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Why Scope 3 Accounting is Broken in the Fashion industry

The global fashion industry is a $3 trillion market and accounts for ~10% of global carbon emissions with a projected increase of 50% by 2030. ~75% of these emissions stem from upstream Scope 3 activities in the supply chain (purchased goods and services from tier 1-4 suppliers).

apparel-and-footwear-value-chain
Apparel and Footwear Value Chain¹

Due to pressure from regulators and consumers, and out of pure goodwill, many brands have defined their Science-Based Targets for 2030 in pursuit of becoming net zero by 2050. To achieve these targets, brands will have to start measuring their Scope 3 emissions accurately so that they can track the impact of emission reduction initiatives in their supply chain.


However, in conversation with 100+ fashion brands & retailers, we realized that most of them are struggling with Scope 3 accounting (especially with 'Purchased goods', 'Use of sold products', and 'End-of-life treatment of sold products' Scope 3 categories) for a few reasons: 1. Lack of primary data


Brands that are early in their sustainability journey haven’t yet mapped out their entire supply chain and lack data transparency as shown in the figure below

brand-supply-chain
Supply Chain tiers of a Fashion Brand

Due to limited data from their supply chain, many fashion brands still use spend-based calculation methods for Scope 3 emission accounting. This approach is highly inaccurate as it is based on EEIO emission factors that are global/regional averages and don't account for the differences in prices of products across brands & manufacturers.

spend-based-calculation-methods
Spend-based calculation of Purchased Goods emissions²

2. Cumbersome supplier data collection


Once brands have mapped out their supply chain, their next biggest challenge is gathering primary emission data from their supplier's facilities. This is absurdly complex for larger brands that have hundreds or even thousands of facilities worldwide. Sustainability teams at these brands spend months coordinating with their suppliers to fill in their sustainability data surveys and then consolidate the collected data for their Scope 3 accounting needs.


Further, brands have little trust in the self-reported data provided by their suppliers as their suppliers often underreport facility emission data, forcing them to hire a third party to audit and verify these reported values. Many sustainability teams have even raised concerns about the poor data quality of these 3rd party verified data sets.


The Higg Facility Environmental Module (FEM) was created by the Sustainable Apparel Coalition and their technology partner Higg to solve some of these issues yet a lot of problems still persist:

  • Suppliers get almost a year to get their Higg FEM data verified which precludes the ability of brands to incorporate this data in their annual Scope 3 accounting.

  • The Higg FEM data is only collected once a year which implies brands would only see the impact of any improvements made in their supply chain an entire year later.

  • Brands have found gross anomalies in even third-party verified Higg FEM data which raises questions on whether even using FEM-reported data is worth it. Some brands reported cases where they found the total production volume of a facility in Higg FEM to be lower than the volume they themselves purchased, let alone what that facility might have created for other brands!

We've covered other such limitations of Higg FEM in another blog that also covers how brands and retailers can leverage primary facility environmental data to power their Scope 3 accounting.

3. Manual work


Brand sustainability teams that are collecting supply chain data from their facilities have to spend considerable manual effort in consolidating the information received across hundreds of spreadsheets. Once the data is consolidated, teams spend their valuable time checking the supplier-reported data for errors and then allocating those total facility emissions to the products that they themselves purchased. This stretches the bandwidth of the sustainability team which is typically understaffed at most brands as shown in the figure below.

Data Management Workflow for a Sustainability Team

The brands we spoke to expressed a dire need for solutions to these manual tasks so that they get more time to work on decarbonization initiatives that'll help them meet their SBTs.


4. No fashion-specific software


A recurring theme that's emerged from our conversations with brands is their dissatisfaction with existing carbon accounting tools in the industry. Some sustainability leaders have even analyzed more than 15 tools and yet haven't adopted one because they don't provide enough value worth the cost.


There are a few reasons why such tools just don't cut it:

  • Some tools extract the purchased material data obtained from a brand's procurement systems and combine that with material-specific emission factors to calculate total Scope 3 Purchased Goods emissions. This isn't enough as it leaves out the emissions of manufacturing processes in the supply chain which make up a big chunk of total emissions.

  • Other tools extract purchased product categories from a brand's purchase orders and combine those with industry-average emission factors of that product type. While this does incorporate emissions of both the materials and the manufacturing processes, it's still inaccurate as it doesn't incorporate the uniqueness of the brand's value chain such as the manufacturing location, weight of the product, etc.

  • Most tools don't integrate with primary supply chain data collection tools like the Higg FEM, Enablon, Sphera, etc. As a result, sustainability teams spend days aggregating this data in spreadsheets from hundreds of facilities so that it can be combined with their other internal emission data for reporting. Moreover, the data in Higg FEM isn't granular enough to allow easy integration into a brand's emission accounting. Facilities report emissions for the entire year along with total production volume without allocating emissions across the different product types produced. This gives brands no option but to allocate emissions from these facilities purely based on the amount of volume they purchased during that year vs what the facility actually produced for them alone. As you can imagine, this leads to severe over or undercounting of emissions. For example, let's say a facility produced 1000 T-Shirts and 5000 Jackets during the reporting year. Brand A only buys those 1000 T-Shirts from that facility. If the facility emitted 2000 tCO2e during the year, Brand A would have no option but to allocate that facility's emissions to its own Scope 3 by using a volume-based allocation approach i.e., (1000/(1000 + 5000)) * 2000 = 334 tCO2e. A T-Shirt has significantly lesser materials and energy-intensive processing steps compared to a Jacket and therefore emits a lot lower amount of carbon. In this situation, Brand A is unfortunately overcounting its Scope 3 emissions unnecessarily.


5. Lack of trust in Higg MSI


Many brands use the Higg Material Sustainability Index (MSI) to evaluate the environmental impact of materials used in their products.


The Higg MSI has recently come under controversy for favoring synthetic fabrics and for a lack of transparency in the underlying data. This has led to mistrust in the index and brands are hesitant to use the data for calculating their environmental impact, lest they get called out for greenwashing.


With the departure from Higg MSI, brands consult a multitude of emission factor databases like Ecoinvent, Gabi, Agribalyse, etc. This inadvertently leads to inconsistency in reported emissions as datasets for similar materials/activities across these databases might have different system boundaries, assumptions, and cut-off rules which makes any comparison efforts futile.

 

Brand sustainability teams are severely resource-constrained and it's imperative that these problems are solved to give them the time they need to work on decarbonization instead of dealing with accounting headaches. Technology can play a key role in automating the manual work of sustainability teams and making GHG accounting as seamless as possible.


It's also essential that brands get a grip on their Scope 3 emissions accuracy because, without a solid foundation on accurate baseline data, it's impossible to track performance over time as decarbonization initiatives are implemented. A novel solution, using Product Carbon Footprints (PCFs) in powering Scope 3 emissions, has emerged recently and is being supported by global organizations such as WBCSD and SAP. PCFs are the total GHG emissions emitted by a product throughout its life cycle all the way from inception to disposal. In future posts, we'll talk about the value of Product Carbon Footprints and how they will propel the industry toward the gold standard of Scope 3 carbon accounting.

References

  1. Source: Sadowski, M., C. Yan, and N. Aden. 2019. Apparel and Footwear Sector Science-Based Targets Guidance. Washington, DC: World Resources Institute.

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