As companies in all sectors work to shrink their carbon footprints and hit their decarbonization targets, the path to reducing Scope 3 emissions is often anything but straightforward. For some, decarbonizing Scope 3 emissions can be more like navigating a particularly byzantine maze. Such is the case for retailers.
For the average retailer, Scope 3 metrics capture emissions generated upstream and downstream within the value chains of every SKU it sells—numerous, disparate, and sometimes highly fragmented value chains with multiple tiers of suppliers and inputs. And the emissions generated within this labyrinth of value chains span six energy and land-use systems: agriculture and forestry, building, industry, mobility, power, and waste (Exhibit 1).
Scope 3 emissions are, by definition, indirect greenhouse gas (GHG) emissions that are generated within a company’s value chain; unlike Scope 1 and 2 emissions, companies do not directly control these emissions. Consequently, reducing Scope 3 emissions depends on the engagement and efforts of all value chain actors, including suppliers, distributors, and consumers, as well as other public and private sector actors—a retailer cannot realize these reductions in isolation.
The breadth and complexity of their Scope 3 emissions have far-reaching implications for retailers in areas including economic, strategic, brand and reputation, and regulatory compliance. This is why retailers worldwide have embraced the opportunities in these challenges, pursuing ambitious sustainability goals and wide-ranging initiatives that have led to meaningful reductions in product value chain emissions. Their efforts include engaging suppliers to improve energy efficiency in manufacturing and transportation, reduce waste, and transition to renewable energy sources.
Some decarbonization efforts, such as converting power grids to renewable or clean energy in geographies where suppliers are concentrated, are longer-term efforts that depend greatly on the actions and decisions of multiple public and private sector players. However, many decarbonization solutions are within reach of retail value chain stakeholders—and are either cost-neutral or cost-saving to implement.
Framed within seven strategic decarbonization action themes, this report illustrates how retailers and other value chain stakeholders could strategically deploy economic resources, natural or physical resources, human resources, low-carbon technology, and data transparency to realize emissions reductions. Because the scale, complexity, and key players for these efforts vary, so does the retailer’s role in the efforts, ranging from leading and scaling to convening value chain partners to collaborating and catalyzing to advocating and supporting actions to reduce emissions across retail value chains.
Reducing the average retailer’s Scope 3 emissions by 15 percent at a system level is feasible by 2030 using existing technologies; however, innovations in technologies and practices could enable an additional 40 or 50 percent reduction.
Move from plans to progress.
Retailers’ Scope 3: A complex array of value-chain emissions
Retailers’ reporting requirements are specified in the Greenhouse Gas Protocol’s Corporate Value Chain (Scope 3) Accounting and Reporting Standard and ISO 14064, the international standard series for quantifying and reporting greenhouse gas emissions and removals. Under these standards, a retailer’s Scope 3 emissions metric captures all GHG generated from sourcing, making, transporting, housing, selling, and using every product the retailer carries throughout its life cycle.
This means that for a multicategory retailer, reducing Scope 3 emissions—which include sources that make up around 98 percent of total emissions in retail—involves players from multiple sectors and industries and entails efforts to decarbonize six energy and land-use systems. And about 80 percent of a retailer’s Scope 3 emissions are generated upstream in product value chains via feedstock production, materials and components, processing and manufacturing, and packaging (Exhibit 2).
Retailer challenges in focus: Delineating Scope 3 emissions in three value chains
Each of the millions of product value chains whose emissions are captured in a retailer’s Scope 3 contains multiple tiers of suppliers and inputs from regions around the globe. The commodities involved are often mixed together in agricultural areas or at shipping ports, and each tier within a value chain can be highly fragmented. Additionally, suppliers can change their sources for inputs within the course of a single year. This complexity makes it challenging for retailers to influence how suppliers handle or report on emissions.
Consumers’ use of products—powering electronics or washing and drying clothing, for example—is also captured in the Scope 3 emissions for retailers that carry such products. Thus, reducing downstream product value chain emissions often depends on influencing changes in consumer behavior or the energy sources powering the local electricity supply.
Among retailers’ top 15 most commonly sold products, beef is one of the largest sources of Scope 3 emissions for retailers. Around 86 percent of beef value chain emissions are generated upstream by animal feed farming and production, fertilizer production, and cattle ranching, according to McKinsey analysis. Reducing ruminant methane emissions and shifting toward more efficient use of agricultural inputs, maximizing productivity, and adopting regenerative agriculture practices such as no- or low-till soil and cover cropping are key to realizing reductions in this value chain (Exhibit 3).
In electronics product value chains, decarbonizing power use is retailers’ primary challenge. The majority (80 to 90 percent) of the average retailer’s Scope 3 emissions for electronics products are generated upstream via suppliers in highly fragmented markets. Decarbonization in this stage of the value chain largely depends on the availability of renewable energy where suppliers operate (Exhibit 4).
Likewise, in the apparel product value chain, around 62 percent of emissions are generated upstream via energy use among tier-two and tier-three suppliers engaged in garment processing and fiber production (Exhibit 5).
Thus, substantial reductions in retailers’ Scope 3 emissions will require transformations in energy and land-use systems involving efforts among many value chain stakeholders.
Near-term opportunities for retailers: Reducing emissions across value chains
This report identifies seven decarbonization action themes for reducing the average retailer’s Scope 3 emissions; the themes are based on analysis of technically feasible change levers in several product value chains. The highest reduction potential comes from transitioning to clean and renewable energy, reducing livestock emissions, and adopting regenerative agriculture practices. Examples are provided to illustrate emissions reduction opportunities (Exhibit 6).
As noted previously, if all were deployed at scale, these actions could propel a 55 to 65 percent reduction in the average retailer’s Scope 3 emissions by 2030, although some actions carry sizable costs. Actions that reduce or do not increase costs in the system could yield a 12 to 17 percent reduction in the average retailer’s Scope 3 emissions by 2030.
Catalyzing broader decarbonization: Strategies and considerations for retailers
To help retailers prioritize decarbonization efforts, this report arranges levers that could be deployed by retailers and other stakeholders into four groups (labeled A, B, C, and D), each of which could enable strategic decarbonization actions. The report also illustrates these actions with examples of real-world initiatives involving retailers and their value chain partners.
By focusing on the levers in groups A and B, the average retailer could accelerate efforts to achieve up to a 17 percent reduction in its Scope 3 emissions by 2030. However, deploying levers in groups C and D could unlock an additional 40 to 50 percent, highlighting the importance of multistakeholder collaboration to realize substantial impact (Exhibit 7).
Group A: Cost-effective near-tier levers
Retailers could influence group A levers by engaging their direct suppliers, their direct suppliers’ suppliers, and consumers in efforts to scale decarbonization solutions that would result in cost savings or have no impact on cost (cost neutral). If deployed at scale, levers in this group could help reduce the average retailer’s Scope 3 emissions by up to 2 percent.
Examples of group A levers include forming partnerships that facilitate renewable-energy adoption; providing electric vehicle–charging infrastructure; supporting suppliers in implementing their net-zero objectives; and using consumer-focused marketing and tools to promote sustainable energy consumption habits and reduce waste (Exhibit 8).
Group B: Cost-effective far-tier levers
Retailers could influence actions in group B by engaging suppliers in tier-three levers and beyond (along with other industry partners) in efforts to deploy cost-saving or cost-neutral levers to facilitate adoption of sustainability levers. Deployed at scale, such efforts could potentially help reduce the average retailer’s Scope 3 emissions by around 11 to 15 percent.
Examples of group B levers include providing training, education, and resource initiatives in regenerative agriculture practices and emissions reduction for farmers; sharing and collaborating with peer companies and other value chain stakeholders on best practices to reduce waste and maximize process efficiency; setting supplier standards under deforestation-free and conversion-free (DCF) policies; promoting lean-manufacturing adoption among in-network suppliers via supplier contracts; scaling decarbonization technologies with public and private sector support; and mobilizing value chains to reduce waste via systemwide collaborations.
Group C: Costlier near-tier levers
By engaging their tier-one, tier-two, and tier-three suppliers and other value chain partners, retailers could help spark innovation that could improve the feasibility of interventions that are technically achievable but not cost neutral (but whose costs still fall below the predicted global average carbon price in 2030).
Retailer levers in group C center on collaboration with value chain partners to potentially help reduce the average retailer’s Scope 3 emissions by around 19 to 23 percent.
Examples of group C efforts include collaborating with value chain partners, not-for-profit organizations, and research institutions to support research in advancing sustainability measures; fostering private sector–led investment in emissions reduction innovations; advocating for public sector–led incentive programs aimed at helping value chain partners address costs or resource issues; encouraging and accelerating renewable adoption via supplier engagement; taking part in campaigns to stimulate consumer awareness of, and encourage greater consumption of, plant-based protein; and helping signal demand for alternative protein by engaging suppliers in long-term contracts for plant-based ingredients.
Group D: Cost-prohibitive far-tier levers
Group D levers are far removed from retailers and extremely costly to implement using today’s technology, but retailers can nevertheless support, advocate, mobilize, and engage suppliers beyond tier three and other stakeholders to facilitate breakthrough innovation and solutions to realize systemwide changes. Group D levers deployed at scale could yield a 25 to 30 percent reduction in the average retailer’s Scope 3 emissions.
Group D examples include launching public and private sector–led initiatives to encourage investment in and adoption of renewable technology and clean- and renewable-energy grids; collaborating with value chain partners and other private and public sector actors to invest in and expand circularity of materials by, for example, facilitating consumer access to recycling via collection centers and encouraging recycling via incentives; supporting recycling technology R&D; supporting rare earth recycling and sustainable sourcing; advocating for public sector–led incentives to promote regenerative agricultural practices; and encouraging start-up and technology company-led innovations to support precision agriculture for croplands through pilots and specifications.
Considerations for retailers: Measurement, accounting, and reporting
The complexity and scale of emissions captured in retailers’ Scope 3 present practical challenges in precisely measuring, accounting, and reporting on emissions reduction progress.
Measurement challenges include variability in emissions resulting from changes made in production locations and methods, raw material use and sourcing, energy use, equipment use, and modes of transportation; inconsistent data formats, measurement standards, and infrastructure for data storage and processing; and barriers that prevent retailers from connecting data to batches of commodities or products as they pass from one stage of the value chain to the next.
Accounting challenges for retailers can stem from a disconnect between industry averages and actual decarbonization project impacts in retailers’ product supply chains or items, changes in historical estimates that require companies to revise and restate baseline data and create uncertainty around target setting and management, changes in and uncertainty around GHG accounting methodology, and emissions factor updates that lag behind changes in energy grids and agricultural systems.
Such measurement and accounting challenges can complicate reporting. For many retailers, determining their Scope 3 inventory can seem like a modeling exercise based on broad industry averages and historical emissions factors. It is often difficult for retailers to reconcile and report on actual emissions reductions in their value chains because of barriers to gathering and allocating reliable data and the lack of consistent methodology to adjust industry averages to account for particular decarbonization efforts. Retailers may also face potential competitive risks from disclosing sensitive sales or margin information in reporting category- or item-level emissions. As well, Scope 3 inventory figures can mask differences in decarbonization effort and results: a growing retailer that is decarbonizing its value chain may report the same percentage change in Scope 3 footprint as a shrinking retailer that has not done anything to decarbonize its value chain.
Despite these challenges, retailers are managing such complexity through the following actions:
- working with their individual suppliers and data aggregators to improve the quality and availability of data and the applicability of accounting and reporting standards
- simplifying methodologies to facilitate modeling where data is not available and providing order-of-magnitude estimations of Scope 3 footprint to highlight major concentrations of emissions and inform priorities for decarbonization
- providing supplemental information to demonstrate impact of decarbonization efforts to help stakeholders understand their Scope 3 decarbonization strategy and contribution and their role in emissions reduction
- improving the practicality of measurement, accounting, and reporting by engaging with carbon accounting standards bodies, reporting platforms, and regulators to help address challenges
Considerations for retailers: Engaging with the public sector
On many fronts, reductions in retailers’ Scope 3 emissions are subject to public sector–led initiatives regarding energy and land-use systems; thus, retailers would be well served by a deep understanding of existing and proposed standards and guidelines. Retailers can determine whether or how public guidelines related to emissions affect their business outlook and the effectiveness of their efforts to decarbonize their value chains. Retailers can also help create change by advocating for national and international climate policies that address the interests of stakeholders in their business, value chains, and customer communities.
Decarbonizing retailers’ value chains is feasible—but it cannot be done in isolation. At-scale deployment of the sustainability measures outlined in this report will require system-level change involving farmers and ranchers, manufacturers, suppliers, nongovernmental organizations (NGOs), public sector actors, energy companies, financial institutions, data and technology providers, and consumers. Coordinated multistakeholder action is imperative.
