Time to take action on Scope 3 - Value Change Initiative publishes system of systems for credible value chain emission reductions

The Value Change Initiative (VCI) recently presented their Systems Lab publication “Making value chain decarbonisation a scalable reality: Role of Scope 3 systems in enabling collective action and co-investments,” which conveys the vision on how to credibly account, claim and report Scope 3 emissions. Scope 3 emissions – the emissions across a business' entire value chain from production to consumption to landfill – represent 70% or more of a company’s carbon footprint.

Considering Scope 3 emissions make up such a major share of greenhouse gas (GHG) emissions, reducing them is key in reaching Net Zero commitments. Despite this, finding ways to achieve and accurately report Scope 3 emission reductions has been lagging. The VCI Systems Lab publication outlines the vision for a “system of systems” that enables collaboration and co-investment between value chain partners, while avoiding many of the pitfalls commonly associated with Scope 3 action. The publication has a clear message: It’s time for companies to put their money where their value chain emissions are – and with this comprehensive systems framework, they can do it together.

Considering the urgent need for collaboration in Scope 3 emission reductions, why have companies been hesitant to take action? The challenges related to the complexity of value chains themselves are a big reason. Modern value chains consist of a network of actors where no single organization holds direct control over the entire process. This means that organizations need to collaborate to address the emissions that they all hold partial responsibility over.

Challenges hindering action include the perceived threat of freeriding; quality of project data moving across the supply chain tiers; and lack of clear guidance on how to account for interventions jointly with value chain partners. Let’s take the example of the free rider problem: There are currently few incentives for companies to be early movers, as nothing is stopping competing companies from benefiting from investments made in shared value chains. If Company A invests in Supplier X, Company B – who sources from the same supplier – can also reap profit and reputational benefits with no investment of their own. This problem illustrates the need for a common, data-driven system to track and allocate Scope 3 emission reductions fairly across all actors.

The Systems Lab is the first to propose a model for a “system of systems” – setting the stage for the roles of actors and the needed structure to verify, track and claim Scope 3 emission reductions. Organized by the Value Change Initiative in 2022, the Lab brought together 31 organizations across diverse sectors to explore ways – or systems – to build confidence in data about impacts of collaborative value chain interventions.

The system of systems put forward by the VCI comprises of three interconnected – you guessed it – systems. When combined, they create an enabling ecosystem that allows value chain actors to collaborate and co-invest in emission reduction interventions, all while providing the right level of transparency and integrity.

The three systems represented are:

1. The Impact Verification System, which verifies that intervention outputs are the result of a validated project design and its implementation. This helps make sure that emission reductions/removals are taking place as reported and evaluate the impacts of interventions.
2. The Tracking System is needed as a next step to safeguard who can claim the verified output for their reporting purposes. Only companies who can show proof of sourcing to the specific suppliers (or “Supply Sheds” in cases of imperfect traceability) are eligible to claim the benefits of interventions.
3. The Trading/Transfer System facilitates transactions between potential co-investors. Companies can trade their rights to claim an impact with other actors in the shared value chain – allowing benefits of interventions to be shared across multiple actors.
4. The Registry connects the three systems and serves as a database collecting and tracking the information created in the systems, mitigating the risk of double counting.

So, how does the system of systems help solve challenges for Scope 3 action, such as the free rider issue? This setup makes sure that we know who is investing and where at all times, and who is benefiting from those actions. Having a consistent process and clear rules through a registry, standardized verification and agreed units enables integrity and credibility in the system. Companies sourcing from the same suppliers can invest in the same intervention and clearly divide the claims and benefits, while avoiding double counting. Meanwhile, no company will be able to claim emission reductions that they have not invested or traded in – all contributing to credible and valuable claims for Scope 3 reporting.

The system of systems outlined in the VCI’s Systems Lab publication provides a shared vision on how Scope 3 emissions can be reduced collaboratively – and proposes rules for how it can work. It incentivizes companies to invest outside their own factories, creates a reliable framework for the transfer of impacts, and allows for tracking over time. This all contributes to reducing the risks of investment in the value chain.

The Systems Lab relies on its members – a network of companies, service providers, project implementers, and standards – to collectively define and test practical solutions needed for effective Scope 3 reporting and claiming. These actors are now perfectly poised to move beyond the inertia on Scope 3 and take collective action, enabling major advancements towards Net Zero goals in the next few years.

This consensus-driven framework is also the basis for the Value Chain Impact Verification Solution launched by SustainCERT in May 2023. As the first such platform in the world, it is leading the way in accurately verifying, tracking and co-claiming emission reductions and removals along the value chain – helping companies take credible climate action in the complex world of Scope 3.