Scope 3 is one of the most difficult things to assess. As disclosures improve and migrate toward internationally recognized standards, this should improve. In the meantime, there are a number of ways that companies monitor their supply chain to mitigate their risk profile and protect their reputation, notably: surveys conducted by the company or using modeled analytics. Sustainability agencies will typically look at a companies’ policies and how those policies manifest themselves as requirements of the companies’ suppliers. For example, a rating agency may ask, “Can you demonstrate a requirement that you impose on your suppliers in terms of their sustainability performance?” A company may require a supplier to report science-based targets for the transition of suppliers’ business activities toward net zero carbon emissions. This policy provides a signal that the company is serious about target setting for its suppliers and allows the monitoring of progress toward the objective. The metrics or goals included in a policy are very important. Goals need to strike a balance between ambition and reality. For example, if a company wants suppliers to report science based targets, the goal may need to reflect that in the near term only the largest suppliers will be held accountable for this. As such, the company’s near-term goal may be a percent of supplier spend or supplier spend above a certain threshold. Another way supplier performance is measured is through questions to the company, along the lines of, “How do you monitor supplier performance?” This is particularly important for industrials like chemical companies or cement manufacturers where health and safety has been a focus area for a long time. Companies typically cite their policy and demonstrate how they monitor their supplier’s performance. In many sectors, monitoring of supplier performance against sustainability goals remains weak. Many companies rely on their suppliers to self-monitor and self-report. This can present considerable risk if regulation or best practices in a jurisdiction are materially different from that of the company, or if the supplier is very small.

At this stage, it really varies. By sector, I think it would be wise for a company to explore what their competitors do and why. When universal disclosures that cross sectors exist (e.g. TCFD and SBTi) it is best to use them. Having a concrete target that can be measured and allows a company to demonstrate progress is better than just saying “We aspire to have our suppliers comply with science-based target reporting.” Companies can start with a modest ambition at first, and then become more ambitious once they’ve achieved the first target. The reality is that companies need to understand their supplier base, and ask questions like, “How many suppliers account for what percent of my spend? How many companies that I work with do I need to engage, in order to make sure this happens?” You can't just make a statement in your sustainability report without a plan for how you will achieve the stated objective. To meet stated targets, somebody needs to engage with suppliers to communicate, “This is our policy, and here are our goals. You account for X percent of our spend, and we would like to work with you to create science-based targets to help us achieve our goals.” Companies need to be very thoughtful and very deliberate about what they're doing in order to take a step forward, because if that step forward is a success, they'll build momentum. Companies quickly learn that the pursuit of their sustainability strategy is part of a broader strategic transformation for the business. This offers a substantial opportunity to engage and partner with key suppliers and customers. Once companies recognize that this is an opportunity that allows both the organization and their suppliers to win, it takes on a different form, rather than just something else to do.

I believe that procurement is a subset of supply chain management and that supply chain management is something bigger. For example, when I was doing DEI advocacy in a prior role, one of the first things I did was go to procurement and get them to change the terms and conditions of our contracts to reflect our DEI position and policies. Direct recruitment of diversity in our suppliers is not germane to what procurement does – they’re trying to minimize costs, while improving quality and timeliness of procurement functioning. The procurement function, of course, considers liability, however sustainability and business transformation go beyond what procurement has typically operationalized.

To evaluate an individual supplier there is increasing reliance on TCFD, SASB, GRI, and CSRD for sustainability reporting metrics. In the absence of disclosures, an investor must rely upon estimates of performance for the supplier portfolio that consider three predictive indicators of performance: company size, the region in which a company operates, and its sector. The fourth consideration is the level of allegations or media–both positive and negative–around a company. There are AI tools that scan for allegations and adverse media about companies and geolocation tools that can highlight concentrations of activity in jurisdictions of high risk. There is an observed correlation that companies with high levels of allegations often have lower sustainability scores and higher probabilities of default over time. Using reported and estimated performance, investors can scan investee portfolios for a range of risks highlighted by performance outliers, regional concentrations (e.g. exposure to physical climate risks, modern slavery, corruption), and sectoral concentrations (e.g. high emitting sectors).

If there is a reputational risk or a quality risk somewhere in your supply chain and it contributes to the overall value proposition you offer it isn't any less of a risk. It's not as much in your control, but it can still be problematic. If your emissions are within your control, there's a lot more you can do about them than if the emissions form part of the company’s scope 3 and are generated upstream. For example, if an organization manufactures combustion engines and the bulk of the emissions occur by people consuming petrol, gas, or diesel when the car is operated, that organization may emit very little emissions comparatively, but it's still responsible for the emissions that arise from the use of the product. The more of your emissions that occur in scope 3, the more difficult it is to tackle them. For many companies, scope 3 can make up 90% of total emissions. Regulations are trying to hold financial institutions, asset owners, and companies accountable for supply chains to ensure that all emissions are being tackled, monitored, and managed in a distributed manner.

There are different approaches companies can take to collect supply chain information. One approach is survey based (e.g. EcoVadis, CDP, etc.) Another strategy is to use AI machine learning and scraping tools, like RepRisk, that consider adverse media about a company. There are also modeled analytics from companies like Moody’s that estimate the performance of suppliers based on certain criteria that are modeled and calibrated against a statistically relevant quality data set to provide performance estimates and are a useful first step to screen suppliers. Companies can 1) isolate risk concentrations in their supply chain (e.g. high emitters, climate vulnerability, child labor, geographic concentrations, other sectoral risks, etc.) and 2) find performance outliers to prioritize deeper analysis and engagement.

Yes, misalignment can occur from the methodology, metric definition, or the way measurements are derived. Furthermore, what is considered scope 3 for one company, is considered scope 1 for their supplier, and the supplier will have their own scope 2 and scope 3. Depending on what metrics a company is disclosing, scope 3 and possibly scope 2 emissions will be difficult to reconcile until reporting standards improve. Collecting the information is almost a second order problem compared to how the information is reported. The work of the standard bodies is incredibly important because it is starting to set common definitions and common units of measurement. To make progress in managing emissions, the focus needs to be on establishing reporting standards. Companies can help by supporting common standards.

A small or medium-sized company is never going to be asked to report on the totality of measures that are reported on by a large company. A large company may be asked to report on anywhere from 200 to 400 different metrics. A medium-small company is going to be asked for 50 or 60. Once you know what those are, based on what’s material for your industry, go for the ones that matter and tackle it that way. Ask yourself, who do we serve and what matters to them? Who are our audiences? What is material for our sector? By this I mean if you're in the clothing industry or fashion manufacturing, modern slavery and child labor are going to be key concerns. Focus on upcycling and recycling and make sure you have a strategy, aligned policies and reporting to manage your sustainability goals. If you're in a big emitting industry, focus on GHG emissions. Make sure you can report on and have strategies to reduce Scope 1 and Scope 2 and engage with your suppliers on Scope 3.

Companies are very focused on their supplier resilience – but now the definition of resilience is broadening. When I was procuring critical parts of my value chain from a third party, I was typically looking at their financial strength: I was looking at their size, the quality they produce, and how reliable they are. Now you're just thinking more deeply about how your suppliers do what they do and the impact of their activities on key stakeholders in their business and your business. By using an expanded definition of supplier resilience to include emissions, employment practices, governance, corruption, etc. you are thinking more broadly and more strategically about your own corporate resilience by taking the sustainability practices of your suppliers into account.