Making A Case For Sustainability In Supply Chains By Curbing Scope 3 Emissions

Companies have focused too long on ensuring emissions at their organizational level are kept down to a minimum. It's time they look at what goes on downstream beyond their immediate line of sight.

A hearty welcome to the 46th edition of The Logistics Rundown, a weekly digest that aims to put some perspective on what’s brewing within the logistics industry. This is a space where we religiously dissect market trends, chat with industry thought leaders, highlight supply chain innovation, celebrate startups, and share news nuggets.

Over the last few newsletters, we've seen the impact of how rising fuel prices are causing innumerable bottlenecks across supply chains and squeezing purchasing capacity of consumers due to rising CPI inflation. 

While we could point fingers at the Russian invasion of Ukraine for most things wrong with gas prices today, the discourse on sustainability and reneging on gas dependence has gotten more steam. For businesses, pursuing sustainability helps kill two birds with one stone, reducing operational costs associated with fossil fuels and improving their emissions standing. 

The latter is no joke — companies are seeing a real need to buy into sustainability efforts as investments are increasingly getting tied to ESG reporting, aside from a consistent consumer pushback towards companies irresponsible with their carbon footprint.

This being said, measuring this 'footprint' is by no means easy. Scope 1 emissions are by far the simplest to measure for any company, as it focuses solely on emissions arising from the organization. Scope 2 emissions are a bit trickier as they comprise Tier 1 emissions, including the purchase of electricity — where you're not generating the electricity on-site, but getting it as utility services. 

While Scope 1 and 2 have been the ones in focus over the last decade, Scope 3 emissions are fast becoming the topic of contention — and will be, over the course of this newsletter. 

To paraphrase Scope 3 emissions from the Environmental Protection Agency (EPA):

"Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain. Scope 3 emissions include all sources not within an organization's Scope 1 and 2 boundaries."

In essence, Scope 3 covers anything but Scope 1 and 2. It's the indirect piece to emissions that's been long ignored, primarily due to the lack of tangible methods to measure it. 

Let's say there's a clothing brand selling merchandise that's marketed as 'eco-friendly.' But following the trail of where it came from, the eco-friendly tag might stop making sense beyond the factory where the garment gets manufactured. For instance, cotton in the fabric comes from a farm in India with an inefficient way of watering its cotton field. Maybe there's reckless use of electricity in the motor that pumps water into the field. There are several 'ifs' and 'buts' in this equation that are difficult to track, which is what makes defining Scope 3 incredibly arduous. 

There are several 'ifs' and 'buts' in this equation that are difficult to track, which is what makes defining Scope 3 incredibly arduous. 

"There are over ten categories of Scope 3 emissions, including how your product gets made. This even includes how your product is transported and distributed, especially when you hire someone else to do it and don't do it yourself," said Brett Wetzel, senior director of applied knowledge at freight tech firm Breakthrough.

"Large organizations have a difficult time wrapping their arms around it. Many companies we work with subscribe to longer-term targets as they are coming to terms with what constitutes Scope 3," said Wetzel. 

Based on the Science-Based Targets Initiative (SBTI), companies must report their Scope 3 emissions if they exceed 40% of the organization's total emissions. Most companies go way beyond this number, with their Scope 3 sitting at around 90% of total emissions on average.

Wetzel pointed out that smaller, privately-held companies can exert better control over their supply chain, including a consolidated supplier base. This can give them improved transparency to where their Scope 3 emissions originate, enabling better mitigation means. 

"For such companies, it's easier to start those conversations as there are a lot fewer things that they need to manage. But for companies like Kraft, Heinz, Nestle, or Unilever, with different business units and products, the next ten years would be about looking to wrap their arms around product and operational buckets that are big contributors to their Scope 3 emissions."

Of all the different categories of Scope 3, the transportation segment of the supply chain takes a meaty part of these emissions, with Wetzel contending it to be around 10-15% of the total emissions. To start with reducing emissions, it makes sense for companies to consolidate their freight, decreasing the need for frequent hauls while optimizing every move. 

"There are times where trailers aren't being completely filled. There might be good reasons, especially with stricter delivery windows and protracted supply chain issues that push companies to keep moving the products to keep the shelves filled. But when we start identifying where the facilities are and the optimal lanes of movement, we can see companies can do much better," said Wetzel. Companies can also ditch trying to truck out all their products to use railroads — a slower transport option, but with twice the energy efficiency. 

Similarly, a case can be built for the use of alternative energies within supply chains. "Once companies start looking at changing the status quo, alternative energies become not an IF or an OR statement, but rather an AND statement," pointed out Wetzel. "It's about creating an overarching strategy to find a space where sustainability makes sense economically. When companies have a better idea of their options, they can start to collaborate with partners like the trucking companies and energy providers."

Once companies start looking at changing the status quo, alternative energies become not an IF or an OR statement, but rather an AND statement

With no concrete paths to sustainability, companies must realize there isn't a one-size-fits-all approach. Narrowing the focus to double down on a single solution might often leave benefits on the table or create experiences that are unsavory, resulting in companies frittering away time and resources. 

"Education or access to information is a huge barrier today. For instance, companies don't realize that compressed natural gas is a solution that's been around for a decade. There's a possibility of doing it with renewable sources like landfill gas or dairy waste, where we can capture methane. For the most part, education on the front end is the biggest issue."

The second major headwind to Scope 3 mitigation is collaboration. One segment of this is the friction in having the sustainability talk with vendors and transport providers. The other segment is the issue organizations have with collaborating inside the company. In most companies, sustainability efforts fall on the shoulders of people at the C-suite level or a level below that.

"The C-suite is on the vision, the transportation professionals are in charge of executing the vision, and you have the sustainability lead sandwiched between them to connect the dots. If you don't have these three key pieces on the same page, it's difficult to set the vision and have the buy-in to get the vision executed. Great plans continue to hit roadblocks in companies simply because someone misinterpreted the vision, ensuring the strategy never gets materialized."

On the other side of the spectrum, there's more activity in the regulatory space, be it environmental standards at the state or federal level. Investor and capital guidance pushing companies' ability to track and commit to a plan is increasingly becoming a vital yardstick for receiving funding. 

Investor and capital guidance pushing companies' ability to track and commit to a plan is increasingly becoming a vital yardstick for receiving funding. 

Wetzel is positive when talking about the future. "I think we're seeing commitment ramp up in the last few years as companies sight a better way of doing things. Even in a low-cost diesel environment, we still saw people continuing to make commitments. And now, with fuel prices way higher, we see more companies going for the alternatives available today — like electric battery vehicles and hydrogen fuel cells. The challenges to widespread adoption still remain, but this is a step in the right direction to ensure a better, more sustainable future."

The Weekly Roundup

High inflation has led to a cooldown of demand as the average household loses spending power, resulting in a drop in the spot rate market for both the truckload and LTL markets. Analysts are beginning to pull back their earnings estimates for Q1 as the economic downturn has reverted the market to pre-pandemic rates. Some companies have already begun pricing for a potential recession. Great news for shippers, less so for trucking firms. 

Electronics car manufacturer, Tesla, is finally beginning to feel the pain of the supply chain shortages. The company which has managed to grow rapidly despite the chip shortage has finally hit a halt in production. Tesla CFO, Zach Kirkhorn cites the Shanghai lockdowns, part of China’s “Zero COVID” policy as part of the reason for the slow down in production. Tesla is still reaching record-breaking profit levels, despite the supply chain challenges.

Shanghai has been in lockdown for three weeks, following closely after the Shenzhen lockdown in March. According to data from Windward’s Maritime AI platform, the number of vessels waiting to berth outside Chinese ports has grown nearly 200% since February. Other ports have managed to stay operational but are losing ground due to the difficulty in finding truck drivers and warehouse workers that test negative for COVID-19.

The $120 billion grain industry is in chaos as Russia’s war against Ukraine continues. Between 80 to 100 bulk carriers are unable to depart Ukrainian waters due to safety concerns. Countries that rely on grain imports from Ukraine will be hard-pressed to afford grain from other countries. Currently, the United Nations Global Index on food prices is at an all-time high.

…said who?

“Undeniably, China is the single biggest market for all sorts of nuts and bolts, everything from your basic components to sophisticated components. You cannot recreate that ecosystem in any other country of the world.”

- Kamala Raman, vice president at Gartner Inc., commenting on how nearshoring supply chains from China to North America is not as easy as it sounds

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