A Beginner’s Guide: Value Chain Analysis in Your Business’s Environmental Sustainability Strategy

Value chain analysis looks at the complete web of activities and relationships connected to your business, from raw materials to end-of-life disposal of a product. This process can be a strategic business tool, revealing opportunities to strengthen your performance, reduce costs, and mitigate operational risks.

It’s also becoming essential for building an effective environmental sustainability strategy. The analysis provides visibility across the broad ecosystem that shapes your products, services, and environmental impact. This bigger-picture perspective can help to mitigate risk and cut greenhouse gas emissions (GHGs). Emissions associated with the value chain (including those counted under Scope 3 that are not under a company’s direct control—more on that later) can be challenging to account for but can have significant potential climate impact.

When you have a clearer picture of what’s happening along your company’s value chain, you can identify the easy wins, high-impact solutions, and longer-term improvement projects that can lead to operational, fiscal and environmental benefits. Here’s what to look for and how to get started.

Comparing a value chain to a supply chain: What’s the difference?

First, what is a value chain and how does it relate to a supply chain?

• Supply chains are all about supplies: The materials and services required to get a product to the end of the assembly line (real or virtual) and out the door to the final customer.

• A value chain is broader and encompasses the supply chain. It’s more holistic and includes both upstream and downstream activities. Think not just about what goes into making and selling a product but also what goes into boosting its value: research and development, marketing, after-sales support, and even how products are disposed of at the end of their usable life.

When analyzing your company’s environmental impact and finding the opportunities for improvement, the entire value chaincomes into play. You’re not only making choices that could help to gain a competitive advantage and maximize value to your customers, but you’re also recognizing that reducing GHG emissions and environmental impact is an essential component of that value.

So how can you begin to assess your environmental impact within your value chain?

Let’s start by understanding how Scope 3 emissions relate to the value chain

You can organize a company’s emissions in three categories: Scope 1, 2 and 3. In brief, Scope 1 includes emissions under the business’s direct control (such as fuel burned by vehicles or manufacturing processes), and Scope 2 includes indirect emissions from purchasing energy, such as electricity. Scope 3 covers the rest: Emissions associated with everything from office furniture to employee travel to customer disposal of your product. Essentially, your Scope 3 emissions are those associated with your company’s value chain.

Scope 3 can make up more than 90%of a company’s total emissions, offering your business a significant opportunity to reduce emissions and meet climate-related business goals.

Read more: Emissions explained: Understanding Scope 1, 2 and 3 in your business

What are the benefits of reviewing your business’s value chain?

Value chain analysis has significant potential to reduce your company’s emissions, but that’s far from the only reason to perform one. Additional benefits can include improving business efficiencies, reducing physical climate-related risks, gaining third-party certifications, limiting reputational risk, and identifying new market opportunities.

For example, when a business reduces electricity usage across operations, it can cut operating costs while lowering emissions. These advantages can extend further along your value chain. Prioritizing reduced GHG emissions with vendors with recognised environmental certifications may also drive innovation, improve stakeholder relations, open new markets, and mitigate risk from higher and fluctuating energy costs.

Read more: Fueling your business’s transition to renewable energy

Preparing for physical climate-related risks such as flooding, wildfire and extreme weather has been shown to have significant financial benefits for companies. In fact, the Intact Centre on Climate Adaptation estimates that for every dollar invested in climate adaptation and preparedness, companies can avoid $3 to $8 in damages or extra costs per decade.

How to conduct a value chain analysis

Your company’s value chain analysis will consist of a series of steps, from defining your business goals through to identifying Scope 3 activities, collecting data and reporting emissions. Standardized approaches and principles can be useful to ensure consistency and transparency for partners and stakeholders, and a comprehensive value analysis should take these standards into account.

But as a starting point, analyzing your company’s value chain—and assessing the benefits that come with this knowledge—includes steps that are useful to understand.

1. Identify activities

Think of your company’s Scope 3 emissions as the emissions of other organizations in its value chain. The list of organizations might include the suppliers, logistics providers, waste management companies, travel vendors, retailers, employees, and customers involved in the company’s overall business operations. These emissions are often separated intoupstream (those connected with purchased or acquired goods and services) and downstream (those connected with sold goods and services), and into categories such as capital goods, business travel and investments.

Identifying the types and categories of activities in your value chain will help you determine which operations contribute to your company’s Scope 3 emissions.

2. Review costs

Once you’ve identified all activities, you’ll gather information on the value, cost and associated GHG emissions for each. Understanding this data is essential to making value chain–related decisions targeted at business goals, be they maximizing value, lowering costs, or reducing emissions, or all three.

Understandably, companies may find this process overwhelming. With so many components to the value chain, collecting data can be time-consuming. One method is to triage the list of activities, identifying those that you anticipate having the highest potential for emissions reduction and other goals. These are often the activities (or vendors) that represent a higher proportion of your overall spend.

To help guide your calculations, you may want to consider working with a third-party carbon management tool, or reference an globally-recognized source, such as the GHG Protocol Technical Guidance for Calculating Scope 3 Emissions.

3. Identify opportunities

The next step is to review your data and determine what you can change to improve emissions and efficiencies. There are many ways to do this, but one is to find the top and bottom-performing activities and then do more of the former and less of the latter. For example, your value chain analysismight uncover high-value, lower-emissions activities that are worth increased investment, or low-value, higher-emissions activities that should be refined or replaced.

Carbon management is an ongoing process. Regular reporting, reassessing and refining will help you measure progress and continue to make positive change.

Categorizing and tracking Scope 3 emissions

Once you understand your value chain better and have begun collecting data on costs, value and GHG emissions associated with various activities, you can determine what emissions are being created in each section of the chain. For example, you might gather information from travel vendors on how many kilometres employees fly each year for business travel. The Greenhouse Gas Protocol divides the value chain into 15 categories—including business travel, capital goods, upstream leased assets and investments—and offers a useful guide to help companies calculate their Scope 3 emissions.

Calculation methods can vary depending on your goals and the available data, but as a guideline, the more detail you require, the more effort is needed to calculate emissions. For some businesses and in some cases, a rough estimate is sufficient for decision-making, while in others, detailed calculations are required.

A hybrid approach is a common choice. When it comes to purchased goods and services, for instance, you might choose activities with the largest spend as having a high potential for finding efficiencies and potential emissions reductions. Then, you can put more time into those calculations while using secondary data for the remaining activities.

Value chain analysis: A step forward for your business

The effects of climate change pose a significant risk to business operations and growth, both directly through events such as extreme weather and indirectly through challenges such as supply chain disruptions or increased costs. By performing a value chain analysis and identifying opportunities to improve efficiencies and lower GHG emissions, your company can take action to help protect and improve its bottom line while working toward long-term environmental sustainability.