Managing ESG with Target Setting
In a rapidly warming world, managing for ESG (Environmental, Social, and Governance) represents a fundamental shift in how businesses operate and are evaluated in the global marketplace. This approach acknowledges that companies have responsibilities beyond generating profits, extending to environmental stewardship, social welfare, and ethical governance. But beyond societal obligations, ESG has also become critical for corporate strategy and success through brand building. Companies are increasingly recognizing that customers value companies with a strong commitment to ESG, as do employees and investors.
The Types of ESG Emissions
There are three categorizations of ESG emissions that companies must manage to understand their environmental impact: Scope 1, Scope 2 and Scope 3.
Scope 1: These are emissions that are direct emissions from sources that are owned or controlled by your organization. These include:
- Stationary Combustion: Emissions from burning fuels in boilers, furnaces, and generators.
- Mobile Combustion: Emissions from company-owned vehicles.
- Process Emissions: Emissions from industrial processes.
- Fugitive Emissions: Leaks from refrigeration and air conditioning systems.
As an example of Scope 1 emissions. If your company operates a fleet of delivery trucks, the emissions from the fuel used by these trucks are Scope 1 emissions.
Scope 2: These are indirect emissions from the consumption of purchased electricity, steam, heat, or cooling. These emissions occur at the facility where the energy is generated but are attributed to the organization that uses the energy.
Scope 3: These are emissions due to all other indirect emissions that occur in a company’s value chain. These can be both upstream and downstream activities, such as:
- Purchased Goods and Services: Emissions from the production of goods and services the company buys.
- Capital Goods: Emissions from the production of long-term assets.
- Fuel and Energy-Related Activities: Emissions from the production of fuels and energy purchased by the company.
- Transportation and Distribution: Emissions from logistics and distribution activities.
- Waste Generated in Operations: Emissions from waste disposal and treatment.
- Business Travel and Employee Commuting: Emissions from travel and commuting.
- Use of Sold Products: Emissions from the use of products sold by the company.
- End-of-Life Treatment of Sold Products: Emissions from the disposal of products sold by the company.
As an example of Scope 3 emissions, if your company manufactures electronics, the emissions from the mining of raw materials, the production process, and the disposal of the products at the end of their life are all Scope 3 emissions.
Developing an ESG Baseline
The first step in managing your ESG is to collect the data needed for calculating your ESG footprint. There are two methods for accomplishing this:
Supplier Surveys: Via surveys and the right questions, a company can collect Scope 3 emissions data from each supplier. The question that is asked is the percentage of the supplier’s emissions that can be attributable to the business they do with the company.
Spend Data: This applies for all three scopes – 1, 2, and 3. For Scope 1, the spend data collects the consumption of fuels used in a company’s operations and uses emission factors against each type of fuel to calculate the Scope 1 emissions. For Scope 2, the spend data collects the use of electricity and heat from utilities. We can use emissions factors for each utility to get the greenhouse gas emissions due to the use of utilities. For Scope 3, spend data captures the consumption of each purchased commodity and service. This can be translated into the supply chain emissions due to these purchases.
Setting ESG Targets
Once the ESG baseline has been established, the next key step in managing emissions is to set targets. Much as companies control their finances by setting targets, the right way to manage emissions is to set targets to a suitable level of granularity. Companies can choose to set targets by organization, by department, by supplier and by commodity. For example, a company may decide to set emissions targets for travel, much as they would set a travel financial budget.
Once these targets are set, the task is to manage to them so that emissions can be controlled and ultimately reduced. To accomplish this, the key step is to develop and implement initiatives to reduce emissions, such as improving energy efficiency, switching to renewable energy sources, and optimizing supply chain processes. The third key step is to regularly monitor progress towards emission reduction targets, and immediately identify exceptions if targets are not being achieved.
Leveraging the right tools
The need to first set a baseline across Scope 1, Scope 2 and Scope 3 by collecting data both through surveys and spend information, as well as setting targets and monitoring against these targets requires the right set of tools. Gainfront is the only provider in the market that has purpose built its ESG solution to holistically address all the requirements for ESG management.
Rahul Asthana has a PhD in Operations Management from the Anderson School at UCLA. He has 25 years of experience in supply chain management, starting his career in IBM working in supply chain operations. He then moved into product management and product marketing of supply chain software while at SAP and Oracle. He manages product strategy and product management at Gainfront. In terms of hobbies outside of work, he really enjoys tennis. Follow Rahul Asthana on Linkedin!