The Humble Freight Invoice Could Be Key To Quantifying Scope 3 Emissions

Sustainability is now a rising metric of importance in freight operations, alongside costs and service reliability. Giving the metric some concrete shape has remained an issue, though.

A hearty welcome to the 66th 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 course of several editions of this newsletter, we've discussed in great length the importance of enforcing sustainability in supply chain operations. Companies under the public eye have largely promised to work on reducing their carbon footprint, buoyed by widespread consumer advocacy and a regulatory push to curb emissions. 

The recent topic in contention has been Scope 3 emissions, which measure all indirect emissions outside the company's four walls. Scope 3 quantifies the emissions resulting in the backdrop of a company's activities — both upstream and downstream of its supply chain.

While companies have pushed for reducing their direct carbon footprint (measured via Scope 1 and 2 emissions) through various measures, Scope 3 emissions have been harder to measure, let alone tackle. To make matters worse, companies are expected to be mandated by the SEC to disclose their Scope 3 data in the near future. 

Scope 3 is the quintessential 'rest of the iceberg' that has remained underwater for far too long. For instance, companies in the manufacturing sector could see 70-80% of their total emissions lie in Scope 3. With consumers (and investors) turning environmentally conscious, Scope 3 revelations could sabotage brand image and dent business. 

The nature of these emissions makes it a perplexing situation to be in for companies. For the most part, companies are yet to scrutinize the sustainability of vendor operations, considering profitability and service levels are usually the top two concerns impacting operations. Even if they do, there isn't enough visibility beyond Tier-1 vendor operations. And for large corporations partnering with hundreds of vendors of all sizes and spread-out geographic markets, streamlining operational data across their entire ecosystem has remained unfeasible.

Within the different emissions segments that Scope 3 captures, transport emissions make up a meaty part, taking roughly one-fifth of the total emissions created. That said, transport emissions tracking companies are a bit of a letdown too. 

"If you ask 20 different vendors to get you emissions data, you'd get 20 different versions of how they calculate it and what it's based on. There are no governing standards, transparency, or third-party accreditation on how that data was collected. Scope 3 has remained an internal project without any external implications for quite a while," said Josh Bouk, the president of Trax, a global leader in the transportation spend management space.

While this has been acceptable till date, the new SEC regulations would mean mandatory reporting. Once in effect, large public companies would likely need to report their Scope 3 from 2025 for the previous calendar year. "Companies can no longer work with the thumb-in-the-air approach; they need real data. They'd need standards, like the ones they have with GAAP accounting, for instance," said Bouk. "That's the challenge, really. Credible and accurate data is hard to come by if you're just trying to ask the vendors directly for it."

Tightening regulations around Scope 3 is not the same as, let's say, the ELD mandate considering challenges with adhering to regulations goes beyond a company's circle of influence. High fragmentation and several stakeholders within an end-to-end value chain result in visibility levels exponentially dropping as we go further downstream. Small and medium-sized vendors predominantly lack digitalization within operations, making it harder to measure and monitor carbon footprint. 

Supply chain visibility platforms exist, but come with a lot of caveats. "To be accurate, you'd have to be able to look at every shipment and monitor its every move, analyze the transport mode, the vehicle the freight was on, how far it traveled, and in what weather. All these factors and more such elements impact carbon emissions. Visibility vendors lack this level of sophistication and granularity within their data," said Bouk. 

The focus must be to analyze the best option available in the market — what are the standards followed? What's the data accuracy? What part of a shipment's end-to-end journey is monitored, and how comprehensively?

One way to derive the carbon footprint of supply chain operations is to scrutinize freight invoices. Aside from being easy to collect and simple to understand, invoices are a comprehensive form of monitoring as service providers are bound to list every move to get paid.

"Being a freight audit and transport spend management company, we receive millions of invoices from transportation vendors yearly at Trax — equating to over $24 billion in transportation spend," said Bouk. 

"These invoices come via EDI, flat file, PDFs, and even paper documentation. Within these invoices lie critical information like distance moved, type of vehicle used, haul time, and a variety of other factors that help understand the move's carbon footprint."

Considering every vendor wants to be paid, monitoring freight invoices can ensure 100% coverage of all company shipments — and the associated emissions. Bouk contended that by collecting data off of those invoices, harmonizing, and auditing them, it will be possible to create a comprehensive emissions calculator model that can help zero down Scope 3 emissions. 

One of the obvious advantages of having visibility into emissions is that companies can comprehend and report their carbon footprint with conviction. Companies can also act on this information by adding sustainability as a separate yardstick to measure partners against — aside from cost and service levels. Making decisions based on carbon footprint will help companies hit their sustainability goals quicker while improving their standing amidst an increasingly climate-conscious consumer base. 

"It's really encouraging to see how companies are genuinely interested in doing well by doing good," remarked Bouk. "Corporate America often gets a rough reputation. But there are a lot of excellent executives — people who are making good financial and sustainable decisions. That's encouraging; it says we're going in the right direction."

Understanding emissions also help companies pick better modality choices and look seriously toward optimizing freight movement. This could be about picking rail over truckload, or shipping three pallets in full truckload instead of shipping one pallet three times a week on LTL. "This wouldn't be possible without proper planning," pointed out Bouk. "The visibility into emissions motivates companies to reduce emissions by planning better, resulting in better optimized and cost-effective freight moves."

The Weekly Roundup

U.S. home sales have dropped 7.7%, following a record-setting trend as November marks the tenth month of consecutive declines. Home sales are dropping off in the wake of the Federal Reserve raising interest rates in an attempt to offset inflation rates. Mortgage interest rates are up 7% and are part of the Fed’s fastest-ever interest rate-hike cycle. 

Union Pacific will be pausing its use of embargos. The embargos, which were intended to help offset supply congestion, have risen dramatically from five in 2017 to 1,000 in 2022. The Surface Transportation Board has called Union Pacific CEO Lance Fritz and other UP execs to a hearing in Washington, D.C., earlier this month. Union Pacific carries approximately 27% of US rail freight and 11% of all long-distance rail freight.  

Despite both California and New York signing laws that will ban the sale of non-electric vehicles by 2035, automotive executives are less than optimistic about the adoption of electric vehicles. Predictions made in 2021 estimated that EVs would make up 65% of all auto sales in 2030. That estimation has now since dropped to 35%.

There has been a considerable push for freight tech in ocean and air freight industries, especially given the massive supply chain disruptions over the past few years. Now, freight tech developers are branching into US trucking markets. As the driver shortage shows no signs of relenting, technology could help to offset the shortcoming. 

…said who?

“Now we are seeing a nationwide slowing of imports.”

- Gene Seroka, the executive director of the Port of Los Angeles, commenting on US container imports cascading towards the end of the year

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