The passing of the Climate Corporate Data Accountability Act (aka SB 253) into law in California is shaking the very foundation of business transparency. It will permanently alter the landscape of environmental responsibility, the aftershocks of which will be felt for years to come.
This groundbreaking legislation was proposed in January 2023, requiring stricter greenhouse gas (GHG) reporting practices for all private or public corporations operating in California with over $1 billion in annual revenues. Unlike the pending SEC rule, SB 253 leaves no room for companies to opt out of reporting on Scope 1, Scope 2, and Scope 3 emissions, which covers all aspects of a business’s extended supply chain – affecting more than 5,000 companies globally.
To better understand how SB 253 will impact business, let’s dive deeper into the background, implications, and role of supply chain platforms like e2open.
The background of SB 253’s bold mandate
SB 253 was born out of a growing resolve among California lawmakers to mandate greater supply chain transparency. It’s a direct response to the increasing demand from consumers, investors, and regulatory bodies for companies to be more accountable for their environmental impact.
A notable aspect of SB 253 is the public support garnered from industry giants like Apple, Google, Microsoft, and IKEA. This kind of endorsement challenges the long-standing counterargument suggesting that a law like this is infeasible or detrimental to businesses. These influential companies recognize the urgency and importance of addressing environmental concerns with their supply chains, and their support underscores the legitimacy and feasibility of SB 253’s requirements.
The complex challenge of measuring Scope 3 emissions
At the heart of SB 253 lies the challenge of measuring Scope 3 emissions, which encompasses the company’s entire value chain. This difficulty arises from the lack of understanding about where emissions occur within the complex web of suppliers and processes. Every partner and business process are potentially contributing to the emissions of a product. This includes emissions related to raw materials, sourcing, production, distribution, use, and even disposal of products. Without detailed information about the location and business processes of suppliers, companies face a significant blind spot in their efforts to measure and reduce emissions. SB 253 aims to fill the knowledge gap necessitating broad and deep visibility into sub-tier partner and business practices and conformity for GHG reporting.
Broader implications beyond emissions reporting
The significance of SB-253 goes beyond emissions reporting, aligning with broader trends in Environmental, Social, and Governance (ESG) legislation, such as the 2021 Uyghur Forced Labor Prevention Act (UFLPA). These regulations emphasize the importance of establishing sub-tier visibility and collaboration as foundational elements to managing risks and opportunities throughout the value chain.
It’s intriguing that the common foundation of sub-tier visibility can be harnessed to address various business challenges. Whether it’s emissions reporting, ensuring an ethical supply chain, or complying with other ESG requirements, having a clear view of the extended value chain offers economies of scale and improved operational efficiencies. Companies that leverage network-based, end-to-end supply chain platforms like e2open, which is based on sub-tier visibility and collaboration, are better positioned to manage various disparate business challenges at once.
The financial nexus of emissions, costs, and service levels
Investors often draw connections between carbon emissions and financial risk, and companies with higher emissions are often perceived as riskier in a world that’s actively pushing for decarbonization. The looming possibility of carbon taxes further underscores the importance of lowering emissions. By forcing companies to disclose their emissions publicly, SB 253 effectively shines a spotlight on their environmental risk.
However, it’s essential to recognize the intricate interplay between emissions, costs, and service levels. Reducing emissions often entails large-scale operational shifts, which can impact cost and service levels. Conversely, decisions made to optimize cost and service levels can influence emissions. This interdependence necessitates a holistic approach to supply chain management that integrates these factors.
This also means that companies must be able to manage their supply chain end-to-end, in real-time. A carbon accounting/consulting firm, point solution, or best-of-breed vendor doesn’t have the visibility needed for this level of management. Instead, companies need a robust platform with the end-to-end scope of a multi-tier network to provide the data, optimization, and execution ability. Not only does e2open’s platform enable this level of management, but it also has interdependent logic built-in to manage the outcomes without cannibalizing margins or customer service levels.
Three approaches to Scope 3 emissions
Currently, there are three predominant approaches to measuring Scope 3 emissions:
- Correlating emissions with supply chain costs. This spend-based method translates supply chain costs into emissions through a conversion factor. Under this approach, the only way to reduce emissions is to reduce costs, which is not sustainable in the short and long term because it artificially restricts the company’s growth potential.
- Correlating emissions with the number of units produced. This life-cycle assessment (LCA) method assigns an “average” emission to each unit produced (finished good, component, or sometimes raw material). Calculating total upstream emissions becomes an exercise in summing these averages. Under the LCA approach, reducing emissions is only feasible by making and selling fewer units, which again, artificially restricts the company’s growth.
- Correlating emissions with business processes. This supply chain collaboration approach looks to primary data sources, such as suppliers themselves, for emissions information. It entails a virtual mapping of partners and business processes and provides ever-increasing transparency into where emissions occur and at what volumes. The collaboration approach provides the only scalable way to reduce emissions without restricting the growth of the business.
The third approach is the most promising approach for long-term emissions reduction. Driven by source data instead of averages, or the false equivalence of cost/emissions, it provides greater confidence in the accuracy of what’s reported. And it reveals what levers can be pulled to reduce emissions when the time comes that a carbon tax is implemented.
To help companies effectively manage their supply chain, e2open’s network-based platform synthesizes cost and service levels and environmental/social factors, empowering companies to create value and reduce risk throughout the organization. The same core framework can also provide the foundation for an end-to-end ESG system of record (SOR) for your supply chain. The SOR gathers information from external partners and normalizes it, making it decision-grade and useful for ESG reporting and decision-making.
Navigating a transformative journey
The passing of SB 253 into law represents a turning point in the corporate world’s commitment to environmental responsibility and supply chain transparency. Implications are profound, extending beyond emissions reporting to encompass cost management, ethical supply chains, and risk mitigation. As the market continues to evolve, supply chain platforms like e2open are at the forefront, helping companies navigate this transformation journey successfully. The path to a more sustainable and responsive future is paved with transparency, collaboration, and informed decision making, and SB 253 is lighting the way.
To learn more about how e2open can help your business navigate SB 253, contact us.