Tackling Scope 3 emissions through supplier collaboration

This is the fourth in a series of blog posts that highlight how decarbonization can create value and how consumer goods companies can formulate—and then implement—viable plans to reach their decarbonization targets across the full range of emissions.

As earlier articles in this series have laid out, most consumer companies are not on track to meet their own decarbonization targets. This represents a missed opportunity because in addition to decreasing companies’ environmental impact, decarbonization can create value by reducing costs, growing market share, and enabling the building of new green businesses. Appropriate levers to tackle Scope 1 and 2 emissions will depend on subsector- and company-specific factors as well as the cost and abatement potential of that lever.

For most companies, however, Scope 3 emissions typically represent about 90 percent of total emissions,1 with most coming from companies’ purchase of inputs to their own production processes. The drivers of Scope 3 emissions differ for each subsector, which means that companies need to engage with their suppliers to formulate and implement appropriate decarbonization strategies. In our experience, successful supplier collaborations actively promote value chain transparency, offer decarbonization incentives, and are founded on thoughtful efforts to build capabilities and establish effective program governance.

Assessing Scope 3 emissions

Scope 3 emissions are those that occur in a company’s value chain—both upstream and downstream (see sidebar, “The main drivers of Scope 3 emissions for consumer goods companies”). These emissions (unlike Scope 1 and 2 emissions) are therefore not directly controlled by the company. As a result, tackling Scope 3 emissions requires companies to engage with suppliers, distributors, and customers. This is no simple feat because consumer sector value chains are characterized by a particularly high level of complexity and fragmentation.

The focus of this article will be upstream emissions, which make up, on average, two-thirds of Scope 3 emissions and are therefore a priority to address. Compared with downstream emissions, upstream emissions are more in the control of consumer companies, and strategies for reducing these emissions are more mature than for downstream emissions.

The decarbonization of value chains is particularly important for purchased goods and services, which constitute the largest source of Scope 3 emissions across the consumer goods sector. For retailers, apparel manufacturers, and food processors, for example, the upstream value chain accounts for 70 to 75 percent of their Scope 3 emissions, with purchased material—including raw materials, ingredients, and packaging—being the primary source (exhibit).

The breakdown of upstream Scope 3 emissions varies by subsector.

Appropriate decarbonization levers vary by subsector

The drivers of Scope 3 emissions differ, which means that each company will need to go through a process of assessing the best levers for decarbonizing the upstream value chain in their own specific context. There are, however, commonalities within each consumer goods subsector.

Retailers tend to rely heavily on their upstream value chain, which can contain high levels of emissions. Plastic packaging, for example, is derived from fossil fuels through energy-intensive processes such as the refining and processing of crude oil. As a result, it is crucial to engage suppliers in decarbonization efforts. Collaborating with suppliers involves setting targets and building appropriate initiatives in various areas, including transportation, fuel and electricity consumption, packaging, and waste management.

For apparel producers, purchased goods emissions are driven by textiles. Processes such as dyeing and finishing can be highly energy intensive, and petrochemical-based products, such as nylon and polyester, are created from fossil fuels. Decarbonization can therefore involve the substitution of conventional or emissions-intensive textiles for alternatives such as organic cotton or recycled polyethylene terephthalate (rPET), both of which can reduce emissions by up to 40 to 50 percent. Purchasing recycled textiles can be a powerful way to harness circular growth opportunities and reduce emissions.

Food-processing companies face a significant decarbonization challenge because meat and dairy play a central role in Western diets, accounting for almost half of all product-related Scope 3 emissions. Food processors can decrease their upstream emissions by working with suppliers to implement practices that reduce the emissions intensity of these products. For example, a European dairy company has been innovating through a farm-by-farm decarbonization approach; carefully planning the diet of cattle and adjusting on-farm management practices resulted in a decrease of up to 50 percent in greenhouse-gas emissions compared with peer companies.

Unless changes to product design and raw-material selection are possible, Scope 3 upstream decarbonization in the consumer goods sector will require supplier collaboration. Successful supplier-collaboration programs are generally built on five core elements:

1. Prioritization of initiatives

Once companies identify the appropriate decarbonization levers, they should be translated into tangible initiatives. These initiatives should then be assessed and prioritized based on their cost and potential impact. Clear prioritization and sequencing will enable the resources to be deployed efficiently and strategically.

2. Value chain transparency

Value chain mapping and standardized supplier emissions reporting can improve the transparency and comparability of emissions data, enabling companies to identify areas for improvement and prioritize decarbonization efforts. Improved transparency can also foster collaboration with suppliers and drive the innovation needed to foster more-sustainable and more-resilient value chains.

3. Capability building

Supplier training and education programs on practices to reduce emissions can help build supplier capacity and overcome barriers to implementing decarbonization initiatives. Consumer companies should consider instituting their own learning programs, which can then be enriched by establishing an exchange forum for suppliers to share both knowledge and experience-based learnings.

4. Supplier decarbonization incentives

Clear and ambitious incentives are a useful tool to drive action and ensure alignment with the overall company strategy. Incentives can come in the form of both rewards and penalties. If, for example, agreed targets are achieved, financial rewards can be offered as a way to both motivate the necessary investments and recognize progress.

5. Program governance

Supplier collaboration programs can benefit from effective governance. A number of elements are involved in getting governance right:

  • Setting up a cross-functional oversight team can help to develop a robust framework with clear responsibilities and decision-making processes.
  • Regularly evaluating and appraising program efficiency can enable continuous improvement.
  • Full leadership buy-in—from both the consumer company and supplier, and especially within the team overseeing the project—is important to enable efficient, timely decision making.

Working with suppliers to address Scope 3 emissions can be challenging, but the volume of Scope 3 emissions means that this collaboration will be a key element in any holistic decarbonization strategy.

The next—and final—article in this series lays out the key steps involved in formulating and implementing a successful decarbonization strategy.

Charlotte Bricheux and Jonas Lehr are consultants in McKinsey’s Zurich office, where Lucas Ponbauer is a partner; and Sebastian Gatzer is a partner in the Cologne office.

The authors wish to thank Rens Gerrits, Sebastian Kahlert, and Szimonetta Rasky for their contributions to this article.

1 McKinsey Catalyst Zero analysis, based on 2022 CDP data.

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