The Global 500 Report, Carbon Disclosure Project’s (CDP) annual summary of climate reporting by the world’s 500 largest companies released in September, gives the most insight to date on corporations' reporting about climate change and their supply chains. But what does it tell us?
First, the number of companies reporting on their supply chains continues to grow steadily. Two years ago, only about a quarter of the world’s top 500 companies reported on “Scope 3” greenhouse gas (GHG) emissions—those emissions from activities they have influence over, but that 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. For example, this year, although Kraft Foods said that physical risks linked to climate change are not material, they described a whole set of supply chain and other issues that potentially matter, and 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 partly by the more systematic ways that CDP is asking questions.
That relates to a third development: This year, CDP made Scope 3 reporting more robust by expanding definitions. In following GHG Protocol’s Scope 3 Guidance under development, it transformed last year’s five categories into eight more specific ones, and then added nine. 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 to work to ensure its reporting requirements are aligned with the standard once finalized (and meanwhile CDP is taking public comments on 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. Which 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 Scope 1 and 2, or “internal,” emissions combined. But it will take a little digging to get a representative number, since 50 percent of companies don’t report Scope 3 at all, and 40 percent that do just publish for only one convenient category, like transportation.
The companies to look at are the 10 percent that reported on supplier emissions, and the even smaller five percent that reported on supplier emissions beyond direct purchasing relationships. For these companies, the Scope 3 multiple is much higher—more like five times for those reporting on direct suppliers, and 10 times when providing a comprehensive assessment. Some companies were much higher still—Kraft and Danone reported Scope 3 emissions more than 15 times those from their internal operations, and Unilever’s are more than 50 times. 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 talked with Francesco Tramontin, associate director of global issues management at Kraft, which this year CDP named to the 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 on Scope 3 emissions at all.
I asked Tramontin why Kraft is interested in managing and reporting on supply chain emissions. He 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 start 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 like the development of GHG Protocol Scope 3’s 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 to 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 information to publish. When Kraft set out to report on Scope 3 for the first time last year, the company had more information than it would end up reporting, but wanted to share the data it had the most confidence in. The company overcame hesitations by publishing 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 very cautious about prognosticating.
This year, Kraft has not only expanded the categories it is reporting on, but has found a way to provide more information on topics it is less certain about. Kraft does this by disclosing emissions by subcategory with narrative descriptions and confidence estimates for each, which range 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 that he was sure the quality and confidence of data would increase.
The Road Ahead
The supply chain will come into the picture more and more, Tramontin concluded. However, his experience reveals a difficult balance that companies need to achieve. On the one hand, there is incentive to report as openly as possible. On the other hand, there is pressure to ensure that reported 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 vast potential 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.
- Like Kraft, envision the aim of collecting data as gaining insight for prioritizing opportunities to make investments in sustainability. In that 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, anyway.
- 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, leveraging their dollars and skills.
- Finally, address budget and resource constraints by utilizing 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.