing emissions by subcategory with narrative descriptions and confidence estimates for each, ranging from plus or minus 20 percent (business travel) to about 40 percent (supply chain and end-of-life packaging). Tramontin said he couldn’t yet say whether Kraft would add more categories next year, but felt certain the quality and confidence of data would improve.

The Road Ahead

The supply chain will enter the picture more and more, Tramontin concluded. His experience, however, reveals a difficult balance that companies need to achieve. On the one hand, there is an incentive to report as openly as possible. On the other hand, there is pressure to ensure that disclosed information is trustworthy.

This leads Kraft and other companies to an important debate that is arguably the front line of supply chain reporting: the extent to which they can use the coarse data produced by life-cycle assessments and generalized industry “models,” versus more specific information provided by suppliers themselves.

The former is easier to obtain, but largely overlooks potentially vast differences in practices among peer suppliers; the latter can generate factory floor-level information about particular suppliers, but requires a much greater commitment of resources to manage.

Questions and answers regarding these issues will continue to unfold as new GHG Protocol guidance comes out this winter and companies report to CDP next May and beyond. In the meantime, here are some promising approaches borrowed from the experiences of Kraft and others.

1. Collect Data to Gain Insight for Prioritizing Sustainability Investments

In this context, reporting is important but it is a byproduct of understanding interconnections with suppliers, products, partners, and the physical world. This is really what most stakeholders are interested in.

2. Don’t Be Afraid of Your Footprint

The next phase of Scope 3 reporting will see more companies report on their impacts, more deeply and in more categories. This will allow greater comparability, better benchmarking, and more insightful discussion about ways forward.

Until that happens, a large Scope 3 footprint is a much better sign of leadership than no reported footprint. Scope 3 management can lead to enrolling suppliers directly in improvement efforts and leveraging their dollars and skills.

3. Address Budget and Resource Constraints by Using Sampling and Estimations

It is acceptable to provide information that is approximate or based on random and/or targeted verifications. The key to getting that right is to understand how accurate the information is, and make your level of confidence and uncertainty — like the figures themselves — transparent.

A Working Definition of Scope 3 Emissions

Greenhouse gas emissions are typically divided into three “Scopes” for the purpose of organizational and project management.

The first, Scope 1 emissions, refers to combustion (e.g. from fuels, chemicals, or other materials) that leads to GHG emissions on a company’s site or other operations under ownership or control. Scope 2 emissions refer to purchased electricity at a company’s site or other operations under ownership or control. Together, Scope 1 and 2 usually can be called “internal” or “operational” emissions.

“Scope 3 emissions” refers to greenhouse gas (GHG) emissions that a company has influence over, yet which are outside its direct control. Supply chain emissions are one component of this, and there are several others, as shown in the table below.

These definitions have been popularized by the GHG Protocol, which is the standard for the business management of GHG emissions. The GHG Protocol is revamping its original definition to provide more comprehensive guidance. The results are due in early 2011.

Currently, a good working definition is CDP’s, which now has 17 categories of Scope 3 emissions. Here they are in the context of last year’s categories:

Image licensed stock.xchnge user barunpatro.