Value chains are dynamic, shaped by evolving market relationships and involving multiple actors with varying levels of visibility into on-the-ground operations. As companies work to implement Scope 3 strategies to bring down emissions in their value chains, they face challenges such as limited traceability, lack of supplier-specific data and dynamic value chains.  These challenges impact how companies can claim emission reductions for their greenhouse gas emissions reporting towards Science Based Targets (SBTs) or regulatory disclosures (e.g., CSRD).

To address some of these challenges, the Value Change Initiative (VCI) has been developing the concept of Supply Shed. This approach enables companies to work with value chain emissions in a more flexible way, while ensuring emission reductions are real and linked to the commodities and products in the value chain. Below, we explore the definition of a Supply Shed and its practical applications.

What is a Supply Shed?

The Supply Shed serves as a unit of analysis and aggregation that allows companies to account for their emissions and the impacts of the interventions aimed at reducing them. It functions as a mechanism to aggregate suppliers providing equivalent goods or services for the purpose of GHG accounting. According to the Value Change Initiative Guidance 1.1 (2021), a Supply Shed is defined as:

“A group of suppliers in a specifically defined market (preferably at sub-national level) providing similar goods and services (commodities) that can be demonstrated to be within the company’s supply chain.”

The VCI has further refined this definition in alignment with standards developments, such as the GHG Protocol’s definition of the sourcing region in the Land Sector and Removals Guidance (LSRG). A key aspect of the Supply Shed is its geographic boundary, as a Supply Shed is a group of suppliers providing functionally equivalent goods or services within a fixed and spatially defined area that is demonstrably part of a company’s value chain. Importantly, a Supply Shed that aims to be consistent with the LSRG sourcing region must include all suppliers within designated boundaries, regardless of their practices or segmentation. Therefore, it cannot only include a subset of farms within the geographic boundaries of the Supply Shed. Lastly, Supply Sheds cannot overlap – all farms within a geographically defined area can only be part of one Supply Shed. The latest VCI Food and Agriculture guidance shows that strata of farms with specific practices (e.g., farms with practices to reduce emissions) can be accounted for through stratified emission factors showing the created impact, however recognizing the Supply Shed as the underlying boundary.

Supply Sheds are defined by reporting companies for accounting and reporting purposes. While a single company must ensure its Supply Sheds do not overlap geographically, Supply Sheds from different companies may overlap due to different designs and there are no fixed boundaries that companies must use. However, aligning Supply Shed boundaries across companies would be beneficial for consistency across the value chains (e.g., to enable co-claiming and co-investments).

Types of Supply Sheds

There are two fundamentally different types of Supply Sheds, each with unique applications and limitations.

1. Supply Shed as a Market-based Mechanism (MBM).
This approach is useful when direct physical traceability is not feasible. This type of Supply Shed enables companies to establish a credible association between the reporting company and an intervention through the principle of equivalent goods and services. However, mitigation outcomes from interventions accounted for in this way must be reported outside of the Scope 3 inventory, as they don’t align with current GHG Protocol requirements. Supply Sheds as an MBM can be used in combination with project-based accounting to establish mitigation outcomes, and it is currently used to incentivize investments through narrative claims.

2. Supply Shed as a level of analysis to report emissions (aligned with the LSRG sourcing region definition).
This approach requires physical traceability to a sourcing region and necessitates a Chain of Custody system to track the movement of commodities. It aligns with the sourcing region approach presented in the draft LSRG, where it is defined as the region that serves a known first collection point or processing facility on a sub-jurisdictional level. Furthermore, to ensure it fulfills the requirements of the LSRG, the geographic boundary should remain at a sub-national level, and the emission factor used should consistently represent the set of farms. Companies choosing this approach must account for the performance of all attributable productive lands in that sourcing region, so the reported outcomes reflect the overall performance of the entire sourcing region, and not just the interventions.

Companies may opt for an LSRG-compliant approach of the Supply Shed or for using it as an MBM. MBM Supply Sheds typically allow for larger geographical scopes than Supply Sheds in line with the LSRG sourcing region. The appropriate use of a Supply Shed depends on factors like the commodity/product, infrastructure, geography, product shelf life, and on the interpretation of the Supply Shed used. The VCI has also identified archetypes of Supply Sheds for different types of agricultural commodities, such as cold chains (e.g., dairy, meat), row crops (e.g., wheat, corn) and cash crops (e.g., coffee, cocoa).

How can Supply Sheds help address limited traceability?

Supply Sheds reflect the way trading companies typically operate, accommodating situations where a company may not be able to directly trace sourcing to a specific upstream supplier. Instead, they can demonstrate that sourcing comes from a group of suppliers within a “market”. The Supply Shed allows companies to work with a bigger unit of analysis but still enables a reasonable level of traceability and a meaningful connection to the company’s own value chain.

The Supply Shed helps incentivize investments to enhance traceability over time by allowing companies to claim mitigation outcomes generated in a Supply Shed (market-based allocation or accounting). Furthermore, it enables credible co-claiming and co-investment by allowing multiple parties to execute interventions in a region where they source, but may not directly influence their exact suppliers (market-based attribution).

Example: defining a Supply Shed

How can companies define their Supply Shed? A food company sources grain for bread production from a specific region of the U.S. It also knows that the grain is covered by an industry association spanning three states in that region. Although the company has procurement contracts with suppliers in only two of these states, it can define its Supply Shed as the three-states region covered by the industry association. The key here is that the company knows that the grain coming from that three-state Supply Shed is serving the same market, and that the type and quality of grain grown is used for the same purpose (e.g., human consumption). The company can also demonstrate that they source their grain from this Supply Shed because they have procurement contracts with grain suppliers in 2 of those 3 states. If the company would like to further align with the LSRG requirements, they would need to establish a mass balance backed by evidence and information provided by the product tracking platforms used by the company, and ensure that the emission factors used in their accounting correspond to the Supply Shed.

The future of the Supply Shed

The VCI continues to refine the concept of the Supply Shed and its operationalization in the ongoing Food & Agriculture Working Group. The next steps include:

– Aligning on Supply Shed use cases with evolving GHG Protocol standards.

– Evaluating MBM applications to incentivize investments in the landscape.

– Understanding how current MBMs such as commodity certificates can be leveraged to account for the Supply Shed.

– Exploring potential use cases beyond carbon accounting, such as enabling accountability across different dimensions of sustainability and offering possibilities for more strategic insight into their operation.

– Developing technologies for more accurate data collection systems and performance assessment at the Supply Shed level.

One promising approach is the development of collective Monitoring, Reporting and Verification (MRV) systems that work at the Supply Shed level, allowing companies and stakeholders to assess impacts in a harmonized and efficient manner.

Operationalizing the Supply Shed

Learn more about the operationalization of the Supply Shed in VCI’s recent accounting and reporting guidance for the Food & Agriculture sector.