Podcast: Cracking Scope 3: why resolving carbon data confidence is crucial
24 minutes
Years of trying to resolve Scope 3 data gaps in supply chains and yet, this scope of emissions remain one of the biggest blind spots for businesses and their carbon management.
Our EiQ experts - CEO Kevin Franklin, Head of Channel Partnerships Erin Lyon and Chief Customer Officer Andy Gibbard - dig into why Scope 3 continues to challenge businesses, how to resolve the visibility gaps and why it’s more critical than ever to do so.
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Full transcript:
Andy Gibbard, Chief Customer Officer, EiQ: Hello, and welcome to our session on tracking Scope 3 emissions across the supply chain. My name is Andy Gibbard, and I'm Chief Customer Officer at ERQ. And I'm here today with two of our experts, Erin Lyon, Global Head of Channel Partnerships across ERQ and LRQA, and Kevin Franklin, CEO of ERQ and Chief Product Officer at LRQA.
Thanks both very much for joining me today. Tracking Scope 3 emissions across the supply chain is a business imperative. But for many, however, it's notoriously difficult to obtain accurate, meaningful and actionable data. So today, we're going to be diving into this topic, hopefully, busting some myths along the way, and looking at how Scope 3 emissions tracking fits into total supply chain confidence.
So, starting off then, Kevin, why are Scope 3 emissions so critical to track, and what are the key challenges of doing so across the supply chain?
Kevin Franklin, CEO, EiQ: Great question, Andy. Look, it's easy to answer that by talking about climate change, and I think we can take it for given or as given that climate change is a key part of this conversation. Now, very specifically, though, and from a business perspective, emissions are money. Right? Emissions cost money because they're linked to energy consumption.
And if we're reducing energy consumption or if we're moving towards more renewable forms of energy, we have opportunities to, A) save money, and B) to be building more resilient supply chains. So, in terms of why they're important to track, those, I would say, are two really key reasons. In terms of the challenges, well, the biggest challenge is data collection, actually. This has been an issue, really, that's been present for really all of my career, actually, so the last two decades as a minimum. No one's fully cracked the capture of Scope 3 emissions. What we've done in LRQA and in EiQ is we've been capturing energy data for every single one of the audits we've been doing now for the last two years, so probably, actually, around 40,000 audits in total.
So we built an incredible repository of data at the factory level. This is not all Scope 3, by the way. This is the manufactured part of the Scope 3 portfolio. And what that means is we now know energy consumption by energy type as well as then the associated emissions because we've applied the relevant emissions factors, for all of those factories.
That can feed into clients' programmes as they look to basically build out a full supply chain, a full manufactured emissions number, and also help them to identify where their emissions are the greatest, with which suppliers, in which markets, and then to start reducing those emissions strategically with the suppliers. Ideally doing that in partnership in ways that reduce costs and build resilience, as we were saying before.
Erin Lyon, Global Head of Channel Partnerships, LRQA: I think Scope 3 is, when you look at it, it's your biggest impact where you have the least visibility, and that makes anybody nervous because that's where you really need those insights. And historically, we've just not been able to get that with the right degree of confidence, and investors are relying on that information increasingly. So, we have to get to a point of confidence in Scope 3 data really, really quickly.
KF: Not just visibility, but also potentially liability, because, you know, if those costs go up, it's gonna flow straight through into the cost of production. And that's definitely a risk today, particularly in the current landscape where we have tariffs, geopolitical risk. We saw in Europe just how much energy prices went up as a result of the war with Russia. If that happened in other markets, it would have huge impacts on supply chains. And again, this is why tracking energy, reducing it, building out more resilient and diverse energy portfolios and profiles at the supply level is really important.
AG: So how are current and emerging regulations shaping the way that companies report scope three emissions, and how do these vary by region or by industry?
KF: Well, let me give you a few examples, Andy. It's a good topic actually to discuss because we're in a position today where we talk a lot about deregulation, yet, actually, a number of the emissions requirements are still present and are not getting deregulated. Two very good examples are CBAM, so the Cross Border Adjustment Mechanism, which is in place in Europe and is definitely something that's still being scaled today. That is an area where regulation is impacting businesses that are importing into Europe from Southeast Asia, Greater China, all of those regions. CBAM will be very much in place. EU ETS, which is the emissions trading scheme, still very much in place as well.
So these are two regulatory areas where I think we're gonna continue to see a lot of traction relating to Scope 3 emissions, as well as regular kind of one and two for those businesses in those respective markets.
EL: I think the verification of that data becomes critical in both of those mechanisms and others as well in terms of when it relates to Scope 3, that there needs to be a greater trust in the reported information, which is why the verification of the data that's being submitted for those that kind of mechanism becomes critical, and that's why we've got key gaps at the moment.
AG: And then how do regulatory frameworks influence the quality of carbon data collection, and what can companies do to ensure compliance whilst maintaining transparency and traceability?
KF: Also a great question. What I'd say firstly is there's a long history, right, around carbon accounting and carbon data, going back to the greenhouse gas protocol work from, I think it was, the 1990s. So there's a long history here. And, you know, that long history has been progressively flowing into regulatory environments kind of step by step. Point being, people know what to do. The question is whether they're doing it or not.
And they started most companies by looking at kind of scope one and scope two, so their own generated and then obviously electricity, etcetera. And that's actually been an area where a lot of businesses have been able to get quite a good foothold, quite a good understanding of their emissions.
And you mentioned verification earlier. A lot of the verification reporting has been strong in kind of Scope 1 and Scope 2 areas, but not so much Scope 3 because of all of the challenges around getting access to the data. What we're now starting to see is Scope 3 is starting to be expected. Some of the stock exchanges are starting to require Scope 3 reporting. There's some state-level Scope 3 reporting requirements as well. And increasingly, there are also investor requirements around Scope 3.
Certainly, investors are driving a lot of this. As we were saying before, it's partly because there are hidden financial risks in the Scope 3 space. And if those costs start to get transferred back into the businesses, it'll have a disproportionate impact on EBITDA margins and potentially even the cost of the product to the customer.
AG: So what best practices should companies adopt to ensure the accuracy and consistency of their carbon data collection? And also then how can technology help here?
EL: I think technology is a key part of this whole discussion. Let's not separate Scope 1 and 2 because it's critical there, but especially for Scope 3 data collection, enabling suppliers to report much faster and also enabling verifiers to access that information that they've reported in a much more, easier way that where they can provide that verification.
And it also means that it enables we should be able to see a greater amount of digital verification that's happening across entire supply chains, which we have to be able to do because we've got regulations that require verified Scope 3 data, but we've got a shortage of verifiers globally who can provide that level of resource. So we've got to find different ways, and technology has to be an enabler that's going to allow us to do that.
KF: Maybe I'll just kind of pick up on the technology piece and then go back to sort of the first part of your question. On the technology side, I mean, you have to bring AI into this conversation because we're talking about a lot of data, a lot of data from a company's own supply chain, its own organisation. So its own data will be significant, but there's also a lot of other information out there that's often used for carbon accounting, Scope 3, etcetera.
It could be emissions factor data. It could be energy grid structure, like what percentage of an energy grid is coming from renewables or nonrenewables. And you just won't have the bandwidth to do this yourself as a business. Right?
Most companies that are doing this kind of accounting, that is not their sole job, right? They actually have other products and services that they're trying to get to market. So they have small teams of people that are doing this work, and they're trying to work with a lot of information. So AI is gonna be really critical for solving that and also solving, I think, some of the data centricity and data challenges itself because sometimes people working in those teams won't be data experts, they won't be data scientists, and AI will definitely help you. It'll help us to research faster, get more information, bring it together, be more accurate in how we combine, and then use it for reporting that might flow into verification and so on.
Going back to the first part of your question, which was kinda hinting at the need to collect more primary data, I think we do need more audits to be collecting Scope 3 data. A lot of tools that have been built to estimate Scope 3 data have leveraged self-assessment questionnaire responses from factories, and in many cases, or from other suppliers, by the way, not just necessarily factories, could come from multiple parts of your Scope 3 universe. A lot of times there will be mistakes in that information.
They'll be intentionally misreported. They could even be entirely made up, quite frankly. I think that's unlikely, right, nowadays, but there's a large margin for error, and this is why you need to go beyond just using a self-assessment questionnaire or online data submission format to getting there in person, as you've mentioned, and checking and then verifying that information.
AG: How important then is the standardisation of data collection methods and what role do industry benchmarks or certifications play here?
EL: I think it's critical with because without that, then, you can't then provide that information to, for example, an investment community who want to make those decisions based on a like for like comparison. So unless we have data standardisation, both being submitted but then also verified, it presents enormous challenges. Whereas if we have that standardisation, but we've got to lean into the creation of that standardisation globally, because otherwise then we have to do equivalency exercises and then we're creating additional mess.
KF: Maybe I've got a blind spot here, but don't we already have standardisation for carbon accounting? And I think unlike the social side, where everything Erin said is completely right and there's definitely need for all of those things. Here there is an expected standard, but I think you wouldn't even dream about doing carbon accounting without going to the greenhouse gas protocol, without going to 1464, which is obviously the ISO standard on carbon accounting and verification.
That's where you start any kind of carbon programme. Right? So I think this part of the ESG, sustainability, responsible sourcing space is the one that's actually led the way by having increased standardisation from the beginning.
AG: Thinking then about risk management, how does having high quality, Scope 3 emissions data contribute to due diligence and to total supply chain confidence?
EL: If you're a buyer, then you've got the full picture because that's the if you think about total supply chain confidence as a jigsaw, there's a lot of missing pieces at the moment, and this enables you to create the perfect picture of complete confidence. So for me, it's that final part of the puzzle that brings everything together that enables then for you to make informed decisions about your supply chain and where to prioritise and where where where you've got significant gaps or costs that need managing, where you can lean in to support that.
KF: Yeah. It's definitely a critical piece or maybe more than one critical piece in the jigsaw puzzle. And, you know, for me, total supply chain confidence is about knowing what's happening where in your supply chain and when. So a lot of it is about visibility. And if you don't have knowledge of Scope 3 emissions, you're missing a large part of the puzzle.
It's an absolutely critical part of it. As we said before, it's linked to cost, it's linked to resilience, it's linked to supplier relationships, and, you know, without those things, you don't have a business.
AG: So how does EiQ, support companies to manage and analyse environmental data from their supply chains?
KF: Total supply chain confidence. You've said it already, Andy. And that's the objective of EiQ. In terms of energy emissions and scope three or broader environmental data, multiple ways. Firstly, within the EiQ portfolio, there are multiple assessment tools. So we have obviously ERSA, which is the Enhanced Responsible Sourcing Assessment. And as part of every ERSA audit, we do collect energy data on-site. So that's one.
Within that ERSA suite, we also have an ERSA environmental add-on tool, which is a dedicated environmental audit tool that goes beyond emissions and energy to also looking at water, waste, etc. So that is another option. We also have a carbon maturity self-assessment questionnaire, which can be done both unverified as well as verified. In fact, we have a couple of clients using that tool as part of their sustainability linked loans today.
So part one of this is the sort of ERSA suite of tools, and there are multiple other things in the ERSA suite, but those are three that would feed directly. So the existing ERSA tool with the supplemental data collected, the dedicated environment audit, and also the self assessment questionnaire framework. In addition to that, within the ERSA tools and then in the broader EiQ platform, we, of course, have our forthcoming AI modules and the benchmarking and trend analysis.
So on benchmarking and trend analysis, if you're logging into EiQ, there is a dedicated environmental and a dedicated carbon accounting and emissions section, where you can see both your own emissions and benchmark it against peers. The same exists for suppliers, actually. So typically, people think of EiQ just for large corporates, and they can absolutely see all of those things.
But if you log in there as a supplier as well, you will see your environmental emissions, and you can see how you benchmark against your peers by country and product lines. So it it's there for both of those two things. And what we're looking to now integrate into kind of this next phase of EiQ as we sort of go hard on generative AI and reporting is modeling.
A huge part of Scope 3 emissions and environment in particular is about modeling your impact. Oftentimes, when we have the visibility of a supply chain, we're only seeing part of it. So we don't see all 10,000 suppliers or 200 suppliers. We may just be seeing 50 of those or 60% or even 15%. Now the great thing around the methodologies on the carbon accounting side is if you've got a representative data sample, you can estimate your broader exposure. And that's one of the things we're looking to build into EiQ moving forward as well. We have an initial version of that live in the sort of reporting module, the carbon reporting module today, but we'll be further expanding that as part of the rollout of generative AI later this year.
EL: Is the capacity training a lesson as well too? Because you as a supplier may understand the concept, but you also need to coach and train the people who are going to be collecting and delivering this information. So that's a key part of the whole process is how do you upskill to enable people to share the right information.
KF: All of the eLearning tools, absolutely, and we've had well over one and a half million lesson completions now. But then there are specific modules on environment, multiple different parts of that, energy, water, waste, and, obviously, carbon accounting.
AG: Let's wrap up then by looking forward and looking at emerging trends. So what trends do you see in in carbon data management and reporting, and how do you think this will evolve in coming years?
EL: I think we'll lead with Scope 3. That'll be the biggest trend shift. I think we've sat in a very comfortable space for a long time, which is collecting information that's adjacent. Whereas, actually, we should have looked to sit the other way around. We'll lead with Scope 3 because that's where we've got the biggest impact and we'll have a lot more Scope 3 confidence. So for me, this the whole discussion is gonna be inside out instead. I think that's the biggest trend shift we'll see.
KF: What I would just add to that is, well, certainly what I would like to see is more connectivity to finance and potentially even insurance. So what I'd really like to see happening is some of that Scope 3 data being shared from suppliers directly to banks to support sustainability linked loans or some kind of finance product that can incentivize the diversification of their energy portfolios, whether it's, you know, wind, solar, whatever, bringing that into their portfolio and into their energy mix and having the direct relationship.
This is something that we're looking to do with EiQ, but there are obviously other tools and platforms out there, and we know that this is an agenda that would have a lot of interest. It would be great to see our industry moving from one that's been so compliance-driven to one that's a lot more incentive led.
AG: Thank you both for all of your insights today. Some really great, very forward looking, ideas for, for everyone to be thinking about here. With that in mind, would any of you like to share any final thoughts with the audience today?
EL: Maybe just a final thought about consumer, because I don't think we've talked about the consumer very much, the ultimate buyer. There's been a narrative in sustainability for a long time that, oh, consumers want this. This is what they're after. And we haven't, honestly, we haven't really seen that played out. But maybe now with the changing environment and a shift to people looking at products differently because of tariffs, because of geopolitics and looking, questioning more about what and where is this from that I'm purchasing, that the whole scope three part of that product will become much more important as part of that whole buying decision. So I think the more information that we can input into our product descriptions enables consumers to actively make a choice that they haven't historically been able to. So maybe Scope 3 data will be the final light bulb that enables that.
KF: I think that's a great point. And I think with that, you know, where you can empower consumers to maybe move into voluntarily offsetting some of those emissions, that would be a really great innovative step to take. But, you know, what what I would say is kind of my separate point here is, and we haven't covered it much at all, is physical climate risk. I think this is the next big thing.
We talk a lot about energy consumption and a lot about emissions, expanding that, getting better at that, verifying that, getting the right data, and these are all big questions that we need to tackle. But the flip side of the whole climate agenda, which is how we came into this, is physical climate risk and exposure. And, you know, there are a lot of supply chains out there that are at risk of being stranded. Right? Stranded assets is something we've historically spoken a lot about for oil and gas or mining facilities. But, you know, we have we have climate migrants these days because there are countries that are disproportionately impacted by extreme weather events, and people are leaving them because of those reasons. And we also have supply chains that are highly exposed to climate events. And it's not just places like Bangladesh. It includes places like The US. We've all just seen what's happened in California, and we've seen many similar sorts of major climate events impacting supply chains across Asia and in China as well. So I think we've got to get a lot better at integrating physical climate risk into the responsible sourcing narrative, into the carbon accounting narrative, and into the business narrative.
AG: Great topic for a future session. Excellent. Erin, Kevin, thank you very much for all your time today. Thank you everyone for watching. Please do check out eiq.com, and please also follow us on LinkedIn, to find out about everything else that we've got coming up. Thank you very much.