Quantifying Supply Chain ESG Risks: A Flexible Framework

Global regulations and investor demands have galvanised companies to closely scrutinise the environmental, social, and governance (ESG) profiles of their suppliers. As part of this, firms are aiming to quantify Scope 3 emissions, or those resulting from assets that are not owned by the company but are active in its supply chain (whereas Scope 1 and Scope 2 emissions result directly from the operations of a company). However, it has also long been recognised that calculating Scope 3 emissions — as outlined in the reporting frameworks for the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas (GHG) Protocol — is difficult and costly. In this article, we introduce a simple and intuitive approach to calculating the emissions resulting from a company’s base of suppliers. Importantly, our framework can be generalised to evaluate other types of ESG risks embedded in a firm’s value chain.