Uniting risk management and sustainability to curb Scope 3 emissions in supply chains

One of the most pressing environmental challenges that supply chain leaders face is greenhouse gas emissions, especially carbon dioxide. And regulations are pushing companies to act responsibly. For example, the focus is on the highest carbon contributors in the first phase of the Carbon Border Adjustment Mechanism, the European Union's tool to minimize carbon-intensive imports. Scope 3 – indirect emissions emerging from downstream and upstream supply chains – is arguably the biggest contributor. According to the UN Global Compact, Scope 3 emissions account for over 70% of a business's carbon footprint.¹ Plus, it's trickier to track. Why? Because emissions from transportation, use of sold products, investments, and distribution of purchased goods and services aren't always transparent.

Reducing Scope 3 requires a comprehensive understanding of sources and drivers, from raw materials extraction to a product's end of life. You need effective collaboration and coordination with multiple stakeholders, such as suppliers, customers, regulators, investors, and nongovernmental organizations. Here are some of the major bottlenecks that suppliers face today in measuring, reporting, and reducing Scope 3:

1. Navigating the data maze: Supply chains often lack reliable and standardized data. The reason? The absence of affordable and efficient techniques to measure these emissions combined with the lack of a regime to enforce information sharing. All this makes it hard to establish a credible baseline, identify hotspots and improvement opportunities, and track progress over time
2. Ensuring supplier engagement and collaboration: A Deloitte report states that only 13% of companies can map their entire supply chain network, and up to 22% have no visibility beyond their immediate suppliers.² This lack of visibility hits a supplier's confidence in participating in emission reduction initiatives and adopting best practices
3. Lacking green motivations: Conflicting incentives and goals among stakeholders make suppliers reluctant investors in emission reduction measures. Similarly, some customers may be unwilling to pay a premium for low-carbon products or services if they do not perceive a significant value proposition

The semiconductor industry has a huge carbon footprint. And carbon emissions from semiconductor production would rise by about 8% annually in the coming years if we're not environmentally careful.³ The industry faces several challenges to meet climate goals – complex Scope 3 quantification, heavy water consumption, added cost of recycling electronic waste, missing risk engagement protocols for suppliers, and more. A semiconductor's value chain is highly complex with several touchpoints, from chip manufacturers, data centers, and mobile vendors to back-and-forth transportation from source to consumption. The solution? Deploy an analytics-based approach to calculate all levels of emissions accurately. Using machine learning and generative AI, it is possible to estimate impacts in a way that limits emissions over time. But you'll need a hyperconnected supplier network and a 20/20 on operational realities.

Every challenge presents a solution. In this case, adopting a holistic and collaborative approach is the way forward. It involves using digital tools to collect and analyze data, implementing carbon pricing or offsetting mechanisms, setting emission reduction targets and action plans, and partnering with suppliers to develop their capabilities and emission awareness. Reaching into your customer's multitiered supply base to mitigate risk and assess sustainability practices is a winning strategy for reducing Scope 3 emissions. Our risk management and sustainability practices follow this approach (see figure) and help suppliers achieve positive results.

The key features of this approach are:

1. Creating a data foundation and applying advanced analytics: Use advanced analytics and artificial intelligence to help collect and process data from various sources, such as invoices, purchase orders, bills of materials, transportation logs, and more. This allows you to gain granular insights into your supply chains' Scope 3 emissions at various levels of aggregation, such as product category, supplier group, and geographic region
2. Embedding fair carbon pricing: Implement internal carbon pricing in supply chains to model the cost of carbon emissions in your operations and decisions. Attaching a monetary value to a supply chain's emissions will keep processes green and teams accountable
3. Setting targets and action plans: Consistent with the Paris Agreement, set your targets. Develop action plans for supply chains that outline specific measures and initiatives to achieve product design optimization, logistics efficiency improvement, renewable energy procurement, and more
4. Boosting a supplier's capabilities: Partner with suppliers to develop emissions measurement, reporting, and reduction capabilities. And provide training, tools, feedback, recognition, and support to improve environmental compliance and create a culture of collaboration and innovation among suppliers

Adopting this approach can enhance your function's credibility by disclosing and managing its Scope 3 emissions consistently and verifiably. This will elevate trust and loyalty with customers, investors, and regulators. Improving efficiency and resilience in the face of volatile energy prices, carbon taxes, or regulations, combined with value propositions of low-carbon products or services, will create new opportunities across the value stream. You can strengthen your ecosystem-wide supplier partnerships by aligning initiatives, incentives, and goals and sharing operational best practices. Even in hard-to-abate sectors, such as steel, cement, or chemicals, supply chain teams can leverage their collective power to reduce emissions.

A $25 billion global semiconductor manufacturer faced the risk of enduring disruptions across its supply chain due to a lack of supplier collaboration and resilience. We used our approach to deploy a smart, multitiered supplier network map to increase compliance and risk management, including setting up a risk and ESG council to monitor and track Scope 3. This initiative supported the manufacturer to rely on its suppliers, decrease its risk of inventory imbalances, and maintain visibility across the supplier ecosystem.

With the tools, guidelines, and joining forces with suppliers to set sustainable goals, you can more easily integrate data, tools, and best practices to locate emission sources and track carbon pricing throughout your company's value chain. However, creating an action plan and ensuring stakeholder alignment can be time-intensive and challenging. Especially for the semiconductor industry, where meeting regulatory compliance on time is of the essence. From setting goals, creating a robust data foundation, and developing supplier capabilities to accurate carbon accounting, the approach keeps you shielded against Scope 3 surges. And you can speed up your bid to keep the planet green.

Sources:

¹ UN Global Compact Network UK, Scope 3 Emissions, 2024

² Supply Chain Digital, Supply chains 'playing catch up on visibility technology', 2023

³ Boston Consulting Group, A Net Zero Plan for the Semiconductor Industry, 2023