Revisiting the Sustainable Supply Chain
Hitachi Consulting officially started our sustainability-focused consulting practice a little more than a year ago, but we have been helping customers in this area for a few years. One of the team’s first mandates was start to practice what we preach. We decided to implement an information system internally to track our environmental footprint. As part of this, we gathered up all the data we had that could be used to track our electricity, gas, water and paper usage in our office buildings as well as our employee air and car travel.
Going into this project, we expected that things like electricity use and air travel would be large contributors to our greenhouse gas footprint – and this turned out to be true. But, frankly, we were surprised at the results because the impact of one of these was so disproportionately large. We found that our employee air travel makes up about 80 percent of our greenhouse gas footprint and has consistently done so for the last few years. The other two big components are employee car travel and office electricity use, which each account for about 10 percent of our GHG footprint. We also know that our current method for calculating employee car travel does not reflect all car miles, so we expect that the percentage for this would actually be slightly higher.
What this experience tells us is that the environmental footprint of Hitachi Consulting is largely (90 percent at least) based on activities that occur on our behalf but are not directly tied to our actual operations. For example, we don’t own or operate the airplanes and cars that our consultants use to get to our clients’ locations. But our clients expect us to work closely with them, so this is a mostly unavoidable consequence of our business model.
The Greenhouse Gas Protocol was jointly convened in 1998 by the World Business Council for Sustainable Development and the World Resources Institute. In GHG Protocol parlance, the indirect emissions that occur due to activities outside of the electricity we purchase are called Scope 3.
Definitions according to the GHG Protocol:
- Scope 1: All direct GHG emissions.
- Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam.
- Scope 3: Other indirect emissions, such as the extraction and production of purchased materials and fuels, transport-related activities in vehicles not owned or controlled by the reporting entity, electricity-related activities (e.g., transmission and distribution losses) not covered in Scope 2, outsourced activities, waste disposal, etc.
Now that we understand our footprint and the big drivers for this, we are looking at creative ways to reduce the impact from our travel without harming our ability to deliver the great service that our customers expect, such as doing more telecommuting, leveraging video communications and Web-based conferencing, scheduling staff to be offsite more frequently, and looking at using carbon offsets. This is all still a work in progress, but our journey could not have started without the visibility into our footprint that we gained by implementing information systems to help us track this.
Why would this anecdote about our Scope 3 environmental footprint be of interest to you?
1. Scope 3 is a large part of the footprint of most companies.
It turns out that in many other industries, Scope 3 emissions also make up a very large percent of a company’s footprint. Some estimates put it between 70 percent and 95 percent on average for many industries. A report by NSF and Trucost calculates the average Scope 3 to be 69 percent. Given this, there is a good chance that many of the readers of this article are part of a company with large Scope 3 emissions.
For example, at the extreme end, a construction company called Webcor Builders recently completed a Scope 3 footprint analysis and what they found is startling – 99.6 percent of their GHG footprint occurred outside of their operations. The majority of their overall footprint was embedded in the construction materials they get from suppliers, such as concrete, steel and glass. Now that they know this, they are working with these suppliers to come up with creative ways to reduce Scope 3 emissions.
The global home furniture retailer IKEA did a similar analysis of their Scope 3 emissions and calculated that it accounts for 82 percent of their footprint. In their case, they included not only the furniture lifecycle but also things like customer transportation to their stores. Based on this information they are looking to locate more of their stores near public transportation, provide shuttle buses and bikes with trailers, and are working with suppliers to improve their efficiency and reduce the footprint of their products. See IKEA’s Never Ending List of all of the things they are doing to improve sustainability.
2. Customers expect suppliers to provide them this information.
Across many industries, customers are expecting their suppliers to provide information on the environmental footprint of their products and services.
Wal-Mart and the U.S. government in particular – the two largest buyers of goods and services in the world – both have announced their initiatives to start collecting this information, as I have discussed in a previous article. Recently, Wal-Mart announced additional details related to sustainable agriculture that “will launch in 2011 for top producers in our global food sourcing network. This will help us learn about the water, energy, fertilizer and pesticide used per unit of food produced.”
In another example, the outdoor clothing company Patagonia has done an impressive job determining the individual lifecycle footprint of 150 of their products – tracking metrics such as energy and water use, waste and GHG emissions. In order to do this, they collected data from their suppliers extending back to the origin of the primary materials (such as cotton, wool and leather). They use this information so that they can take actions to improve these metrics, but they have also made this public and feature it for a subset of their products on their website in a section they call “The Footprint Chronicles.”
There are many examples of customers expecting suppliers to provide more information on environmental footprints, so no matter where your company fits into the overall value chain, there is a good chance you are going to be asked to provide this information and expect to manage it down relative to your competitors over time.
3. Calculating a Scope 3 footprint is a big data management challenge.
In order to look at your full Scope 3 footprint, you need to gather information from your suppliers about the “upstream” footprints (energy, water, waste, recycling, greenhouse gas, etc.) of the raw materials or finished goods they are providing you and then you need to gather downstream information about what happens to your products after they leave your door. To do so, you’ll need to gather and integrate internal data about your products and their bill of materials and suppliers and customers and combine this with external data provided by suppliers and customers and possibly their suppliers and customers – depending on the boundary you set for this. You will also need to integrate data from other external sources, such as standard factors for calculating emissions.
The good news is that the standards for Scope 3 product and supply chain footprints are being ironed out right now, with more than 60 companies road-testing and providing feedback on the rules. The final version of these rules will be published as part of the GHG Protocol by early 2011.
Reducing Scope 3 Footprint Can Improve Your Bottom Line
The bottom line is the real reason companies are doing any of this in the first place.
Reducing the lifecycle environmental footprint of your products and services basically results in products that were produced with less energy, water and waste – all things that cost money. In parts of the world where greenhouse gas emissions also have a cost (such as Europe, New Zealand and Japan), reducing emissions throughout your entire value chain will also help to reduce the cost of your products and services.
For example, Pepsi recently announced plans to reduce water consumption and carbon emissions by 50 percent in five years in their U.K. operations. The plans will also reduce waste and will be a source of cost savings and cost stability for the company.
Gaining visibility to your company’s Scope 3 environmental impact and taking actions to improve it can appear to be a daunting task, but with emerging tools, standards, market drivers and a realization of its financial benefits, leading companies are beginning to make significant strides, putting them in a better position versus their competitors.