Executive Summary

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1) Regulatory and stakeholder pressure centered carbon management in the sustainability strategies of global corporations who commit increasingly to quantifiable emission reduction along their value chain

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2) Scope 3 emissions pose the biggest challenges to manufacturers who seek visibility into their supply chain. A multitude of suppliers, inconsistent methodologies and a lack of standardized reporting undermine the actionability of scope 3 emissions data. 

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3) Suppliers face a daunting number of regulatory frameworks, while being short on expertise and resources to fulfill them. Expensive and overfitted solutions for enterprise customers limit suppliers’ access to technology and uphold their reporting struggle.

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4) AI-powered carbon management can automate the data collection from suppliers’ ERP systems and respective emission calculations. This solves the resource-issue on the supplier-side and unlocks high quality data and transparency along the supply chain.

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Introduction

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In today's interconnected world, companies with complex supply chains are faced with intricate networks of manufacturers, service providers such as distributors, and buyers. These supply chains span across countries and even continents, involving diverse stakeholders and regulatory environments. These complexities amplify the challenges of managing carbon emissions and sustainability efforts.

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The urgency to address carbon emissions has reached a critical point. Regulatory pressures, stakeholder expectations, and the recognition of the environmental impact of business operations by the public have prompted companies to make carbon management a center piece of their sustainability strategies. The focus has shifted from mere environmental stewardship to a quantifiable commitment to reducing carbon footprints across the entire value chain. For example (source 1), “at the end of 2022, more than 4,000 companies covering over a third of the global economy’s market capitalization, were setting targets or committing to do so via the SBTi.”

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This article outlines the current challenges for large enterprises in measuring emissions in their supply chain, how this translates into challenges for their suppliers, and how current developments in AI technology can mitigate these challenges.

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Challenges in Carbon Management for Large Enterprises

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Lack of Adequate Infrastructure and Data Silos

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Large enterprises contend with a multitude of challenges. They often still lack a dedicated infrastructure and processes to efficiently collect and track carbon data in the same way as financial data. As outlined in our last article, carbon accounting is still frequently done using spreadsheets and confidence in the results as well as availability have a lot of room for improvement. This hinders companies from including carbon emissions early into their decision making processes making them behave reactively. Even if the right infrastructure is in place, their potential is limited by sprawling organizational structures with each department often utilizing different systems for data management. This fragmentation leads to data silos that hinder the holistic tracking of carbon emissions. Consequently, companies struggle to access accurate, up-to-date information for comprehensive carbon reporting.

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Fragmented Scope 3 Emissions Tracking

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While companies typically have granular data and a high level of control over their Scope 1 and Scope 2 emissions, Scope 3 emissions — the indirect emissions originating from the value chain — pose a formidable challenge. As the World Resource Institute noted (2), manufacturing is among the industries with the lowest share of Scope 3 reporting despite its supply chains being a major emitter of greenhouse gasses. Scope 3 emissions are influenced by suppliers of materials and components, transportation partners and other external service providers, as well as customers. Companies tend to focus on their top-suppliers where transparency and control is highest but overlook issues further down the value chain. Furthermore, supplier data is often collected in varying formats applying inconsistent methodologies. This lack of standardized reporting undermines the value this data can provide for applications such as direct comparisons and benchmarking.

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“For MNCs (multinational corporations), there are special challenges in governing lower-tier suppliers. There’s often no direct contractual relationship, and a particular MNC’s business often doesn’t mean that much to the lower-tier supplier. [...] They frequently don’t even know who their lower-tier suppliers are, let alone where they’re located or what capabilities they have (or don’t have).”

Harvard Business Review (3)

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Multiple Regulatory Frameworks and Guidelines

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Operating in diverse geographic regions exposes large enterprises to a range of reporting requirements and guidelines. Fortunately, regulators are increasingly making an effort to share best-practices and improve interoperability. For example, collaboration (4) between the European Commission, EFRAG and the ISSB took place to align the ESRS and IFRS Sustainability Disclosure Standards. Nevertheless, the complexity of navigating multiple regulatory frameworks will remain for the foreseeable future and a clear trend towards increasingly comprehensive and stringent requirements will only increase workload. Moreover, there are a number of initiatives such as the SBTi, CDP, Pathfinder and Catena-X that companies may be expected to engage with by their stakeholders.

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Resource-Intensive Manual Processes

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Many large enterprises still rely on manual processes for data collection, analysis, and reporting. This approach is resource-intensive, error-prone, and time-consuming. The need to collate data from various sources and verify its accuracy places a significant burden on internal resources.

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Challenges in Carbon Management for Suppliers

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Limited Resources and Expertise

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Suppliers, particularly smaller ones, often lack the resources and expertise required for effective carbon management. So far, a common solution has been to hire external consultants which are in short supply (5). However, this not only incurs substantial cost but also creates a dependency if it comes at the expense of building up internal capabilities. The supply of talent which can be hired is limited (6) and training employees takes time. Therefore, technology has a special role of bridging the gap between what is needed and what can currently be done. 

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Lack of Standardized Reporting

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Suppliers face a lack of standardized reporting formats, leading to inconsistencies in data capture and reporting. This lack of uniformity poses challenges specifically when it comes to exchanging product carbon footprints between suppliers and integrating them into a comprehensive carbon management system. Since supply chains are responsible for a large share of emissions in the automotive and manufacturing space, any serious reporting and decarbonization efforts must tackle this problem. This is the reason why Catena-X has declared it one of its core benefits (7) to establish standardized measurements along the value chain aimed at documenting and comparable real carbon data within the automotive industry. 

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Cumbersome Data Collection

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The challenges suppliers face when it comes to data collection mirror those of large enterprises but are exacerbated. A SAP insights study (8) found that the smallest companies are most dissatisfied with the quality of sustainability data and their concerns stem from a lack of accessibility and confidence to insufficient frequency. They frequently receive data requests from multiple customers, which are increasingly complex and not aligned with one another even if concerning similar topics. This results in duplicated efforts and inefficiencies in data collection processes. At the same time, these companies themselves have suppliers in their upstream supply chain from which they want or need data all while lacking the resources and market power that an OEM has to set standards and collect data.

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Limited Technology Adoption

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Suppliers, particularly those with limited resources, face barriers to adopting advanced carbon management technology. On the one hand, there has been an undersupply of technological solutions tailored specifically to their situation and needs. But even if such a solution exists, suppliers may not be aware of it and the perceived complexity and cost associated with technology implementation deter many suppliers so they struggle to adopt solutions and use them to their full potential.

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The AI-Powered Solution: Transforming Carbon Management

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Automating Data Collection and Analysis

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AI's capability to automate data collection and analysis addresses the resource-intensive nature of manual processes. By automating routine tasks, such as data extraction from invoices, ERP systems, and product descriptions, AI-powered solutions expedite emissions calculations, reduce errors, and free up valuable human resources for day-to-day operations or strategic decision-making. Moreover, the quality of results can be improved. The struggle to collect and harmonize data often forces one to rely on assumptions and simplistic calculations to fill data gaps. Conversely, an AI that has been trained on comprehensive company emission datasets can employ sophisticated models in far less time.

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Leveraging AI for Data Integration

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AI technology is a powerful tool to address the challenge of data fragmentation and the reliance on manual processes. By harnessing AI algorithms, large enterprises can harmonize data from disparate sources, aggregating information from various departments, systems, and locations into a unified carbon management platform. This integration enhances data accuracy, accessibility, allows for assessment with little delay while at the same time reducing the risk of errors and the need for manual work.

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Enabling Efficient Supplier Engagement

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AI technologies simplify the process of data collection from suppliers. By harmonizing data streams and automating data entry, suppliers can easily contribute accurate carbon data. This streamlining of supplier engagement reduces the burden on both suppliers and enterprises, enhancing data accuracy and transparency throughout the supply chain. In the long run, this will create a treasure of data that can be harnessed for other applications related to supplier engagement such as sourcing and finding implementation partners.

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Enhancing Scope 3 Emissions Visibility

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AI-driven solutions have the potential to play a pivotal role in enhancing the tracking of Scope 3 emissions. Beyond automated data capture and aggregation, AI excels at analyzing large amounts of data and uncovering hidden patterns. We may not yet know in detail which applications will emerge in the coming years. However, it is clear that given a rapidly growing stockpile of data and previously unseen capabilities to automatically analyze it, we will gain unparalleled insight into the value chain's carbon footprint. This will allow companies to perform tasks such as benchmarking their companies against their peers or creating forecasts and scenarios with ease. 

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Conclusion

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In the complex realm of modern supply chains, carbon management challenges are multifold. For large enterprises, navigating data fragmentation, Scope 3 emissions, and regulatory complexities poses significant hurdles. Meanwhile, suppliers contend with limited resources, a lack of reporting standardization, and the struggle to adopt advanced technology. The integration of AI-powered carbon management solutions heralds a new era of sustainability. By leveraging AI's prowess, companies can seamlessly integrate data, enhance emissions visibility, engage suppliers efficiently, and automate data processes. This transformative approach paves the way for resilient and sustainable supply chains, catalyzing a future where carbon management is not just a compliance necessity but a strategic imperative.

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For inquiries and partnership opportunities, contact us at contact@forward-earth.com. 

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Sources

1 ​​https://sciencebasedtargets.org/about-us

2  https://www.wri.org/update/trends-show-companies-are-ready-scope-3-reporting-us-climate-disclosure-rule

3  https://hbr.org/2020/03/a-more-sustainable-supply-chain

4  https://www.ifrs.org/news-and-events/news/2023/07/european-comission-efrag-issb-confirm-high-degree-of-climate-disclosure-alignment/

5  https://www.ft.com/content/63a1fed0-384b-4390-b53a-f54630904c0c

6  https://theconversation.com/green-jobs-are-booming-but-too-few-employees-have-sustainability-skills-to-fill-them-here-are-4-ways-to-close-the-gap-193953

7  https://catena-x.net/en/benefits/sustainability

8  https://www.sap.com/cmp/dg/reimagine-sustainability/typ.html

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