09 October 2023
Written by Tinglong Dai, Christopher S. Tang and Hau L. Lee
Lego, the world’s largest toy manufacturer, has built a reputation not only for the durability of its bricks, designed to last for decades, but also for its substantial investment in sustainability. The company has pledged US$1.4 billion (S$1.9 billion) to reduce carbon emissions by 2025, despite netting annual profits of just over US$2 billion in 2022.
This commitment is not just for show. Lego sees its core customers as children and their parents, and sustainability is fundamentally about ensuring that future generations inherit a planet as hospitable as the one we enjoy today.
So it was surprising when the Financial Times reported on Sept 25, 2023, that Lego had pulled out of its widely publicised “Bottles to Bricks” initiative.
The ambitious project aimed to replace traditional Lego plastic with a new material made from recycled plastic bottles. However, when Lego assessed the project’s environmental impact throughout its supply chain, it found that producing bricks with the recycled plastic would require extra materials and energy to make them durable enough. Because this conversion process would result in higher carbon emissions, the company decided to stick with its current fossil fuel-based materials while continuing to search for more sustainable alternatives.
As experts in global supply chains and sustainability, we believe Lego’s pivot is the beginning of a larger trend towards developing sustainable solutions for entire supply chains in a circular economy. New regulations in the European Union – and expected in California – are about to speed things up.
Examining all the emissions, cradle to grave
Business leaders are increasingly integrating environmental, social and governance factors, commonly known as ESG, into their operational and strategic frameworks. But the pursuit of sustainability requires attention to the entire life cycle of a product, from its materials and manufacturing processes to its use and ultimate disposal.
The results can lead to counter-intuitive outcomes, as Lego discovered.
Understanding a company’s entire carbon footprint requires looking at three types of emissions: Scope 1 emissions are generated directly by a company’s internal operations. Scope 2 emissions are caused by generating the electricity, steam, heat or cooling a company consumes. And scope 3 emissions are generated by a company’s supply chain, from upstream suppliers to downstream distributors and end customers.
Currently, less than 30 per cent of companies report meaningful scope 3 emissions, in part because these emissions are difficult to track. Yet, companies’ scope 3 emissions are on average 11.4 times greater than their scope 1 emissions, data from corporate disclosures reported to the non-profit CDP shows.
Lego is a case study of this lopsided distribution and the importance of tracking scope 3 emissions. A staggering 98 per cent of Lego’s carbon emissions are categorised as scope 3.
From 2020 to 2021, the company’s total emissions increased by 30 per cent, amid surging demand for Lego sets during the Covid-19 lockdowns – even though the company’s scope 2 emissions related to purchased energy such as electricity decreased by 40 per cent. The increase was almost entirely in its scope 3 emissions.
As more companies follow in Lego’s footsteps and begin reporting scope 3 emissions, they will likely find themselves in the same position, realising that efforts to reduce carbon emissions often boil down to supply chain and consumer-use emissions. And the results may force them to make some tough choices.