Saving the planet requires to account for global value chain emissions

COP is the moment of the year when public and political discussions on climate change adaptation and mitigation strategies are at their highest. New data has been released, which makes the urgent need for change even more evident. The keyword that stands out in the many reports published on the topic is record.  

There has been a new record of Global GHG emissions, reaching 57.4 gigatons of CO2 equivalent (GtCO2e), increased by 1.2 per cent from 2021 to 2022. 2023 will be the warmest in 125,000 years, and the 10 warmest years in the historical record have all occurred since 2010. October 2023 registered the highest temperatures on record of sea surface temperature for the extrapolar oceans, and a record for the consecutive number of months in which the sea ice levels have been consistently below average. 2023 also holds a record for the speed and amount at which glaciers are retreating – in the Alpine area, for example, a record 45% deficit in snow has been registered. In 2023, wildfires have been record-breaking for extent, persistence and intensity, filing the largest single fire in history, and so have been flooding disasters, which also hold the sad record of the deadliest weather event of 2023 to date.  

2023 is expected to hit an increase of 1.4 degrees compared to pre-industrial levels

And while 2023 is a record year, it will not hold this result for long: severity and duration of climate hazards are expected to rise in the years to come. 2023 is expected to hit an increase of 1.4 degrees compared to pre-industrial levels, quickly reaching the benchmark of 1.5 degrees that has been the bugbear since the Paris Agreement. In 2022, temperatures rose to 1.2 degrees. 

Firms and their value chains contribute to climate disruptions 

The cause of this situation is, clearly and unambiguously, human activity. Production and consumption activities are a significant contributor to global emissions, accounting for a substantial portion of total emissions. Firms play a central role in causing climate impacts, generating a large part of human emissions, especially the fossil energy sector and large multinationals. To report one figure among many, it is estimated that over half of global industrial emissions between 1988 and 2015 can be traced back to just 25 corporations. This is especially the case if we consider the full scope of emissions for which corporations can be held accountable.  

Indeed, other than for direct emissions (Scope 1), firms shall be accountable also for the emissions generated from the purchase of electricity, steam, heating and cooling for running the company's activities (Scope 2) and, more importantly, emissions from suppliers that generate the inputs and components needed by the firm to perform their activities (Scope 3).  

Half of global industrial emissions between 1988 and 2015 can be traced back to 25 corporations

Overall, accountability changes dramatically when emissions of value chain suppliers are also considered. On average, supply chain emissions (or upstream Scope 3 emissions) are 11.4 times higher than operational emissions, especially in industries such as electronics, automotive, food or fashion. This is especially challenging as, nowadays, most multinational enterprises (MNEs) no longer carry out the full range of activities involved in producing goods on their own but govern complex networks of suppliers that stretch across borders, each responsible for some value-added activities — also called global value chains (GCV).  

Firms and their value chains are affected by climate impact 

Nonetheless, firms are also affected by climate impacts — providing them with pragmatic, other than ethical, rationales to embrace the climate challenge. According to a recent survey, more than 60% of European firms are reported to feel vulnerable to physical risks caused by extreme weather events. This percentage increases to 77% if we consider Spanish firms alone. Sectors such as agriculture are hit particularly hard: it's estimated that by 2050, there will be a decline of up to 85% in areas suitable for viticulture in Mediterranean Europe, challenging blockbuster productions such as Prosecco, Valpolicella, Bordeaux or Rioja, to name a few.  

Firms are exposed to climate risks not only directly but also via their value chains

Interestingly enough, firms are exposed to those risks not only directly but also via their value chains, as the impacts of extreme events do transmit along supply chain partners. Take the case of the heat waves that impacted Canada in the 2021 summer, cutting half their durum wheat production, which translated into unprecedented problems for pasta makers in Italy in terms of supply scarcity, high prices and the need to reorganize their supply chains.  

Becoming part of the solution 

Even more interestingly, however, firms can also be part of the solution, having the possibility to innovate and transform their activities to reverse the course of action. More and more cases of firms transitioning toward carbon neutrality or negativity are reported. But how can we make sure to turn emerging good climate practices into widespread common practices in order to reach the needed change (at the needed pace)?  

The solution can be found close to the problem. If value chains are the hotspot of impacts for firms, this is also where we can find greater leverage to improve, becoming an engine of virtuous cycles. Several tools are available for companies to understand, together with their supply chain partners, how to effectively reduce emissions. Implementing strategies to cascade better practices along the supply chain is far from easy and requires influencing the action of independent organizations, often located in countries where regulation on environmental matters is laxer and pressure to account for environmental impacts lower.  

Indeed, other than a policy-practice decoupling — not walking the talk — another, more subtle form of decoupling could occur (and should be tackled): a means-ends decoupling. This is, doing something that is not reaching the targeted outcomes. Indeed, it is hard to understand and predict what is happening at far-away suppliers, and even harder to instigate and support the necessary changes there. If change is to take place, however, it is not possible to disregard the relevance of accounting for supply chain emissions — something that in the near future European corporations will be required by law.