Quantifying Supply Chain ESG Risks : A Flexible Framework

Regulators have pointed to Scope 3 carbon intensity metrics as a comprehensive measure of a firm’s climate risk profile. However, it has long been recognized that the calculation of Scope 3 emissions is difficult and costly. In this paper, we propose a simple and intuitive approach to calculating the emissions resulting from a company’s base of suppliers. Our model can be supplementary to Scope 3 metrics when the latter is not readily available. Empirical tests suggest that the proposed metric makes a statistically significant contribution in explaining the outputs of conventional approaches, in addition to those from Scope 1 and Scope 2 measures. Furthermore, our model offers a flexible framework for evaluating other types of ESG risks embedded in a firm’s value chain