## 3.2 Select and Segment Suppliers

3.2.1       Establish your Emissions Baseline and Prioritize Categories3.2.2      Assess Supplier Sustainability Maturity and Risk Exposure3.2.3      Segment and Prioritize Suppliers


## 3.2.1 Establish Emissions Baseline and Prioritize Categories: A three-step process

Establishing a supplier emissions baseline is a critical first step, as it allows you to identify emission hotspots in your supply base. This ultimately enables you to prioritize suppliers for engagement based on their impact on your Scope 3 emissions baseline. It also equips you with an independent view of your suppliers’ emissions, which you can use as a benchmark once suppliers start to share internally calculated emissions data.It is important to also dive into a supplier’s emissions at the category level. Different categories will face different decarbonization challenges and must be addressed with tailored levers. For example, among an electronics company’s categories, you may have: metal, plastics, computer chips, etc.Different categories can have different emissions intensities, different decarbonization levers and potentially even a differing ability to decarbonize (e.g., some industries may have a more mature decarbonization pathway than others). It is therefore critical to not only consider emissions hotspots per supplier but also per category.Once a supplier’s emissions baseline has been assessed, a heatmap can be developed to plot suppliers on a category-supplier emissions matrix and identify hotspots among your supplier base.


## Step 1: Create an initial baseline

The GHG Protocol defines two methods in which a supplier emissions baseline (in kg CO2) can be calculated from secondary (i.e., industry average) data:A spend-based method is an easier but more general way to estimate Scope 3 upstream emissions for your supplier spend. The method estimates emissions for goods and services by collecting data on the economic value of goods and services purchased, and multiplying it by relevant secondary (e.g., industry average) emission factors.When starting with a spend-based method, companies only need procurement spend and a global emissions database.Spend-based method calculation: $ value of bought product * average emission factor in kg CO2/$ = CO2 emissions.With a spend-based approach, you match your suppliers’ procurement spending to global emission factors databases. Since databases are often country-specific, it is important to use emission factors as close as possible to the activity location. Free databases such as Idemat (global averages), DEFRA (UK), ADEME (France), EPA (US), and IPCC provide greenhouse gas emission factors and parameters.A manual matching process of procurement spending and emission factors can be cumbersome and time-consuming. There are several software solutions and databases that do this matching process in an automated way, building a high-level view of the overall supply-chain footprint. As a result of the initial calculation, the largest emissions sources can be identified.The average-data method calculates CO2 emissions using mass or quantity of units of purchased goods or services, multiplied by relevant secondary emission factors. Other relevant units for activity data may include volume, hours spent, or other categories as appropriate.Average-data method calculation: mass of bought product in kg * emissions factor (kg CO2/kg)Where possible, the average-data method is preferable to the spend-based method since it provides a more accurate estimate of your suppliers’ emissions. However, it is only possible if quantity information (i.e., emissions factor values for a particular quantity) is available. Databases are often limited to specific geographic regions and more generic – i.e., not available at the required level of detail. You may therefore need a product carbon footprint (PCF) analysis, to use this approach.Product-level emissions data is considered the most accurate approach. Primary emissions factors are obtained directly from suppliers (e.g., you can ask your suppliers to share the PCF of the products they supply to you). When they are not available, secondary emission factors have to be used.


## Example: Emissions baseline calculation approaches

Spend-based and average-data methods adopted to calculate emissions from purchased goods and services

Once supplier emissions have been estimated, you can plot them on a supplier-category matrix, to identify emissions hotspots across key suppliers and categories. A differentiation across procurement categories is important, as different categories will face different decarbonization challenges and must therefore be addressed with tailored levers (e.g., they have different emissions intensities, different decarbonization levers and a varying ability to decarbonize).By plotting supplier emissions on the supplier-category emissions matrix, a heatmap can be created that clearly outlines emission hotspots in your supply chain.An example of a digital tool that identifies emissions hotspots in the supply chain is the EcoVadis Carbon Heatmap. The EcoVadis Carbon Heatmap, which is incorporated into its Carbon Action module, allows companies to identify carbon hotspots among their suppliers. The Carbon Heatmap offers features including profiling an unlimited number of suppliers by spending and criticality, carbon emissions risk calculation, mapping of risk by factors like industry and emissions source, and customized recommendations for each supplier. For more details, please reference EcoVadis here.


## Example: Emissions factors across different product categories

The use of the average-data method is prioritized if the emissions factor value is available within a particular source. If the emissions factor is unavailable for the average-data method, the spend-based method is used instead. Emissions factors can be sourced from DEFRA WTT, EPA or others. Emissions factors are illustrative on the right.


## Step 2: Establish data exchange systems

After the initial baselining, companies should improve accuracy over time and collect primary data directly from suppliers:The most advanced data that can be collected is a product carbon footprint (PCF), which tells you exactly how much emissions were generated through the production of this input factor. If your supplier hasn’t calculated the PCF of the sold product yet, you can ask for other data points (e.g., share of renewable energy or electricity, share of recycled materials used in the production process, etc.), which can help you adjust your emissions over time (see step 3 “fine-tune emissions factors” for further details).Collecting primary data from your suppliers can be facilitated by using digital tools of varying maturity. This can range from sharing a simple Excel file to a fully integrated data exchange solution, in which your suppliers can update primary data on a running basis.PACT – the Partnership for Carbon Transparency – has developed guidance on how such data exchange systems can be set up via its Pathfinder Framework here. In addition, PACT is currently working on the development of the Pathfinder Network, which seeks to provide the necessary network infrastructure, to create an open network of interoperable solutions — across all industries and value chains. You can find more information here.


## Step 3: Fine-tune emissions factors

For the most accurate level of transparency, incorporate more supplier-specific assumptions for “emission hotspots.” The GHG Protocol recommends two methods to calculate Scope 3 emissions using data collected from suppliers.The supplier-specific method collects product-level cradle-to-gate GHG inventory data from goods or services suppliers. Using this calculation method, all data is specific to the supplier’s product, which will depend on accurate product-level emissions data. The hybrid method combines supplier-specific activity data when available and secondary data to fill in the gaps for upstream emissions. Supplier-specific data to adjust generic emissions factors can include the following:Differences in energy mix across facilities Different material emissions by process steps (e.g., because companies use different shares of primary vs. secondary materials)Different volumes of waste production per siteEtc.Lastly, the GHG Protocol offers a decision tree to select the appropriate calculation method for emissions from purchased goods and services, as well as detailed calculation examples. For more details, please refer to the GHG Protocol guidance here.The GHG Protocol stipulates that more specific and accurate methods should be prioritized especially for material purchases. In addition, it is advisable to increase accuracy for direct and high-contributing suppliers and for products, components, or commodities that contribute to the most emissions.


## Prioritization Methodology


### A clear methodology to prioritize procurement categories

Not every procurement category is equally important for a company. For example, purchasing IT services from a local service provider should require less decarbonization focus than the procurement of high-emitting input materials. You can start by thinking about key categories for engagement. Supplier engagement approaches will differ based on where the procurement category falls on the matrix.Specific category CO2 exposure indicates how high emitting the category is. Previously, supplier emissions hotspots were identified across key categories. For example, CO2 emissions intensity might be higher on average for the natural gas category than for process chemicals.The scarcity of category decarbonization refers to the “ease of decarbonizing” and can be driven by factors such as the accessibility of low-carbon inputs (e.g., renewable energy and recycled materials), investment costs, feasibility of low-carbon process technology, and potential for life cycle extension and increased reusability. Therefore, scarce category decarbonization means that few viable decarbonization solutions exist.


### Main approaches

Depending on the category’s CO2e exposure and the scarcity of low-carbon solutions, one of four general approaches can be selected. In order of the highest to lowest level of involvement, the approaches are:Transform the category: The category is critical and high priority. However, this category has a challenging path for decarbonization given high CO2 exposure. Categories requiring this approach have difficulty decarbonizing without your active commitment, so you need to be transformative and invest the necessary resources to drive engagement. Engage selectively: the path to decarbonize the category is challenging, but the category is not as critical to your company. To prioritize engagement here, you need to selectively invest and collaborate to share the burden of decarbonizing these categories. Let the market provide: the category is less critical to you, and there is already a path forward (i.e., no scarcity of decarbonization solutions), so you can focus on leveraging the market and deprioritizing category engagement. Secure your supply: the category can decarbonize with little involvement on your end, so you can focus on securing your supply and gaining a competitive advantage.Categories can be plotted on the matrix, including sub-categories and local market breakdowns if distinctive. Concrete actions for emissions management can also be selected based on the approach.


## Overview

Difference in category engagement approaches depending on CO2 exposure and scarcity of category decarbonization.


## References to key resources and tools

(Click below to open the links for more information)


### The GHG Protocol Corporate Value Chain (Scope 3) Standard outlines how companies can assess their entire value chain emissions impact and identify where to focus reduction activities.


### GHG Protocol Scope 3 Calculation Guidance works to make corporate value chain accounting easier to understand and follow. You can find more information here.


### GHG Protocol Life Cycle Databases, including a list of 3rd party databases to help users in collecting data for product life cycle and corporate value chain (Scope 3) GHG inventories.


### GHG Protocol Calculation Tools and Guidance enable companies to develop comprehensive and reliable inventories for their GHG emissions.


### ISO 14067 specifies principles, requirements and guidelines for the quantification and reporting of the carbon footprint of a product (PCF).


### ISO 14040 and ISO 14044, the requirements and guidelines (ISO 14044), principles and framework (ISO 14040) for a Life Cycle Assessment (LCA). Please refer to the ISO 14040 and ISO 14044.


### Pathfinder Framework describes how to calculate Product Carbon Footprint.


### The EcoVadis Carbon Heatmap is a tool to identify carbon hotspots among suppliers.


## 3.2.2 Assess Supplier Sustainability Maturity and Risk Exposure

A two-step process to assess suppliers’ sustainability maturityBaselining gives a first view of emissions across suppliers and categories. From that baseline, you can narrow your focus to identify the highest emitting suppliers or hotspots (as described in chapter 3.2.1). After quantifying emissions, you can measure the climate- or sustainability-related maturity of key suppliers. A maturity analysis is critical as it allows you to:Assess how aware your suppliers are of climate change and sustainability-related risks,Understand whether they have already started to reduce emissions,Prioritize and focus on the suppliers with the highest emissions and lowest maturity. High-emission and low-maturity suppliers can drive outsized impact and will need your support the most.


## Step 1: Identify the right tools to assess maturity

After identifying emissions hotspots in your existing supplier base, that is, high-emitting suppliers in emission-intensive procurement categories, you can assess the sustainability practices of those suppliers. This will ultimately enable you to evaluate their maturity.Overall, there are three ways to do so (see below related case studies for each item):A supplier self-assessment questionnaire: a company shares a questionnaire for the supplier to complete. Typically, these questionnaires are developed by the company and are company-specific. Tailored questionnaires may pose the risk of increasing suppliers’ reporting efforts, as they may receive tailored questionnaires from all their customers. Therefore, questionnaires should be as standardized as possible.Third-party assessments of climate maturity: companies outsource data collection to a third-party provider. Providers often differ depending on the industry. Some platforms are industry agnostic, such as EcoVadis and Sedex SMETA. Other third-party assessments are industry-specific, such as the Together for Sustainability (TfS) Assessment for suppliers of chemical companies. The CDP also features industry-specific questions for select sectors, including oil and gas, chemicals, and cement.You may decide to employ both self-assessments and third-party assessments for your suppliers. Often, a self-assessment is a first step, while a third-party assessment is used for selected suppliers warranting further assessment.


## Step 2: Identify the right parameters to assess maturity

Once you have identified the right tool to assess your suppliers, you can then look at the relevant parameters to assess their maturity. There are a set of basic no-regret questions, such as what their emissions are, if they have started to set targets, etc. However, the relevant parameters are also highly-industry specific, as different industries care about different key performance indicators. For instance:Aluminum processing companies may care about the share of secondary aluminum used in the production process. Customers of professional services companies may care about the share of purchased renewable electricity or measures to reduce business travel. Customers of agricultural products may care about water consumption or deforestation targets.Thus, parameters are highly dependent on the industry and additional questions should be added to account for this specificity (see featured case studies and additional resources and tools below).Assessments of climate maturity can begin by looking at fundamental indicators, with starting questions including:


*Key metrics and counters*


## Example

Sustainability maturity assessment for suppliers


*Featured content group*


## References to key resources and tools

(Click below to open the links for more information)


### Together for Sustainability (TfS) Assessment: Questionnaires conducted online by a TfS partner and EcoVadis platform to assess suppliers in the chemical industry.


### CDP reporting and scoring platform: Global environmental disclosure system for suppliers to self-report climate data through CDP questionnaires.


### EcoVadis is an online platform for corporate procurement teams to assess suppliers’ sustainability performance.


### Sedex SMETA: The Sedex data platform provides sustainability solutions including Self-Assessment Questionnaires, a Radar tool to assess site-specific risks, and auditing to dig deeper into sites and suppliers.


## 3.2.3 Segment and Prioritize Suppliers

A four-step process to segment and prioritize suppliersAfter gaining transparency into supply-chain emissions and supplier maturity, companies can prioritize and segment key suppliers for engagement.


## Step 1: Prioritize suppliers based on risk exposure and influence

Chapter 3.2.1, “Establish Emissions Baseline and Prioritize Categories” established the supplier baselines and prioritized categories based on hotspots. Within each category, suppliers should then be prioritized based on both risk exposure and relative influence, as can be seen in the matrix below.Suppliers should be prioritized based on both risk exposure and relative influence.Risk exposure can be highly company specific. Some of the key components to consider when assessing a suppliers’ risk exposure include:Absolute Emissions: the emissions that a supplier contributes on an absolute basis, where higher emissions mean a higher risk. Emission Intensity: measured by the amount of CO2 emitted per unit of relevant activity, where high emission intensity indicates a relatively higher exposure to sustainability-related risks. Location: if a supplier is in a geographic area with weak environmental protection or sustainability laws, the supplier may have a relatively higher climate-related risk exposure. Suppliers in regions with stricter regulatory requirements are incentivized to act sustainably by the regulator already. For example, the European Union’s ESRS and CSRD regulation have defined strict requirements for emissions disclosure, which incentivizes businesses to improve sustainability reporting. Influence can be measured based on procurement spend. That is, the more you spend on a supplier, the more relevant it will be for the supplier to work with you to decarbonize. Other measures of influence could be longevity of the procurement team’s partnership with the supplier, where a long-standing relationship might mean more influence over the supplier.You should prioritize suppliers for engagement, with a high-risk exposure. Suppliers you have more influence over may require less close engagement, as they are incentivized to decarbonize due to the importance of your business relationship. You should nevertheless also consider those suppliers’ sustainability maturity – you may have a lot of influence over a supplier, but if that supplier doesn’t have the skills and capabilities to decarbonize, you will have to engage closely as well.


## Prioritize Suppliers Based on Risk Exposure and Influence


## Step 2: Segment prioritized suppliers based on maturity

Assessing a supplier’s sustainability maturity gives you an understanding of where the supplier is on its net-zero journey. This can help you to develop a tailored engagement approach and support levers. A supplier that has not measured any emissions would require substantial support, whereas a supplier that is already setting targets would need a less substantial level of support to decarbonize.


## We are distinguishing four levels of maturity:


### Foundational

Where a supplier has a basic understanding of climate-related risks and its adverse impacts on your business and started to measure Scope 1-2 emissions.


### Advanced

Where a supplier has started to set emission reduction targets that are in line with a 2050 net-zero pathway. The supplier also understands what science-based targets are and why they are important.


### Leading

Where the supplier has started to double down on emission reduction activities by having implemented systematic emission reduction activities or having developed a net-zero transition plan.


### North Star

Where a supplier has done all of the above already and is now working towards the disclosure and automated exchange of a Product Carbon Footprint (PCF).


## Step 3: Segment suppliers based on supplier type

Suppliers can be differentiated based on many characteristics, e.g.:Ability to decarbonize Strategic importance (e.g., measured by procurement spend) Location in your value chain (i.e., being a direct supplier, often referred to as Tier 1 supplier)Etc.While all the above differentiation is sensible and the ultimate decision on how you differentiate your suppliers depends on your company’s priorities, we recommend considering a differentiation based on the ability to decarbonize. The ability to decarbonize is mainly driven by two factors:Sector: as elaborated by the SBTi (and in the definition section on the SBTi’s Sectoral Decarbonization Approach), different sectors can decarbonize at a different pace, depending on the maturity of decarbonization technologies available. Size: Small- and mid-sized enterprises (SMEs) oftentimes don’t have the capacity to focus on mitigation in the same way that large companies do. It is therefore crucial to treat SMEs and Large enterprises differently, when engaging them to decarbonize (see below). Based on this differentiation, 3 supplier types emerge:


### Large, non-fossil fuel sector suppliers

Should either follow the Sectoral Decarbonization Approach (SDA), or the Absolute Contraction Approach (ACA) to set science-based targets. For companies in some sectors, such as power generation, iron & steel, cement, forest, land and agriculture, and maritime transport, the SBTi has developed specific methodologies, guidance, tools and requirements to help through the target-setting process.


### Large, fossil fuel sector suppliers

Currently cannot set science-based targets since the sector-specific pathway is still under development. The SBTi is developing a target setting standard for oil and gas companies. The SBTi clearly defines companies that can and cannot commit to the SBTi until the fossil fuel method is finalized here.


### Small- and medium-sized enterprise (SME) suppliers

SME Climate hub: An SME is defined as a company or an organizatoin with up to 500 employees. For more information, see here.SBTi: For a company to be considered an SME by the SBTi, all of the following must be true: 1) Have <10,000 tCO2e Scope 1 and location-based scope 2 emissions, 2) do not own or control maritime transport vessels, 3) do not own or control power generation assets, 4) are not classified in the Financial Institution sector or Oil and Gas setor, and 5) are not a subsidiary of a parent company whose combined businesses fall into the standard validation route. And two or more of the following must be true: 1) Employ <250 employees, 2) turnover of <€50 million, 3) total assets of <€25 million, and 4) are not in a mandatory Forest, Land and Agriculture (FLAG) sector.  For more information, see here.


## Step 4: Plot suppliers on the supplier type-maturity matrix

Now that you:Have a shortlist of suppliers prioritized based on climate-related risk exposure and your influence over them, Know their sustainability maturity, and know their supplier typeYou can plot them on the supplier engagement matrix. Based on where suppliers are in the matrix, you can tailor engagement accordingly.For example, a non-fossil fuel sector supplier with a foundational level of maturity would have only just begun to disclose Scope 1-2 emissions and identify reduction quick wins. That supplier would need more engagement to reach the advanced maturity stage. On the other hand, a non-fossil fuel sector supplier at the leading stage would already have measured emissions, set targets, and begun their Net-Zero Transition Plan. As a result, the leading level supplier would need a lower level of engagement to reach the stage of the North Star.


## References to key resources and tools

(Click below to open the links for more information)


### NQC: platform for organizations to track supply chain performance and manage risk.


### BBVA One View: service to calculate companies’ carbon footprints based on their banking account activity.


### European Sustainability Reporting Standards (ESRS) E1: covers climate change reporting requirements. Please refer to the ESRS E1 draft for the comprehensive standards.


### The Corporate Sustainability Reporting Directive (CSRD): defines a uniform sustainable disclosure standard. Please refer to the European Commission’s legislation here.


### The Greenhouse Gas (GHG) Protocol’s guidelines: provide more guidance on calculating emissions intensity metrics here.