Cutting emissions in the supply chain is a challenge for companies in ESG

In December 2021, retail giant Walmart announced a funding program to encourage its supply chain to emit less greenhouse gases.

Through a partnership with HSBC, the company started to offer financial benefits to suppliers that reduce carbon in their operations, such as credit lines with lower rates and anticipation of receivables.

It was the way Walmart found to face one of the biggest challenges for companies in the sustainable agenda: neutralizing the so-called scope 3 emissions.

In corporate jargon, the climate footprint of a business is segmented by scope, according to the methodology of the GHG Protocol, which standardized the way of measuring and managing greenhouse gases.

Scope 1 emissions are those generated directly by the company’s operations. Scope 2 concerns the carbon released indirectly in energy consumption.

The rest falls into scope 3, which encompasses everything from business trips to purchasing raw materials, transporting products and consumption. This is the category that is often most critical to a company’s environmental footprint.

According to a survey by the Carbon Trust, Scope 3 emissions account for 65% to 90% of the impact of most organizations.

Although the value chain is so relevant to the decarbonization of operations, a company’s efforts are rarely focused on it. A study published on February 10 by the CDP (Carbon Disclosure Project), in partnership with the consultancy BCG (Boston Consulting Group), showed that only 38% of companies engage their supply chain in actions against climate change.

Based on responses from 11,000 corporate suppliers, the survey concluded that the primary focus remains the direct environmental impacts of operations. More than half of suppliers (56%) do not even have environmental goals.

The scenario has started to change recently, with the worsening of the climate crisis and the explosion of ESG (environmental, social and governance) commitments.

Initiatives by large companies such as Walmart also help to put pressure on the market. In the case of the retailer, the new financial platform will be aimed at suppliers of its own brand – which are usually small and medium-sized companies, precisely those that have the most difficulties in accessing capital to finance the climate transition.

The program is part of Gigaton, a project created by Walmart in 2017 to cut 1 billion tons of carbon in its supply chain by 2030.

So far, more than 3,100 companies have joined, but with a network of more than 100,000 suppliers around the world, the retailer’s challenges are still great.

Complexity of value chains makes control difficult

The internationalization of production chains is one of the main obstacles for companies that want to neutralize their scope 3 emissions.

According to Gustavo Pinheiro, coordinator of the low carbon economy area at the ICS (Instituto Clima e Sociedade), from the 1970s onwards, the market began to allocate its productive capacity in places where labor is cheaper, creating the logic of integrated global chains.

“Companies were less verticalized and began to outsource much more. With this process, industries lost control of their production chains”, he explains.

In his view, the search for the cheapest supplier also increased the negative socio-environmental impacts. “No one measures this and almost no one measures it yet. Only now, with the ESG agenda, is this topic starting to enter the agenda.”

Pinheiro says that scope three impacts the manufacturing industry more than the service sector or basic industry, for example. In Brazil, he says, the topic is especially relevant for some specific segments. One of them is agribusiness — including for economic reasons.

In November 2021, the European Commission proposed banning the import of commodities linked to deforestation, such as soy and beef.

If the proposal is approved, the companies must prove, by means of an audit, that their suppliers are not related to the felling of forests. In other words, monitoring the production chain could be decisive for the presence or absence in the European market.

But, in addition to deforestation, agribusiness is a sector whose emissions are naturally high. According to the SEEG (System for Estimating Greenhouse Gas Emissions and Removals), an arm of the Climate Observatory, agriculture is the second activity that emits the most greenhouse gases in Brazil: 27% of the total.

Livestock accounts for the largest part (65%), due to enteric fermentation — popularly known as “beef burp”.

With more than 220 million head of cattle in the country, reducing emissions in the chain is a challenge for meatpackers, and some have already signed commitments in this regard.

Companies assume goals, but give little detail

In March last year, JBS announced the goal of being net zero (zeroing its net carbon balance) by 2040. To be able to fulfill the promise, the company will need to decarbonize its cattle chain, but first it will have to measure these emissions.

Currently, the scope 3 calculated by the slaughterhouse includes only commercial travel, car fleet and waste decomposition on farms — leaving out the methane generated by its suppliers.

According to JBS, a tool to make a carbon balance on properties is under development.

Although this impact is not yet fully calculated, the company says it has strategies to mitigate it. One of the bets is on nutritional supplementation.

During COP26, the refrigerator announced a partnership with the Dutch Royal DSM with a focus on enteric fermentation. According to JBS, studies carried out at Unesp in 2016 showed that an additive in food is capable of reducing methane emissions by up to 55%. At the moment, the project is being tested with 30,000 cattle in Mato Grosso do Sul.

The plan to reduce the slaughterhouse’s scope 3 emissions also involves increasing productivity, slaughtering younger animals, improving pasture management and encouraging integration with farming and forestry.

Asked for details on how it intends to conduct these points, JBS replied, in a note, that it has been prioritizing the reduction of the age of animals in its purchases, and that it has a program to encourage the productivity of suppliers. The company also said it indicated technologies such as crop and livestock integration.

However, the meatpacker did not explain how it will monitor the evolution of these aspects, and did not answer whether there are specific goals for each strategy.

Regarding deforestation, the bet is on a platform to monitor indirect suppliers. The commitment is to have a 100% deforestation-free chain by 2025.

The platform allows JBS to see the link before the purchase: the farms that sell cattle to their direct suppliers. In a statement, the company said it was committed to engaging the entire production chain in traceability and explained that the platform can also reach producers at the beginning of the chain.

Scope 3 also entered the radar of Ambev, which announced, in December, the intention to eliminate emissions in the value chain by 2040.

According to the company, scope 3 represents 83% of its entire carbon footprint.

Ambev has established an action plan that ranges from encouraging regenerative agriculture to the use of alternative fuels in transport, in addition to increasing the recycled content in packaging.

However, the company did not detail how it will implement these initiatives. Sought for comment, Ambev did not explain whether suppliers will be required to adopt these practices, whether there will be any adaptation period and whether it has a budget dedicated to decarbonization.

Gustavo Pinheiro, from ICS, says that Brazilian companies are only at the beginning of their strategies for the value chain.

“We have the challenge of transforming commitments into transition plans. It is not enough to say that we are going to do something in 2040, it is important to clarify the investments to achieve this”, he says.

In addition, Pinheiro points out that the delay in implementing environmental policies can cause companies to end up losing opportunities for the green transition.

“Today, international investors are looking for projects that reduce emissions. By not facing scope 3, companies lose the chance to leverage foreign investment at a low cost of capital”, he concludes.