14 November 2023
“Now it’s time for scope 3”
Marina Andrés, Global Head of Advisory Global Transaction Banking
Effectively managing the supply chain is one of the biggest concerns for companies, and such management can no longer be considered effective if it does not meet certain sustainability criteria. Scope 1 and 2 emissions, which the company emits directly and indirectly respectively, have long been recognized as crucial factors in an organization's environmental impact assessment. However, with a growing awareness of the interconnectedness of global supply chains and the need for comprehensive sustainability strategies, scope 3 emissions have emerged as a vital consideration.
Scope 3 emissions are indirect emissions that occur in a company's value chain, including both upstream activities (e.g. purchase of raw materials and capital goods, employee travel and waste generated) and downstream activities (e.g. use and final treatment of the product sold, investments and transportation). These emissions originate from sources that are not owned or controlled by the company but are the result of its activity.
When setting net zero targets, it is essential to consider scope 3 emissions because they represent a significant portion of a company's carbon footprint. Overall, scope 3 emissions are 11 times higher than direct emissions (scope 1) and account for more than 70% of companies' total emissions. In some industries such as food and beverages, scope 3 can be more than 90% of total emissions, so to become Net Zero in emissions they must act on their value chain.
However, addressing scope 3 emissions is challenging for a number of reasons. One of the difficulties lies in the lack of control over these emissions, as they occur in activities outside the company's operations. Companies must work with suppliers, customers, and other stakeholders to collect data and implement strategies to reduce these emissions. This requires strong partnerships and effective communication across the value chain.
Another barrier companies face is the complexity of quantifying and measuring these scope 3 emissions. Value chains are typically vast and diverse, making it difficult to gather accurate emissions data from different stakeholders. Companies need to have robust methodologies and tools in place to ensure traceability and thus be able to report emissions effectively. Standardization and transparency in reporting will help quantify and measure these emissions and enable comparisons between companies.
How companies can meet this challenge
As the supply chain plays a crucial role in achieving scope 3 emission reduction targets, companies can and should collaborate with suppliers to encourage sustainable practices and emissions reductions. Some market practices include setting emission reduction targets for suppliers, collaborating on innovation and adoption of new sustainable technologies, and supporting suppliers toward the transition to low-carbon alternatives.
BBVA has been working on sustainability-linked supply chain finance as a key product to support large buyers in the difficult task of meeting scope 3 emission reduction targets. By providing financial incentives and support to suppliers, buyers can encourage and facilitate sustainable practices throughout the supply chain.
Additionally, sustainable supply chain finance allows buyers to track and measure the environmental impact of their supply chain more effectively. By integrating sustainability metrics into the accounts payable financing process, buyers can have more visibility into the scope 3 emissions associated with their suppliers' activities. This in turn makes it easier to identify areas for improvement and collaborate with them to implement sustainable solutions, fostering transparency and accountability within the supply chain.
Undoubtedly, sustainability-linked supply chain finance can encourage buyers to proactively address scope 3 emissions and drive positive environmental change across their supply chain.