Logistics Sector: Tackling Challenges to Scope 3 Emissions Reporting

The path to net zero has intensified for companies across sectors as economies are realizing that it is imperative to reduce greenhouse gas emissions to mitigate the detrimental effects of climate change. Scope 3 emissions represent the largest chunk of emissions for many sectors. For logistics, which accounts for ~8% of overall global CO2 emissions, it accounts for 40-50% of total emissions.

An increase in pressure from regulatory agencies (such as US Securities and Exchange Commission and International Sustainability Standards Board) to report Scope 3 emissions will force companies to take strong steps in their CO2 emissions estimation journey. Therefore, it will soon be imperative for all logistics companies to take steps to eradicate problems related to data availability, accuracy, and transparency to report emissions.

While achieving net zero is a challenging task for logistics companies, it presents a tremendous opportunity for them to take proactive steps on climate change and gain a competitive edge. We believe that the upcoming years will be pivotal for logistics companies, as they will need to define an action plan and lead in taking steps towards reduction in Scope 3 emissions.

Companies such as Kuehne+Nagel, Maersk, UPS, and DHL have already defined their long-term goals and strategies for emissions reduction.

• Kuehne+Nagel has made a commitment to reduce its own as well as value chain partners’ emissions by 33% by 2030. It will achieve its objective by creating CO2 footprint visibility throughout its supply chain and educating customers to optimize routes and select services that involve the lowest CO2 emissions.
• Maersk introduced a carbon pact initiative in 2020, with the goal of decreasing Scope 3 emissions by 60% before 2030. As a part of the initiative, Maersk is collaborating with its suppliers and customers to promote decarbonization throughout its value chain.
• UPS has established a goal of reducing Scope 3 emissions by 50% before 2035. The company is directing its resources towards investment in alternative fuel vehicles and renewable energy, while simultaneously partnering with customers to optimize supply chains for sustainability.

The steps taken by players make it evident that CO2 footprint visibility across the value chain is important for logistics companies, as it helps them to identify, estimate, and report Scope 3 emissions. Big logistics companies have huge and complex value chains with thousands of partners. Their biggest challenge, while estimating Scope 3 emissions, is getting relevant information from suppliers and customers.

Some of the key challenges of logistics companies, which Evalueserve has helped our clients address, are

• Extracting information: For precise Scope 3 emissions estimation, logistics companies need primary data from suppliers, third-party logistics providers, and customers. These value chain partners could be small or mid-sized companies that lack the in-house knowledge and personnel needed to provide the required Scope 3 data in a sharable format (they would have to make significant up-front investment). For example, a global logistics company we have worked with had thousands of third-party vendors, most of them small mom-and-pop companies. Collecting information from them was a challenge. Our team designed a simple questionnaire that asked vendors for basic information, such as ton-miles, fuel economy, fuel type, and fleet type, rather than complex technical questions. It created a much better data collection success rate for the company.
• Unwillingness to share data: Value chain partners often hesitate to share data, which creates another key challenge for logistics companies. Moreover, many small companies don’t understand the importance of emissions estimation.
• Lack of standardization: The absence of uniform reporting frameworks / methodologies and the use of varying emissions calculation methods by value chain partners can make it challenging for logistics companies to compare and aggregate data and estimate emissions.

We recommend an incremental and best-effort-based approach to tackle such challenges. Our analysis shows that 80% of a company’s upstream (supply chain) Scope 3 emissions are contributed by one-fifth of their supply base. Thus, to reduce supply chain emissions, companies must focus on high-spend suppliers.

Many logistics companies try to estimate emissions by using approaches such as industry average (instead of collecting data from value chain partners), which leads to inaccurate estimations. The best way to address these challenges is to collaborate closely with value chain partners to enhance their environmental performance and make them understand the importance of collecting / sharing CO2 emissions information. Regular workshops / training sessions with suppliers can help them recognize the advantages of reporting data.

Big logistics companies are designing incentive frameworks that encourage value chain partners to report Scope 3 data. For example, in return for sharing environmental performance scores, suppliers may get better supply chain financing terms.

For one of our clients – a US based logistics company – we have designed a scope 3 estimation program. It included estimation of scope 3 emissions (based on spend and activity method), setting up targets and identification of decarbonization pathways to achieve targets. The biggest challenge for our client was they have thousands of third-party carriers and most of these carriers are very small companies. We adopted spend based methodology (based on ton-miles) initially estimate emissions and then improved the accuracy of scope 3 estimations by collecting information from suppliers. We developed a Scope 3 emissions estimation program that involved multiple push and pull mechanisms for suppliers to share information, such as giving multiple training on the importance of reporting emissions, explaining how they can provide the right information, and discussing the benefits (including easing of payment terms and better supply chain financing) they can get by collaborating with our client.

To know more about industry best practices and Evalueserve's Scope 3 emissions-related solutions, please contact us @ pinky.singhal@evalueserve.com.