How to create a supplier engagement strategy for Scope 3 emission reductions?

Any company serious about emission reductions needs to address Scope 3, with 75-90% of most companies’ emissions in this category. According to a 2022 report by CDP, Scope 3 targets only make up 15% of all new or in-progress climate targets, despite their high volume compared to other emissions. The same report finds that only one in ten companies include climate-related requirements in their supplier contracts. Despite these low numbers, understanding Scope 3 emissions is critical for corporate climate mitigation.

Scope 3 emissions cannot be tackled alone. Supplier engagement is a necessary step to effectively address Scope 3 emissions, which by definition are the emissions of other companies in the value chain and therefore outside of the direct control of any reporting company.

Addressing Scope 3 emissions is no simple task – many companies find it the most challenging piece of the emission reduction puzzle. Creating an effective supplier engagement strategy requires considerable effort and planning, as well as involvement from multiple teams within an organization. However, engaging suppliers leads to many benefits, not only in reaching Scope 3 targets but also in creating resilience in the value chain, enabling monitoring of sustainability initiatives, and complying with regulations requiring Scope 3 emissions disclosure.

Building relationships and strategic partnerships with suppliers can also be the basis of co-investing in, and co-claiming the impacts of, emission-reducing value chain interventions. Find out the key steps to develop an effective supplier engagement strategy below.

According to the Science Based Targets initiative (SBTi) guidance on engaging suppliers, companies must complete a full Scope 3 greenhouse gas (GHG) inventory before setting targets on supply chain emission reductions. This should be done following the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard.

Having a comprehensive overview of your company’s supply chain helps get an idea of how many suppliers there are, which ones provide the highest trade volumes in your inventory, and what changes are likely to happen year-to-year. This can help identify the highest impact opportunities for emission reductions.

Understanding the supplier base allows you to consider the leverage your company has on different suppliers. It is often easier to influence suppliers you purchase significant volumes from, or who you have good existing business relationships with. This process allows you to prioritize suppliers with high impact opportunities, as it can be unfeasible to engage the entire supplier base at one time.

You can also take this opportunity to identify existing programs promoting emission reductions, such as existing supplier engagement programs ran by upstream suppliers or aggregators, initiatives supporting small farmers, regional or jurisdictional programs and financing opportunities, as well as government support for training and local capacity building. Understanding existing initiatives helps you address gaps and find opportunities for co-benefits.

Before settling on a supplier engagement strategy, ensure the program has clear objectives. This way you and your suppliers are clear on what is expected in terms of inputs, data, or commitments as the program progresses. It is also important to identify the tools which will allow you to collect the data to track progress on your targets.

The SBTi recommends considering the following things when setting a supplier engagement target:

1. The total number, type, and size of suppliers that will need to be engaged
2. Your company’s leverage over suppliers
3. Strategic status of suppliers based on business reasons
4. Sourcing and procurement trends over time
5. Supplier GHG program maturity
6. Categorizing suppliers per product, by sourcing, or creating sector categories
7. Suppliers' climate or environmental risk level

A range of operations within your company influences supplier interaction, so it’s key to align on roles and expectations among different teams. Relevant teams range from senior leadership to sustainability, legal, product and finance teams, as well as the sourcing or procurement team of your company. Incorporating the perspectives of each team can provide invaluable input on setting an ambitious yet realistic strategy. Achieving your company’s Scope 3 targets requires each of these teams to understand and commit to your supplier engagement strategy. This calls for coordination and effective communication on objectives and benefits across different departments.

At the start of a supplier engagement program, it’s important to communicate clearly and transparently with suppliers about the objectives and expectations of the program. Communicating requirements and timelines in the beginning allows your program to run smoothly and identify hiccups early on.

This is also an opportunity to address potential supplier concerns, such as confidentiality of data, available support mechanisms and resources, and potential consequences of not participating in the program. Communication with suppliers should be an ongoing process, encouraging mutual transparency and developing stronger collaboration and trust over time.

Different suppliers are likely to have varying levels of knowledge and capacity on GHG accounting and practical emission reducing practices. Lack of resources, such as technology, expertise or funding, can act as barriers for supplier engagement. It is important to provide supporting resources which help your suppliers plan and implement action, such as training, access to expertise guidance, or online materials.

Lack of incentives can also slow down supplier action. Effective emission reductions may require extensive changes to practice, requiring financial and other incentives. Providing premium payments or investing in capital purchases can enable suppliers to take action.

Other, non-financial incentives can include supplier recognition, benchmarking, or business benefits based on performance. While a positive approach can foster good relationships, it is also possible to attach penalties to non-action. Furthermore, emission-related requirements can be directly included in procurement contracts. For the investing company this helps provide a source of lower emission products from the supplier, while for the supplier it helps not only gain much-needed funding but also ensure that there is demand for their products once the emission reductions are implemented.

Companies can engage their suppliers as strategic partners for emission reduction projects. Co-investing in value chain interventions helps share costs across actors, especially in situations where suppliers need additional capital to invest in new practices, or when multiple companies source from the same supplier and wish to invest in emission reductions together.

Value chain interventions require long-term planning and strategic decisions about which investments to make and where to make them. With dynamic value chains, companies may not source from the same supplier year after year. In these situations, companies can benefit from making strategic agreements with suppliers, or from looking into approaches such as the Supply Shed. This can reduce the risk of stranded assets, or investments which the company is unable to fully benefit from.

When companies choose to co-invest in interventions, multiple companies may wish to claim their part of the created climate impacts. This inevitably requires safeguards to prevent freeriding and ensure credible Scope 3 claims. SustainCERT has developed Impact Units, which represent one ton of carbon reduced or removed by an intervention. Impact Units are based on a robust methodological framework that enables a fair equation between incentives to invest in interventions, and scientific credibility in achieving reduction targets. Impact Units enable companies to share the cost of interventions across the supply chain and be recognized for the impact generated. They can also be transferred between value chain partners, enabling credible co-claiming of supply chain decarbonization.

To claim climate benefits, showcase progress towards Science-Based Targets, and demonstrate the business case for made investments, it is key to monitor and report on the success of the supplier engagement program. SBTi requires annual reporting on progress to satisfy its requirements. Continuous monitoring also helps assess effectiveness, points for improvement, and arising challenges or concerns.

Data from suppliers is needed on metrics such as their energy consumption or product carbon footprint. Collecting data from suppliers can be made easier through digital tools which compile emissions data from multiple suppliers in a streamlined manner.

Finally, it is useful to verify the emission reductions and removals taking place in your value chain. Third-party verification, such as that provided by SustainCERT, creates trust and credibility which will benefit your stakeholders, investors and customers.

Supplier engagement is an ongoing, long-term process. As your supplier engagement program takes shape and your business relationships develop, it becomes possible to collaborate on more extensive improvements and pilot innovations in the value chain. The fundamental goal of supplier engagement can go beyond data and performance requirements, and enhance deeper levels of collaboration to deliver on the emission reductions the world needs.

SustainCERT’s services for value chain impact verification help your company demonstrate credible and real Scope 3 emission reductions.