Tuesday, 17 November 2015

The Scope 3 Conundrum - Sharing Responsibility, Sharing Knowledge, Sharing Value in Managing Scope 3 Inventory

“An effective corporate climate change strategy requires a detailed understanding of a company’s GHG impact…  Until recently, companies have focused their attention on emissions from their own operations. But increasingly companies understand the need to also account for GHG emissions along their value chains and product portfolios to comprehensively manage GHG-related risks and opportunities.”

- WRI/ WBCSD’s Corporate Value Chain (Scope 3) Accounting and Reporting Standard, 2011 

The Scope 3 Conundrum

As companies strive to go deeper into their value chain for a true assessment of their GHG emissions impact, they realise that the process is fraught with challenges.  The WRI/ WBCSD’s Scope 3 Accounting and Reporting Standard provided a standardized and step-by-step approach for companies to understand the full impact of the emissions in their value chain. However, preparing the Scope 3 inventory presents some unique challenges:

  • Vendors that are larger than the reporting company, often ignore requests for sharing emissions-related data, or the reporting company is pointed to the disclosures made by the vendor in the public domain.
  • In the case of small-sized vendors that do not have a well-formed sustainability strategy, the vendor simply does not have the wherewithal to collect and collate such data or requests for data sharing are either looked upon with suspicion.
  • In both the above cases, the constrains/ concerns of the vendor are easy to appreciate.  It does, indeed, seem to make little sense that a vendor company should have to disclose the same data to its different customers, in differing formats at multiple instances.
  • Moreover, the reporting company frequently finds it difficult to penetrate beyond its major Tier 1 Suppliers while preparing a Scope 3 inventory.

The above combination of reasons is largely responsible for the failure to prepare a reasonably good Scope 3 inventory, unless the reporting company has the wherewithal to expend significant resources towards such effort.  

The shared responsibility/ shared value approach of the India Greenhouse Gas Program (IGHGP) is ideally suited to deal with the Scope 3 conundrum. 

The Fuftureproof Software 

In order to bring all the vendors of a reporting company on one disclosure platform, IGHGP commissioned the Futureproof Software.  The software, built by Climate Miles, has a user-friendly interface, is accompanied by basic training manual, and is equipped to hold, aggregate and analyse Scope 1 and Scope 2 data from all the vendors of a reporting company.  

However, by itself, a software falls short of achieving the goal of facilitating the inventorying of Scope 3 emissions by companies: while it does act as a receptacle and aggregator of emissions data and an analytical engine, it is still upto the vendor company to enter their data into the software. As mentioned above, the larger vendor companies still cannot be bothered to do this extra task, and the smaller companies are now even more suspicious of giving up data to a cloud-based application.  Expectedly, Futureproof had few takers in the first year of its release.   

The Climate Miles Facilitated Model for Scope 3 Assessment Services: The Indusind Bank Ltd. (IBL) Case Study 

Like many progressive and responsible companies, IBL has been doing its Scope 1 and Scope 2 emissions inventory, but had made only limited headway in estimating emissions along its value chain.  When presented with the offer of the Climate Miles Facilitated Model for Scope 3 Assessment Services, IBL decided to do a pilot project with a single vendor.  

This vendor, a large manufacturer of electronic hardware and software services, is the manufacturer of roughly 80% assets bought by IBL in the category “Electronic Hardware”. This vendor does make detailed disclosures of its emissions profile in the public domain, but data extraction is complicated by the fact that differentiation is not made between the various Divisions of the vendor company.

Climate Miles used benchmarking and modeling methods to estimate the vendor’s emissions that should be attributed to IBL.  The entire process was designed in consultation with IGHGP and complete transparency was maintained with IBL.

At the end of the pilot phase, IBL, satisfied both with the quality of its interaction with the Climate Miles research team, and the value of the service provided, decided to scale up the project to include 100% of its vendors.  

IBL’s vendor profile includes large, small and medium-sized vendors.  For large vendors of the type encountered in the pilot project, most of the data is expected to be based on secondary research and analysis.  From the several medium and small-sized vendors, primary data will be collected within a defined time-frame, and the gaps will be filled up through benchmarking methods.

Data gathered from the project will be entered into Futureproof and will be available to the other IGHG member companies.   

While this is a positive beginning, the true power of the shared-value approach is yet to be manifested.  This will happen only when other IGHGP member companies, and indeed any other company, sign up for the Facilitated Model for Scope 3 Assessment Services, thereby bringing the emissions data of more vendors, small and large, onto a common platform, ready to be accessed by all, dramatically reducing the cost and effort of Scope 3 inventory.

Lets start with this blog in pictures. 
This is what a Scope 3 effort typically looks like:

This is Company A, within the ecosystem of its supply chain.
The size of the circles represents the proportional size of the supplier companies
Company A wants to explore the GHG emissions embedded in its value chain.
As a first step, it examines the Tier 1, Tier 2, and Tier 3 classification of its suppliers 

Let us take a closer look at the Tier 1 vendors of Company A.
The thickness of the connectors represents the volume of transaction between
Company A and the Supplier.  This can be a useful determinant to prioritise which
Suppliers to investigate in the first year of doing Scope 3 inventory

These are the 4 vendors that together account for close to 80% of Company A’s $ transactions. Company A decides to start its Scope 3 analysis with these 4 Suppliers

In the 2nd year, Company A expands the scope to include all its Tier 1 Suppliers

In the next yearCompany A again expands the scope
to include 
its main Tier 2 suppliers as well

Eventually, Company A might be able to go down to its Tier 3 suppliers and beyond

But there is an easier way to do this exercise:

Company A is not the only company in this ecosystem
that wants to assess the GHG emissions of its supply chain!
Company B, C, D and E also embark on a similar exercise.

If Companies A, B, C and D decide to share the data, it will be less effort for everyone.
Suppliers will also prefer it if the all the Reporting Companies agree to deposit their
suppliers data in a common repository, and simply share this data.  
This will mean the supplier only has to disclose their emissions-related data once.

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