Corporate conversations about carbon emissions usually focus more on general environmental benefits than on improving business operations. That’s a significant oversight because compliance requirements are inevitable, and they can either annoy managers by taking up time and resources, or they can actually support business growth.
To build business support, companies should focus on carbon intensity instead of simple carbon emissions. Carbon intensity provides meaningful context not only for environmental benchmarks but for business expenses, operations, and profits.
What is carbon intensity for supply chains?
Carbon intensity is a measure of carbon dioxide and other greenhouse gases (CO2e) created per unit of activity, like generating a product or shipping a container. This differs from Scope 3 evaluations that capture a company’s total carbon emissions produced in their business operations.
Carbon intensity puts that emissions number into the context of your business by comparing it to a particular unit of business activity. The resulting metric offers a more useful measurement framework than merely the raw output number of a Scope 3 evaluation.
For the majority of companies, supply chain activity comprises the largest source of emissions—on average, 11.4 times larger than direct emissions.
To create the most meaningful carbon intensity data, a company will want to identify the unit of activity that best defines its operation in terms of revenue, output, or other business result. For example, a warehousing company may want to measure its carbon emissions per square foot of used space within the facility, a service company might measure per employee, and a manufacturer could measure per product unit created. In addition, any of these companies may want to measure emissions against their financial targets using emissions per dollar of revenue or spend.
Carbon intensity adjusts evaluations of carbon emissions for business success. As the company grows in terms of production, shipments, square footage, etc., emissions can be tracked and managed. CO2e will increase as business grows. However, we don’t want CO2e to double as business growth doubles. Using raw carbon evaluations can make it hard to determine if carbon initiatives are succeeding as your business grows. Carbon intensity metrics are helpful in guiding business decisions and carbon reduction projects.
Figure 1: Carbon reduction goals for supply chain management can be measured by business metric.
Why carbon intensity matters for supply chains
The desire to reduce carbon in the business world has gone mainstream. By Dec. 2021, 622 of the 2,000 largest public companies in the world had created net zero strategies. Net zero approaches strive to counterbalance greenhouse gas emissions produced in business operations with an equal reduction in emissions elsewhere or by finding alternative methods of energy usage and production techniques that do not produce CO2e.
Reaching net zero and reducing carbon requires investment in new technologies, practices, and finances. McKinsey reports that “…spending on physical assets on the course to net-zero would reach about $275 trillion by 2050.” They add that not all the spending should be considered a cost and that investment needs to start now. This highlights the importance of understanding carbon emissions produced in the context of business metrics and growth.
As public and government attention on reducing carbon emissions increases, businesses and financial institutions will prioritize resources toward carbon tracking and reduction strategies. Columbia Climate School reports that over 450 financial firms have pledged $130 trillion in private capital to offset the costly endeavor. That’s a good thing because reaching the goal of net zero by 2050 in the U.S. will require significant investment.
This staggering level of spending should yield a business return.
The benefits of reducing emissions can go beyond being good and concerned global citizens. A carbon intensity strategy can pay off in profit margins, competitive advantage, and sales performance.
Compliance and regulations
For Scope 3 compliance, companies must report all direct and indirect emissions that occur in their value chain. This includes the entire process of making and transporting products and providing services. In addition, countries around the globe are demanding that their national corporations become net zero sooner, not later. Finland has the earliest target of 2035. China, the most populous nation on Earth, has 2060 as a target. Although few countries have yet determined enforcement methods, at some point, companies will be required to reach net zero to maintain future operations across the globe.
Over the last few years, multiple surveys have shown that consumers want the organizations they do business with to be good environmental stewards, and companies that meet this expectation are benefiting. A McKinsey survey found that 60% of American consumers would pay more for a product with sustainable packaging. A recent study found that products making ESG-related claims averaged 28% cumulative growth over a five-year period versus 20% for products that made no such claims.
Every company motivates teams by setting growth goals according to various sets of metrics. For supply chains, this mindset can be applied to improving efficiencies that can be measured by monitoring carbon intensity levels. For example, a supply chain goal could be doubling growth while reducing carbon intensity level (and related expenses) by 40%.
Company culture and recruiting
Gen Z and millennials are more concerned than previous generations about the climate and are more engaged in the conversation. With future generations prioritizing the need for climate action, companies can build a stronger culture by highlighting emissions reduction. Companies that emphasize carbon intensity reduction are also better positioned to appeal to the next generations of recruits.
Sharing with stakeholders
Companies can stand out to stakeholders, including investors, by their commitment to net zero and lower carbon intensity. Public companies, shareholder funds, and investors are all creating environmental investment portfolios because shareholders are increasingly drawn to companies that share their concerns. Both internal and external stakeholders (current and potential) are more often asking their employers and partners about carbon emittance rates and policies.
As companies strive to meet regulations or internal goals, they need benchmarks. Marking the carbon intensity of a particular unit of activity gives companies a very specific measure. That makes it easier to compare the carbon intensity level at different times to gauge progress or compare it to different operational efficiencies and practices.
Sales support and collateral
As Scope 3 emissions calculations and other emissions regulations become more prevalent, business-to-business relationships will prioritize alignment on principles and goals for carbon emissions reductions. Being able to document that they are purchasing from a company with effective climate change policies could make the difference in choosing among potential suppliers. The same “halo effect” can apply to your own suppliers, partners, and transportation providers, who can publicize their support for an environmentally friendly customer.
How to measure carbon intensity for supply chains
Capturing carbon intensity starts with an accurate measure of carbon emissions production in each stage of the supply chain. Carbon intensity can then be calculated for the whole supply chain or for specific sections like inbound materials, manufacturing processes, and outbound logistics.
𝑐𝑎𝑟𝑏𝑜𝑛 𝑖𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 = 𝑡𝑜𝑡𝑎𝑙 𝑐𝑎𝑟𝑏𝑜𝑛 𝑒𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 / 𝑏𝑢𝑠𝑖𝑛𝑒𝑠𝑠 𝑚𝑒𝑡𝑟𝑖𝑐
Figure 1: To calculate carbon intensity, the total carbon produced is divided by the business metrics applicable to your company.
It is important to use the most accurate data available for calculating both the actual carbon emissions produced and the real values that relate to the business metrics used. For example, in measuring transportation emissions, accurate carbon emissions values include not just the distance traveled but details like actual fuel consumption, which accounts for effort due to engine efficiencies, delays, wind, waves, and tides. Values for business metrics should be evaluated retrospectively to account for changes like canceled orders or shipments rather than relying on forecasted or budgeted values.
There are several options for business metrics to consider using to calculate carbon intensity.
Per unit of revenue or spend
Spend and revenue are the easiest values to use with carbon emissions calculations as these values are easily obtained. Using financials creates a broad measure of carbon intensity that can be evaluated across the entire supply chain. They are, however, less accurate than other business metrics as both are susceptible to spikes in pricing due to shortages, disruptions, etc. Consequently, the results may be harder to compare year over year.
Shipment counts are another easy data value to obtain and can also be used to understand carbon in the context of business growth. More shipments mean more business. This method is best suited for evaluations of the logistics side of supply chains, as data on sub-tier procurement shipments may not be obtainable. As companies switch to lower-carbon transportation modes, consolidate shipments, and streamline their transit networks, the amount of carbon per shipment will decrease.
Figure 2: Carbon intensity per shipment for a multi-stage manufacturing process.
Per square foot/meter or storage volume
This carbon intensity measurement option works best for areas of the supply chain that focus on maintaining and storing inventory. The evaluations are based on the total space that is needed to maintain operations. The total carbon produced by housing and moving products is divided by the total number of meters/feet (e.g., the cubic volume comprised of length x width x height) that was used to hold those goods.
Per unit of product
Measuring by product is the best method for understanding carbon in the context of business growth. The information can be broken down to gain additional insights that can help prioritize reduction efforts across different sections of the supply chain (e.g., inbound materials, manufacturing, warehousing, outbound, etc.). It can also be used to evaluate carbon intensity by product type to help identify which products should be prioritized or targeted for carbon reduction efforts.
Evaluating carbon intensity using products is not influenced by changes in pricing and takes into account disruptions that can impact business productivity. As the company grows, so too will the number of products or services delivered, and per-product assessments make it easy to compare how carbon is spent year over year.
Different supply chain personnel can calculate carbon intensity based on the area of the supply chain they are working in. For example:
- Outbound logistics operators: per shipment or pallet delivered
- Warehouse managers: per square meter/foot or pallet of product
- Procurement: Per unit of material purchased
- Manufacturing: Per unit produced
Then, managers can establish the right benchmark for the overall operation and its goals and evaluate progress over time.
Applying carbon intensity to supply chain management
To maximize wins from identifying and tracking carbon intensity, the measurement must be interpretable, must put carbon usage in the context of the business, and must be evaluated over time (e.g., month over month, year over year).
Supply chain professionals can then focus on what they control. For example, say an operation is monitoring metric kilograms of CO2e per shipment. The company may not be able to control shipping options like lane choice, but they may be able to adjust how frequently shipments are sent, how much product is in a shipment, or what route is best for efficient deliveries.
Working with carbon evaluation experts, supply chain professionals can measure the carbon intensity of various shipping methods and then more easily identify ways to lower emissions without stressing resources or operations. The big win is to lower emissions while improving operational efficiencies.
Everstream’s AI and human expertise make it easy to determine the carbon intensity of different shipping methods, so it’s easier and more transparent for managers to choose lower emissions options. An operation may choose to ship less often, for example. They may increase the volume of each shipment or consider different modes of shipping.
Moving the needle starts with a business-focused emissions analysis driven by key questions:
- What activity leads to the highest amount of carbon emittance? The biggest wins will be easier to achieve by reducing emittance associated with this activity.
- What alternatives exist? For example, a manufacturer measuring emissions per square foot could consider replacing outdated equipment or installing an insulating green roof. These options could both lower energy use and improve production.
- What regulations are in place? The best practice is to adhere to policies that comply with the most stringent region where your business operates rather than try to manage multiple policies and risk a costly oversight.
- What are the most important operational KPIs? An operation will make different decisions depending on company priorities, which may include brand image, investor relations, or shareholder value.
- What do we control? Although a company’s supply chain partners contribute the bulk of its total emissions footprint, managers have limited control over those partner operations. Look internally first for change opportunities and then explore external options that can be influenced by incentives, contract clauses, and education.
Once policies are in place, make them an integrated part of your supply chain risk management processes. Set up risk alerts linked to the metrics and key suppliers contributing to carbon intensity.
Attention to carbon production and policy will continue to grow as governments, organizations, and consumers call attention to the negative impacts of carbon on the environment. Carbon assessments are becoming more important and easier to do but often only point to the general departments producing the most emissions and leaving out an understanding of business practices.
Carbon intensity provides insight into how the production of carbon emissions fits into your business and helps identify meaningful ways to reduce emissions while business grows.