Value Chain Reporting: The Next Step in the Evolution of the Annual Report

In a short span of time we’ve seen corporate annual reports evolve from a report documenting only an entity’s financial standing to an all-encompassing report that factors in the three pillars of sustainability: economic, environmental and social. Long gone are the days where a major corporation can deliver just a financial report to its stakeholders. Now, companies must also disclose the environmental impact (emissions, water consumption, etc.) and social impact (fair working conditions, training of employees, etc.) of their business operations. While major strides have been made in the past 15 years to revolutionize the concept of an annual report, we’re approaching the next step in its evolution: Environmental Value Chain (Scope 3) reporting.

In its current state, the environmental pillar of most annual reports focuses solely on the impact of activities that exist within an organization’s four walls; in other words, corporations usually only account for Scope 1 (direct – such as the propane used in forklifts) and Scope 2 (indirect – such as purchased electricity) emissions at their facilities (see graphic below for further explanation). Within Scope 1 reporting, some corporations still exclude emissions from their owned fleet vehicles when transporting goods. This is worrisome because excluded Scope 3 emissions and missing portions of Scope 1 emissions often account for a very significant portion of a corporation’s total carbon footprint.

Courtesy of GHG Protocol

Courtesy of GHG Protocol

While current emission tracking has laid the foundation for reducing global emissions, corporations must rid themselves of the mentality that Scope 3 emissions are optional to report on in order to expedite global emission reduction goals and increase corporate environmental accountability.

Some world-leading corporations have started to make supply chain emissions reporting a priority and most at least do a good job of tracking their Scope 1 freight emissions. Walmart established a goal to remove 20 million metric tons (MMT) of greenhouse gases (GHG) from its supply chain operations in 2010 by 2015; by the end of 2015 they are expected to have a cumulative GHG emissions reduction of approximately 18 MMT1. When more corporations begin to align operational goals with a consciousness of their consequences upstream and downstream like Walmart has done, we will begin to see a true holistic global emissions reduction effort that will hold the entire supply chain accountable for their environmental impact. This is the mentality corporations must adapt in order to meet some of the EPA’s aggressive carbon reduction plans.

The biggest inhibitor of Value Chain reporting is the lack of data availability on the activities that take place upstream and downstream. How can a company report on the environmental impact of activities that happen upstream if the upstream entity isn’t collecting any data? This remains a real challenge; however, we’re entering a time when increased pressure from large corporations could combine with technology advancements such as the Internet of Things to help advance value chain reporting capabilities.

Increased Pressure – Leading corporations are starting to pressure their suppliers to track and be aware of their environmental impact. Sticking with the Walmart example, the retailer set a goal to have 70% of its suppliers in China participate in a Factory Efficiency program and, by the end of 2014, more than 200 factories in China had signed on to use a web-based tool to identify energy efficiency opportunities2. If corporations can continue this pressure by actively seeking suppliers with environmentally sustainable operations, suppliers that currently aren’t tracking their impact will be forced to adapt or their financials will take a hit.

Internet of Things – Gathering data and seeking information at all the different nodes upstream and downstream can be a long and exhausting process. The Internet of Things (IoT) should help to alleviate some of this. IoT will allow massive amounts of data from devices that can track energy consumption at separate facilities to be shared rather seamlessly from node to node. The big question is who has access to this data? A collaborative and transparent approach to shared energy tracking will be needed for the IoT to make a substantial impact. Moreover, all of these facilities must first buy into the technologies of smart energy tracking.

Value stream reporting is the next key step needed to advance global reduction initiatives. By holding the entire supply chain accountable, it isn’t impossible to envision a future where the products we buy carry with them ‘Environmental Sustainability’ labels highlighting the product’s carbon footprint similar to nutrition labels printed on food items.

References:

  1. http://corporate.walmart.com/global-responsibility/environment-sustainability/sustainability-index
  2. http://cdn.corporate.walmart.com/34/c7/6762cc4f43bc929feddd8a4abdd8/2015-global-responsibility-report-executive-summary.13.15.pdf
  3. http://www.ghgprotocol.org/files/ghgp/public/Corporate-Value-Chain-Accounting-Reporing-Standard-EReader_041613.pdf

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