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For the retail industry, the most difficult task in the decarbonization process—the most complex in terms of data and execution—is also the most critical.

Scope 3 emissions cover emissions across the value chain, from raw materials to the supply chain to consumers' final use of products. This is undoubtedly the largest component of the retail industry's carbon footprint. According to the National Retail Federation, indirect Scope 3 emissions account for 90% of retailers' greenhouse gas emissions, sometimes as high as 98%.

Due to the retail industry's massive Scope 3 footprint, a report by Boston Consulting Group and World Retail Congress, owned by Ascential, notes that retail accounts for about 25% of global emissions.

Because these emissions are indirect, they are also the hardest to track and change. Looking back over the past 12 months, retailers have already faced numerous difficulties in managing their supply chains to profitably bring products into the country for sale.

Similar to last year's difficulties, the nature of the supply chain explains the difficulty of Scope 3 emissions. Brands do not own factories and cannot directly control all or most of their production; instead, they outsource production to a geographically and economically complex network of suppliers, each with their own interests and operational concerns. Even just obtaining data and understanding the emissions footprint of the supply chain is a daunting task.

But this is not a reason for inaction. Experts say retailers can start with what they already know and what they can change today. Imperfect data and initiatives are better than none. The stakes are too high, and the industry is too far behind to be timid on Scope 3 issues.

"The reality we are in as a society is that we need to put wheels on the car while it's racing," said Shalini Unnikrishnan, Managing Director and Partner at Boston Consulting Group, who leads the firm's sustainability efforts for consumer products and retail, in an interview. "Is the data problem huge? Absolutely. But even without perfect data, there are smart ways for companies to move forward and make an impact."

"Seriously behind"

There is still a huge gap to close on Scope 3 emissions, and time is running out. However, many companies in the industry have not yet started.

A study by Boston Consulting Group shows how much work remains for the industry. Of the retailers surveyed, only 18% are on track to meet their Scope 3 targets. Another 18% are implementing plans but are behind schedule.

Nearly a quarter (24%) of retailers have set Scope 3 targets but have no specific plans to achieve them, and another 6% have no plans at all. Another 35% have plans but have not made progress on Scope 3 targets or are unsure of their progress.

In other words, for about two-thirds of the retailers surveyed, the most optimistic assessment is that they have made zero progress on Scope 3.

Nevertheless, some retailers have begun setting targets and taking action. According to Fitch Ratings analysis, the number of retail companies setting science-based targets (SBTi) has more than doubled since 2019, while companies committing to set targets have increased from nearly zero to 36.

TargetandWalmart—the largest retailers in the U.S., often leading the industry on operational and social issues—have both made commitments on supply chain emissions and Scope 3.

"We have to do something. The situation is getting worse."

—Ting Chi, Professor and Chair of the Department of Apparel, Merchandising, Design and Textiles at Washington State University

But progress so far is far from sufficient to bring the industry in line with the goals set by the Paris Agreement.

"When you look at net-zero targets, we are seriously behind, and I think we will fall further behind," said Simon Geale, Executive Vice President at Proxima, in an interview. "This will either be a catalyst for change, or worse. I expect a lot of progress in the next decade. But this is such a critical decade that there is a risk that even with all the progress we make... we are still falling behind."

Take the fashion industry, for example, which is a very important case given its carbon footprint. In 2018, the industry accounted for about 4% of global greenhouse gas emissions. According to McKinsey, as of 2020, the fashion industry on its current trajectory would exceed the 2030 emissions target set by the Intergovernmental Panel on Climate Change by more than double.

"I don't know if we can meet the targets on time, but that shouldn't be a reason to do less," said Ting Chi, Professor and Chair of the Department of Apparel, Merchandising, Design and Textiles at Washington State University, in an interview. "We have to do something. The situation is getting worse."

Diving into the data

Simply measuring the scale of a company's indirect carbon footprint is a complex and daunting task, full of investigation, data collection, and estimation. Even to do this accurately requires a lot of estimation.

In Boston Consulting Group's survey, one of the most frequently cited challenges to achieving emissions targets is the lack of access to relevant data. "The data challenge does not give us the luxury of waiting," Unnikrishnan said.

Companies that are just starting to measure Scope 3 emissions typically do the most estimation and guessing. They may use databases that convert economic inputs and outputs into indirect emissions estimates. "Is it the most robust method? No," said William Theisen, CEO of climate consultancy EcoAct, in an interview. "But it's a good starting point to understand where the Scope 3 hotspots are in the supply chain."

On the other end are estimates based on primary data from suppliers and specific products sold at retail locations. Theisen also noted that there is a "middle ground" between pure estimation and large-scale primary data collection.

"If you're a fashion company, you can look at the raw materials used in clothing, and transportation and distribution—look at different categories of information," Theisen said. "We can use these to get a more accurate Scope 3 carbon footprint. Of course, supplier data, primary data is always the gold standard."

But even primary data is just data. There is a wide variation in data quality. Perfect data may not be feasible at this time.

"If I'm a grocer selling a head of lettuce, perfect data means I know... exactly where it was grown, how it was grown, how it was harvested—what happened at every step. Which refrigerator it went into, which truck carried it, how many times it was transported?" Unnikrishnan said.

But it doesn't stop there, because Scope 3 tracks to the final use and disposal of the product. "Finally, after someone buys [the lettuce], did they eat it? Did they waste it, and what happened after it was wasted? That's perfect information," Unnikrishnan added. "So you see now, we can't possibly get to that level in a reasonable amount of time."

"Many companies I see right now are paralyzed by the difficulty of obtaining data."

—Simon Geale, Executive Vice President at Proxima

Spend-based estimates at least give retailers a heat map showing where the largest emissions sources are in their supply chain. To get primary data, retailers can list their largest suppliers, core suppliers, etc., and then essentially ask suppliers for data.

"Starting from the top, they are essentially building questionnaires asking suppliers for detailed information on their carbon emissions," said Tyler Higgins, Retail Practice Lead and Managing Director at consultancy AArete, in an interview.

For data to be useful to businesses and the planet, it must also be correct. "Data must go hand in hand with verification," Unnikrishnan said. "It must go hand in hand with auditability, traceability. This is a very critical part; this is the holy grail."

In Unnikrishnan's view, advanced technologies like blockchain can help enable verification and traceability across the supply chain.

All of this is complicated by the tension between the desire to track emissions—perhaps for climate-conscious investors, or to show customers a sustainability score—and concerns about "greenwashing."

Highlighting this tension is the recent controversy surrounding one of the most commonly used tools by fashion brands and retailers to track their various sustainability footprints. Earlier this summer, the Norwegian Consumer Authority called out several retailers, including H&M, for using theHigg Materials Indexcreated by the Sustainable Apparel Coalition to make sustainability claims.

Higg also has Scope 3 impact estimation tools, although this controversy did not involve those tools. The Sustainable Apparel Coalition hastily reviewed the data and methodology behind the Higg Materials Index, which is used by hundreds of brands. Shortly after,an investigation by Quartzfound that H&M in many cases did not even correctly cite its products' Higg scores.

While not directly related to Scope 3 tracking, the controversy surrounding the Higg Index and H&M again highlights the difficulties even in simpler forms of environmental tracking—namely, using an index to estimate footprints. But experts repeatedly told Retail Dive that companies need to start tracking in the absence of perfect data and tools.

The decarbonization gamble

Tracking emissions is not the same as reducing them; it's just one step in the process. And it doesn't even have to be the first step in every case.

"Many companies I see right now are paralyzed by the difficulty of obtaining data, and they forget that you can actually go out and do things," Geale said. "You can go work with suppliers, switch to electric fleets, or reduce the number of trips needed, or change packaging specifications, or make products circular, or remove water use from processes. Automatically, you are reducing emissions levels on a larger scale."

Geale added, "That's more important than having to be able to measure."

As Jess Dankert, Vice President of Supply Chain at trade organization Retail Industry Leaders Association, pointed out, many large retailers are already having strategic conversations within their supply chain networks and transportation networks for operational reasons. "We see sustainability and emissions factors becoming more important in those," Dankert said in an interview.

Retailers are also looking at the mix of transportation modes they rely on for goods, asking about the role of intermodal and rail in reducing emissions. According to Dankert, there are many "interesting conversations" and "rapid evolution" around emissions.

Erin Hiatt, Vice President of Corporate Social Responsibility at RILA, also noted that many not-yet-realized emissions reductions can be linked to efficiency, such as reducing empty miles in transportation, freight matching, and intermodal. "While looking at low- and zero-emission fleet opportunities, there is a lot to optimize there, as technology and infrastructure develop."

"You can't achieve the goals without bringing the U.S., China, India, and other large economies on board."

—Simon Geale, Executive Vice President at Proxima

In the supply chain, scale is a key factor. "Your ability to influence suppliers is critical to the speed at which you decarbonize your own supply chain," Geale said. "Take Walmart and Costco, for example. A while ago, Walmart took the stance that they could influence suppliers and create collaborative solutions. Costco took the stance that they didn't have the ability to influence suppliers."

There is also the question of who will pay for changing the emissions profile of the supply chain. Many factories operate in countries poorer than those where retailers and their customers are based, with thin profit margins. Chi noted that for many garment factories in developing countries that produce the vast majority of clothing, even a modest increase in costs from carbon reduction could wipe out their profits.

"To meet a requirement that increases unit costs, they will lower quality elsewhere," Chi said. This could ultimately harm other sustainability measures. But Chi also noted, "Cost-sharing could be a very important incentive."

The operational and data challenges of Scope 3 are as complex as the supply chain itself. But there is a very simple, certain way to reduce emissions: reduce the number of SKUs.

"One possible solution we discuss is that we can buy fewer things at higher prices," Chi said. "We talk about more durable goods that can be worn for 10 years instead of two or three, and then throwing away a $10 T-shirt."

The role of policy

Despite recent progress, it is hard to see how the entire industry crosses the finish line, or even comes close, without government intervention.

"You can't achieve the goals without bringing the U.S., China, India, and other large economies on board," Geale said.

Or, as Chi put it more optimistically: "If the government can play a leadership role, I think it will be achieved faster."

The industry acknowledges this too. "Policy has a role," said RILA's Hiatt. "It's hard to say exactly what. You can only react to what's proposed."

As Chi pointed out, government involvement can take the form of regulations and mandates, as well as financial incentives and investment in the infrastructure needed for large-scale emissions reductions.

Hiatt pointed to renewable energy, whose current capacity cannot meet the projected demand under current global climate goals.

"These companies have set targets based on where emissions need to be, and they are committed to taking the necessary steps to achieve them," Hiatt said. "But this relies heavily on collective action from other industries investing to accelerate the pace."

Despite decades of warnings from scientists about climate change, the U.S. has never passed major legislation to address greenhouse gas emissions, and the Supreme Court recently poured cold water on the EPA's efforts to reduce emissions.

One area where action has been taken is the Securities and Exchange Commission's disclosure requirements, which haveproposed rulesthat would, among other things, require companies that have set targets or for which the information is "material" to their business to disclose Scope 3 emissions.

RILA opposes the rule in its current form. "In many ways, it's challenging from a practical standpoint," Hiatt said, adding that the industry group does support providing information to investors, but some of the "mechanisms and timelines" proposed by the SEC "are not really based on the reality of current reporting capabilities."

The concerns RILA has include all of the above—the difficulty of collecting comprehensive, accurate information on supplier emissions.

"I understand the hesitation about Scope 3 reporting, because not everyone is using the same amount of primary data," Theisen said. "But at the end of the day, we have to start somewhere." Theisen added that disclosure pressure might force players to act together: "Maybe we all need supplier data; let's create a coalition to get the data we need."