Carbon emissions reporting: Navigating increasing requirements
Are your customers starting to request carbon emissions data?
If you are manufacturing products for larger companies, someone on your team (maybe you!) has likely recently started getting requests for data on the carbon emissions associated with those products. The tone of those requests is starting to shift from a soft push to an ultimatum as your large customers work to get ahead of Scope 3 emissions requirements.
As these requests are a new world for many manufacturers, our goal with this post is to provide a straightforward resource with background and advice on navigating them for both the short and long term.
This post is based on consultations with dozens of experts and manufacturers in this space. However, the space is changing quickly, so don’t hesitate to email or call if you’re seeing changes to the landscape—we’d love to incorporate them into a more detailed guide.
Background: What’s happening?
At a high level, pressure to track carbon emissions is steadily increasing.
That pressure is coming top-down, starting with where the money comes from: More and more big investors are requiring big company boards to track and reduce emissions. This is creating massive top-down pressure throughout the supply chain.
Why?
Historically, motivations to track emissions included the desire to be a good environmental steward and the opportunity to gain competitive advantage as sustainability becomes an important factor in purchasing decisions.
Now, risk mitigation is a big additional motivator. Large investors believe climate change and the associated regulations and impacts are becoming a big enough risk that they need to be able to track their exposure. More and more countries are putting in place climate regulation. That regulation is getting stricter and stricter. In this new world, the more sustainable the business and its supply chain, the lower the risk.
So they’re asking the big companies for the data that will let them accurately track their exposure to that risk. And big companies are making efforts to comply.
And in addition to making efforts to comply, many companies also see things the same way. The more sustainable their business and its supply chain, and the better they can track that sustainability to comply with regulation, the lower the risk. Increasingly, the principles of Accounting are being applied in this space: Just as companies have to track and comply with standards in how they account for things like assets, liabilities, and cash flow, moving forward they will have to comply with stricter and stricter standards for Carbon Accounting.
As more and more companies see carbon emissions as an increasingly important area of both business risk and competitive advantage, many of them are also making big statements about where their businesses and supply chains will be from an emissions perspective: “Carbon Neutral by 2030,” “Carbon Negative by 2030,” etc. These goals create pressure within their organizations to be able to track and reduce their emissions.
Importantly, a huge portion of many large companies’ emissions are actually outside of their own operations, in their broader supply chain. For many big companies, 90% of their emissions come from their suppliers. Therefore, to accurately track and reduce these supply chain emissions (part of what is frequently referred to as “Scope 3” emissions), these companies have to work with their suppliers. That means they have already begun actively requesting some data from their suppliers, and will be asking for more and more over time.
More and more, what we hear from within these large companies is that being able to accurately report on emissions will increasingly be a requirement for their suppliers to continue to do business with them. Because these large companies buy from many suppliers, over time they will increasingly want accurate, verified data on the emissions associated with producing a specific product: Importantly, that product-level data will allow them to accurately track and reduce the Scope 3 emissions associated with their business rather than the other companies the supplier sells to. The perspective of experts in the space is that over time tracking emissions by product will not be a nice to have, it will be a need to have.
That creates a big challenge. These massive efforts to track and reduce Scope 3 emissions in the supply chain are so new that there aren’t yet clear, broadly-accepted ways of doing it. So while the consensus is that tracking emissions will be extremely important for any manufacturer doing business with large companies, the details are still unclear. Many large companies are frustrated with current methods such as using plant-wide utility bills as a proxy for product-level emissions, and are pushing for more detail and transparency.
For manufacturers that sell to big companies, what does this mean?
Importantly, all evidence indicates that the pressure to track emissions is not going away. Instead, experts believe it will steadily increase and become more and more rigorous. Therefore, ignoring this area is risky.
At the same time, accuracy is critical. Similarly to financial accounting, this is an area where if you don’t yet have accurate and automated systems in place to track key datapoints, setting ambitious targets is risky.
What should we do?
If you are a manufacturer being asked by your customers to report on emissions, we recommend the following approach based on consultation with dozens of experts:
Be transparent with the information you have, while acknowledging uncertainty.
With carbon accounting looking more and more like financial accounting, this data contributes to giving a fair representation of risk exposure. Therefore, it’s important to be as transparent as you can with that data you have.
In parallel, start to plan and put in place your data infrastructure for the future.
Start putting in place systems to automatically collect basic data, such as energy data, which will form the foundation of reporting moving forward. If you have Guidewheel, your company already has quite a bit of this in place. Email success@guidewheel.com and they can help you with everything you need.
As much as possible, look for ways to automate the collection of this data to reduce manual workload and error. Reporting requirements are going to get more stringent, not less.
Treat this challenge as an opportunity to find win-wins and build competitive advantage for your company.
New pressures in the market create new opportunities. Challenge yourself and your team to find ways to build your competitive advantage in this new environment. For example, a data-driven approach to emissions tracking might be a way to further strengthen your relationships with your customers, build relationships with new customers, or even attract new talent.
Specifically, with rapidly improving technology many opportunities to reduce emissions also now come with substantial financial benefits rather than costs. New reporting requirements and systems make this a great time for you to provide your team with good data and challenge them to find and prioritize these opportunities at every level.
In summary, pressure to report on carbon emissions is steadily increasing, and likely to impact every level of the supply chain. As large companies are now required to report on Scope 3 emissions, every supplier in their value chain will soon be required to comply. In addition to keeping up with these requirements, understanding the reason for the pressure and the direction things are headed gives you the chance to identify the opportunity amidst the challenge.
This post is based on consultations with dozens of experts and manufacturers in this space. However, the space is changing quickly, so don’t hesitate to email or call if you’re seeing changes to the landscape—we’d love to incorporate them into a more detailed guide.