As companies assess Environmental, Social, and Governance (ESG) criteria as part of their corporate sustainability strategies, the environment (or “E”) remains a challenge as companies grapple with how to respond to climate change and manage the impact of their operations on the world around them. But organizational changes related to corporate sustainability don’t come without their share of tension and tradeoffs. Why? Because the costs and complexity of compliance remain at odds with profit targets.
In a recent survey by Morgan Stanley, 85% of respondents see sustainability as a value creation opportunity, although 69% cite an expectation of higher costs to comply.
This sentiment plays into recent trends where ESG has taken a backseat. According to Factset, earnings call mentions of ESG declined by two-thirds since 2021. Inflation and, more recently, artificial intelligence have taken center stage as focus shifted.
But business focus on the environment isn't dead; rather, it might be intensifying. The SEC has proposed rules to enhance corporate climate disclosures, drawing significant attention. A major focus is on Scope 3 emissions, particularly in shipping, where these emissions are generated by third-party carriers. These can account for up to 70% of a company's carbon footprint, according to the Global Impact Network. Although the SEC hasn't yet mandated Scope 3 reporting, it's expected to do so soon. Many companies are already starting to report these emissions internally. In some cases, it’s a requirement to bid on certain jobs, sell into certain global markets, or claim applicable tax exemptions.
Unlike the increased costs of reducing Scope 1 and 2 emissions, efforts to reduce Scope 3 emissions often lead to lower costs as it is achieved through distribution optimization.
So, what steps can shippers take to realize these opportunities? Shippers need practical methods to report and reduce emissions while improving their bottom line, making sustainability truly sustainable. This starts with good data and using analytics to align to profit and emission goals.
Overcoming Challenges in Reporting & Measurements
1. Data Collection and Categorization
Calculating Scope 3 emissions is complex due to multiple data sources involving different modes, carriers, lanes, and business segments. Emission factors vary by mode, and variables like distance, weight, mode, and service type make calculations challenging.
Approach: Accurate calculation and reporting start with correct data. Shipment data across modes must be normalized into a database. Freight pay and audit providers can handle this data consolidation; otherwise, shippers must consolidate invoicing data themselves.
Emission factors are unique to each mode and shipment leg. Specialized data providers can help. Shippers can also refer to the EPA, which publishes these factors. These need to be organized by mode, integrated into the data model, and maintained as updated by the EPA.
2. Reporting Standards
Many evolving disclosure standards require expert knowledge. Companies often lack the systems and personnel with carbon management expertise to measure and analyze emissions effectively. Reporting emissions is one issue; reducing and measuring them is another. Shippers should measure the impact of supply chain improvements on carbon emissions.
Approach:
1) Best practices include using standard reporting templates in a BI tool to measure basic carbon emissions across modes.
2) Define standard measures using a data dictionary that notes sources, inputs, and calculations. CO2 emissions are measured in metric tons, using mode-appropriate emission factors multiplied by the ton-kilometer of each shipment.
3) Partner with certified transportation vendors with established emissions reporting, which provides scores and ranks emissions by carrier.
Practical Alignment Between Profit & Emission Objectives
1. Logistics Optimization
Once data is collected, normalized, and measures are established, it's straightforward to assess the impact of distribution changes on carbon emissions.
For example, consolidating parcel and LTL shipments from suppliers to distribution centers removes shipments from the network. The cost and emissions impact of this consolidation can be tracked using the same data views.
A shipper can also switch from air to ground service for select ZIP Codes, maintaining transit times. This reduces emissions and costs without sacrificing customer experience. Furthermore, if the data model is set up correctly on the front end, shippers get cost and emissions savings tracking out of the box when mileage and shipments are reduced or converted to a more efficient mode.
2. Order Optimization
When shipment data integrates with order data, opportunities to enhance profitability while reducing carbon impact expand significantly.
Consider this example: At checkout, customers select shipping speed. If they were informed about the carbon impact of choosing next-day versus three-day shipping, their preferences might change. For brands aligned with climate impact and customer values, offering shipping options that factor in price and CO2 emissions can influence customer choices.
B2B companies also have unique opportunities. For instance, shippers can analyze the cost and CO2 impact across thousands of shipments to customer locations over time. They can measure the environmental impact and cost inefficiencies of under-utilized space in shipments — whether parcel cartons, LTL pallets, or dedicated trucks. Partnering with customers involves sharing data on waste in terms of cost and emissions relative to total sales, leading to distribution optimizations that benefit both parties, such as:
o Setting economic order quantities based on SKU-specific shipping efficiencies.
o Consolidating shipments using predefined rules.
o Structuring freight rebates based on the cost-to-serve model.
o Transparently pricing shipping costs and carbon offsets.
Data Is the Key
In navigating the dual demands of profitability and sustainability, shippers are increasingly turning to data as their ally to accurately measure and report Scope 3 emissions related to shipping, meet regulatory expectations, and uncover new avenues for cost savings and environmental stewardship. As the focus on ESG intensifies amid evolving disclosure standards, integrating robust data practices becomes a strategic advantage in shaping a sustainable future for global supply chains.
Stephanie Bixler is the Chief Product Officer at eShipping, premier managed logistics provider, and founder of Synapsum, the trusted data intelligence provider helping shippers improve profitability and win market share. Synapsum joined eShipping in February 2024. Stephanie has two decades of experience in analytics, technology, and operations, delivering profit growth for Fortune 500 companies. Previously, Stephanie served as the Senior Vice President of Scholastic Technology.
This article originally appeared in the September/October, 2024 issue of PARCEL.
