GHG Accounting

There is little doubt that the global business environment is tilting toward a more green perspective. Consumers are becoming increasingly aware of environmental impact from products they buy and governments are looking for innovative approaches to reduce environmental degradation.

Companies are responding by creating environmentally friendly products and operations. A recent McKinsey Quarterly survey found 60 percent of executives view climate change as a strategically important issue, while 82 percent expect to see related legislation pass in the next five years. But when businesses outsource significant portions of production and distribution processes for a product, measuring climate change impact of a product is complicated.

The solution lies in the product’s supply chain, and that is where companies are now looking. Greenhouse gas (GHG) accounting is the process of capturing an accurate measurement of CO2 equivalent emissions. Many firms have started internal GHG accounting programs, but to measure the total footprint for a product, the program has to extend throughout the product’s supply chain.

Effective GHG accounting in the supply chain requires a structured and verifiable approach, and an understanding of how the data collected will be used to make decisions and/or improvements. The approach must also be appropriate for the size and complexity of the supply chain being evaluated.

The experience of organizations that have conducted supply chain accounting programs leads to an approach that takes advantage of a series of best practices. The program must begin with a detailed discussion of the scope of the supply chain, followed by selecting an accounting standard to guide GHG measurement. The program team needs to reach out to supply chain partners to gather accounting data and calculate the total footprint. Accounting then needs to be put into a format that allows action from executives, partners and consumers.

Scope the Program

Supply chain GHG accounting first needs a firm scope of what products, organizations, locations and processes will be evaluated. This needs to be made with executives sponsoring the accounting program, as well as technical experts knowledgeable of the products and supply chains.

Ideally, the product’s footprint will be calculated by looking at emissions across the total product life cycle, from raw material extraction through production and distribution, customer use and end-of-life disposal. However, total life-cycle accounting is complicated by the complexity of most product supply chains.

Many products have numerous components, supplied by multiple suppliers with varied sophistication in GHG accounting. As product complexity grows, often the supply chain extends, with multiple tiers between the customer and original raw material extraction.

Hewlett Packard (HP) experiences this when it tries to capture the carbon footprint of a computer or printer. HP products are complex, with multiple components (power supply, hard drive, processor, screen, etc.), each of which has multiple suppliers and each has its own supply networks. The products themselves are available in a wide variety of configurations and the life of a product can be as short as six months.

This complexity makes it difficult to define and engage a static supply chain to measure GHG emissions. HP’s solution is to work with suppliers to report company GHG emissions at a corporate level, allocating emissions by revenue, and avoiding the detail that would add complexity without improving the result. The purpose of HP’s approach is to increase energy efficiency of the supply chain through reporting and reduction goals. In early 2008, HP published its goal of reporting the energy used and associated with GHG emissions from 70 percent (by procurement value) of its first-tier direct material and manufacturing suppliers.

The same is true on the distribution side, where the product manufacturer may lose complete control of how the product is handled and the resulting GHG impact. Sierra Nevada Brewing Company has local distributors throughout the United States and Europe. Since distributors are independent companies, Sierra Nevada has a very limited ability to control GHG emissions from ensuing activities. In some locations, there may be just one distributor available, making switching distributors to reduce GHG footprint unfeasible.

Production may involve multiple organizations across the globe. Many companies have multiple production sites for a given product, including blends of internal and outsourced operations. This is often done to use less expensive labor, locate production closer to consumers or provide additional capacity to meet demand surges. However, each location likely has a different GHG profile, due to source of power, type of equipment, building configuration or other factors.

Since supply chains can be complicated and partners have varying sophistication in measuring GHG emissions, companies have found it best to start with a limited scope program and then expand, building on lessons learned. Limiting scope basically comes in two flavors: restricting the program to a single product or component, or restricting the program to first-tier partners.

HP started GHG accounting in the supply chain by surveying its first-tier suppliers, which represent approximately 80 percent of HP’s direct material and manufacturing spending. Ultimately, HP plans to expand the program up the supply chain to capture as much product footprint as possible, but it is starting at the first tier for two reasons. First, HP has a contractual relationship with these suppliers. Second, this approach allows HP to best learn how to conduct GHG accounting in a complex supply chain. The result is an iterative GHG accounting program that continues to expand by including additional supply chain tiers.

Timberland and Honest Tea take a different approach. They are both capturing GHG emissions for a single component or product as a pilot accounting program. With this approach, they capture total carbon footprint of a single product, but have the same goal as HP: total corporate-wide footprint accounting. Taking a product approach allows Timberland and Honest Tea to show early success in total footprint accounting, while gaining a firm understanding of their supply chain complexity.

Neither approach is superior, so companies choose which one best fits their business. With HP’s complex products containing many shared components, it makes sense to start with immediate supply chain partners. For Timberland and Honest Tea, their products have a smaller number of ingredients from smaller suppliers, who may not have experience in GHG accounting. For this reason, it makes sense to start with a single product and work with suppliers to institute GHG accounting programs to capture the total footprint.

Measure Consistently

Once the scope is set, you need to select a measurement standard. Like financial accounting, GHG accounting involves making decisions that can significantly impact the end result, including what emissions to include and how to allocate emissions from multiple use sources.

Several groups have developed protocols for GHG accounting that answer many of these questions. However, there are still several standards to choose from, including International Organization for Standardization (ISO) 14064, the Greenhouse Gas Protocol and the Carbon Disclosure Project. At a minimum, you need to understand which standard the partners in your supply chain are using for GHG accounting. Ideally, all partners in your supply chain will be using the same protocol.

Conduct the Accounting

The actual measurement of GHG emissions in the supply chain is the most involved part of the accounting program. Rather than going out to each supplier to measure emissions, most companies use the partners’ self-reported emissions to calculate a supply chain footprint. This reduces the effort involved in the program using work that is already been done and it also avoids having to learn partner operations and measurement, thus risking the perception of being an auditor.

The first step is engaging suppliers in discussions about GHG accounting. In Sierra Nevada’s case, it has just begun discussions with first-tier suppliers and distributors, including hops and grain growers, glass bottle manufacturers and transportation providers. HP is targeting first-tier suppliers representing the majority of its direct material and manufacturing procurement.

Once internal and partner corporate emissions are known, they need to be allocated to the product or supply chain of focus. HP is allocating supplier emissions on the portion of supplier’s revenue that comes from HP. If a supplier has revenues of $10 million and HP’s purchases from that company are $1 million, HP then allocates 10 percent of supplier emissions to supply chain carbon footprint. While this approach is not entirely precise, it does provide a reasonable estimate.

Other companies may choose to allocate supplier emissions based on product quantity or weight. Any allocation approach must balance accuracy and precision against data availability and the value of capturing more detail. It is important the allocation method accurately reflects GHG drivers in production of the supplier’s product. HP’s goal is to create a supply chain that is energy-carbon efficient, rather than tracking detailed emissions across changing products. Therefore, favoring general allocating methods over product and configuration level precision fits with its goal.

Use the Results

Supply chain GHG accounting is not just a way to track product carbon footprints, it is a tool for reducing carbon emissions across the supply chain. Just as financial analysis in the supply chain can highlight where costs accrue, GHG accounting helps identify the biggest opportunities for carbon footprint reduction. Improvements can only be made if results of the GHG accounting program are used.

GHG accounting identifies how various partners are performing regarding carbon emissions and how much product footprint they are responsible for. GHG data thus becomes a factor for optimizing the supply chain, in addition to traditional business drivers.

Reducing overall GHG emissions for a product can mean increasing emissions at one point along the chain. A product may be redesigned with a material that is more energy intensive to create if using that material allows for greater reductions at other points.

GHG accounting program results can serve as an input to product design. By understanding product footprint, future designs can be built to reduce impacts through use of alternative materials, new production or distribution methods, or by increasing recyclability.

HP currently focuses significant attention to product energy consumption during use. Even though emissions from that part of the product’s life cycle are not HP’s responsibility, energy efficiency factors into customer purchase decisions and overall efficiency of the product.

Continue and Expand the Program

GHG accounting in the supply chain can be a valuable tool for optimizing the carbon footprint of a product, but accounting programs cannot reach their biggest benefits if they are not made continuous. Companies looking to supply chains for environmental improvements, find these often lead to product innovation.

Making your GHG program continuous means working with supply chain partners to set regular reporting schedules. It also means initiating internal programs to continuously review GHG accounting data. Both HP and Sierra Nevada only recently started GHG accounting programs, but both have told suppliers the programs will continue. This means suppliers will be asked for data in the future, reductions will be expected and GHG emissions are an important suppler performance criteria. Wal-Mart has also given suppliers an environmental scorecard that includes GHG emissions data, which each supplier is measured against.

Continuous accounting is not just a way of finding new improvements. Most supply chains are designed to be flexible and will change with efficiency improvements, competitive changes, product introductions and retirements. Continuous programs are necessary to keep GHG accounting accurate. Making the program continuous also means expanding scope to capture more products and more product life cycle. While there are challenges in accounting related to product use and disposal, expanding scope reduces product footprint.

Supply Chain GHG accounting is an important tool for balancing the climate change impact of a product or product line against business performance. A well-structured accounting program provides verifiable, repeatable results that can be used to reduce product footprints and encourage supply chain partners to meet GHG reduction goals. Since most GHG emissions are the result of energy consumption and energy costs are rising, reducing GHG emissions also has impact on the bottom line.

Several challenges still remain in supply chain accounting. Many supply chain partners are not currently conducting GHG accounting programs. This means availability and accuracy of GHG emissions data at some points in the supply chain will be poor. Overcoming this barrier may require working with partners or industry associations.

The proliferation of standards creates a challenge in getting comparable accounting information, making it difficult to ensure an accurate footprint. The World Resources Institute and the World Business Council for Sustainable Development, the organizations behind the GHG Protocol, are working on protocol to unify corporate accounting methods.

GHG accounting is increasingly important. Accurately accounting for GHG emissions requires a structured approach and working with partners to get accurate data. While the effort may be difficult, the potential GHG reduction rewards are significant.

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