Supply Chain Carbon Accounting
Will new solutions emerge that provide even greater transparency into supply chain emissions?
Opportunity Overview
Carbon emissions from supply chains are 11.4x higher on average than the emissions from business operations. For example, most of the fashion industry’s emissions come from upstream activities, such as raw material production, processing and transportation. A World Economic Forum report estimates that eight supply chains alone account for more than 50% of global emissions. As such, companies committed to understanding their full carbon footprint need visibility into their supply chain emissions.
In this article, I provide a brief overview of companies that offer carbon accounting software, which are tools that help organizations measure and manage their carbon footprint. I then consider market opportunities for providing greater transparency into supply chain emissions over and beyond the status quo today.
Current Landscape
The Greenhouse Gas Protocol is a global standard for how companies should prepare their emissions inventory. It classifies emissions depending on the source. I use the Apple Environmental Progress Report for 2020 to illustrate how the standard is applied in practice:
Scope 1 emissions - sources directly owned by Apple, such as fleet vehicles.
Scope 2 emissions - electricity purchased by Apple.
Scope 3 emissions - all other indirect emissions in Apple’s value chain, including the manufacturing, transport and use of Apple products.
Over 99% of Apple’s carbon footprint comes from its supply chain (Scope 3), in part due to Apple’s transition to renewables for its electricity (Scope 2).
Carbon accounting software allows enterprises to measure their carbon footprints in accordance to a global standard such as the GHG Protocol. Recently, many different solutions have been brought to market by both startups and tech incumbents. While some products are offered within a broader ESG data platform (e.g. Nossa Data), most of the recent startups focus on carbon tracking and management (e.g. Emitwise). There are also startups that target the supply chain emissions of specific industries (e.g. CarbonChain for commodities).
Tech incumbents have also started to offer their own solutions. Salesforce’s Sustainability Cloud counts Marriott and Herman Miller as customers. SAP launched a carbon tracking tool built on their ERP product. The SAP solution provides transparency across a customer’s supply chain, including “production, raw materials, energy use, and transport”. Separately, this article hints at Microsoft possibly offering its own carbon tracking product.
Customer Value and Carbon Benefits
Creating an emissions inventory is the first step to any business decarbonization plan. Carbon accounting products aim to make this process as simple as possible for customers, and primarily compete on the following dimensions:
User Experience. How easy is it to cobble together disparate data (e.g. utility bills) and quickly report the results on a dashboard?
Price. Salesforce charges enterprises $4,000 per month while smaller providers could charge 10 times less.
Carbon Management. Newer startups provide tools to manage internal carbon reduction projects or purchase carbon offsets.
Accuracy. Watershed enables its customers to get emissions data from specific suppliers and “not just estimates or averages.”
The ability to meet the needs of investors and regulators is another dimension that further differentiates providers. The practice of disclosing carbon footprints started as voluntary initiatives supported by platforms like CDP. Recently, investor pressure to better understand the climate risks public companies face is driving more carbon disclosures.
Regulation is also pushing adoption higher. For instance, the Task Force on Climate-Related Financial Disclosures (TCFD), established by the G20 Financial Stability Board, recommends a climate risk disclosure framework, which includes reporting out carbon emissions. G7 nations (Canada, France, Germany, Italy, Japan, the UK and the USA) have recently agreed to adopt rules consistent with the TCFD. Outside the G7, Switzerland and New Zealand expressed similar support.
Potential Market Opportunities
There are many ongoing challenges with accurately measuring supply chain emissions. For one, companies could have varying interpretations of Scope 3 categories and boundaries. Emissions are also typically distributed across countries and tiers of suppliers. Disclosure is also still voluntary today, and even the new climate disclosure rules being evaluated by the SEC might not include mandatory Scope 3 disclosures.
However, my hypothesis is that solutions will increasingly compete on providing greater supply chain emissions transparency and accuracy. As businesses large and small take steps towards net zero goals, these commitments will be cascaded down to their suppliers. For example, Salesforce recently “formalized expectations of its suppliers, adding requirements to new contracts to set carbon-reduction goals and deliver products and services on a carbon-neutral basis.”
Recent startups appear to focus on this supply chain emissions tracking opportunity:
Sweep is aiming to connect climate data across multiple companies within the same supply chain.
Watershed was used by Square (mobile payments), Shopify (e-commerce platform) and Sweetgreen (salad chain) to track Scope 3 emissions across different scenarios.
Circulor enables companies to digitally track commodities across “each stage of production, recycling and end-of-life”. Circulor counts Volvo-owned Polestar as a customer.
Assuming my hypothesis is correct, then the next question is whether there will be room for multiple providers, each tailored to the specific requirements of different supply chain verticals? For instance, decarbonizing Cargill’s agricultural supply chain might need visibility into “hundreds of thousands of farmers”.
Will new solutions emerge to meet the challenge?
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