Scopes 1 and 2 emissions tend to be top of mind for organizations looking to reduce their carbon
footprints. These cover company-owned and -controlled resources and indirect emissions from energy
generation. Yet taking a strategic approach to addressing Scope 3 emissions (indirect emissions that arise across the value chain) often represents the bigger challenge.
That said, growing regulatory and investor pressure makes increasingly urgent. For example, as part of the Sustainable Finance Disclosure Regulation (SFDR), fund managers in Europe are required to report

Scope 3 emissions in their portfolios starting in 2023. Moreover, the Science Based Targets initiative (SBTi) provides companies seeking validation for their Scope 3 targets with near-term criteria. For example, Scope 3 emissions targets are required for companies whose emissions are 40 percent or more of the combined total for Scopes 1, 2, and 3 emissions.

Building data transparency and tracking across the value chain are prerequisites to identifying Scope 3
carbon sources and developing concrete plans to reduce emissions.

Decarbonization can be a value-creating opportunity for companies that “play offense,” such as by
capturing green premiums or building new green businesses.

Lowering life cycle emissions requires not only new operational processes and technologies but
also collaboration with customers, suppliers, and other stakeholders. Lower emissions can lead
organizations to radically transform business strategies by rethinking commercial models, making portfolio moves, and building partnerships across the value chain, as well as sourcing new low-carbon inputs and changes to product specifications to reduce emissions during the use stage.

Of course, approaches will vary depending on the industry and business model, both of which ultimately
determine whether the bulk of emissions sit upstream or downstream. For instance, downstream Scope 3 emissions are not as high of a priority in steel production as they are in the automotive industry. 

Key actions
Supplier selection: Tackling emissions in the selection and engagement of suppliers requires lowering input emissions or securing low-carbon supply. Dual-mission sourcing—buying a product that minimizes both cost and carbon footprint—is emerging as the new standard across procurement teams. 

Product specifications: Emission-reduction approaches typically focus on adapting products to reduce input emissions. Some companies are reducing virgin-resource demand while still meeting specifications or safety requirements by changing historical formulations and specifications. By contrast, downstream approaches include developing or adapting products that enable reduced emissions when customers use them.

Partnership: Targeted partnerships across the value chain, particularly those focused on developing and
leveraging new technologies, can help create low-carbon product lines and processes, which can in turn
drive decarbonization actions.

End of life solutions: Recycling and circular solutions can help reduce both downstream and upstream
emissions. Specifically, circularity can reduce end-of-life emissions downstream and potentially secure
recycled raw materials, thereby reducing emissions upstream.

Source: mckinsey.com

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