Climate change is a major threat to human existence that require rapid, far-reaching and unprecedented changes in all aspects of society. Multinational companies have the resources and capabilities to play a key role in catalyzing this change. While most companies have implemented carbon footprint reduction programs in their factories, buildings and fleets, not many have yet mastered how to tackle the emissions of their supply chains. As a result, this situation leads to missed opportunities for reducing their environmental impacts and costs.
Let me explain to you why and some ideas to overcome this situation.
Corporate boundaries: the foundations
Companies in the last decades have been increasingly setting more ambitious targets. Therefore, they created programs to reduce the environmental impact of their directly controlled assets.
A especially focus has been put on reducing scope 1 and 2 carbon emissions. (see Green House Protocol definitions)
Companies invested in energy efficiency, switched to low-emission fuels and implemented renewable energy to balance productivity with long term sustainability.
However, at some point, the carbon budget for the firm starts to get depleted. The incremental gains for investing in their facilities don’t reduce significantly their risks, increase reputation or lower costs.
For example, a factory that has reduced 90% of its carbon emissions and that for saving the remaining 10% requires huge investments.
Level up: Time to explore the world
Companies do not operate in an isolated world but rather source products and services, use logistics, have employees that commute and products that are used and once disposed need to be recycled. All these activities, which occur because of the existence of the company, produce carbon emissions called value chain or Scope 3 emissions. Traditionally these emissions were considered externalities and now there are two reasons for tackling them:
“If we achieve our sustainability targets and no one else follows, we will have failed.”Paul Polman, Former Unilever CEO
Reason 1: Reduce emissions and improve reputation.
Value chain or Scope 3 emissions, called supply chain carbon footprint, often represent the largest source of corporate carbon footprints and reducing value chain emissions leads to opportunities to reduce environmental impact and costs.
According to CDP supply chain report, upstream emissions are 5.5 times greater than those related to a company’s direct operations.
However and despite the size of emissions, only 35% of companies responding declare to be engaged on climate topics with their supply chains. This clearly shows the opportunity for greater impact that still exists.
Reason 2: reduce risks.
Suppliers’ risk management has become key even beyond their direct suppliers. For example, an NGO accused Mattel of causing deforestation for sourcing from a tier two supplier (a supplier of its direct supplier).
Still, some companies believe that by outsourcing activities to their supply chain, their responsibilities also get outsourced. That is no longer the case.
Besides, TCFD (read here my article for more information) requests companies to analyze, reduce and disclose the different risks and opportunities companies face under different forward-looking scenarios compared with the business as usual scenario.
Therefore the earlier you start understanding your supply chain the better.
Upstream emissions are on average 5.5 times greater than those related to a company’s direct operationsCDP supply chain report
The 128 companies recognized as leaders through CDP Supply Chain Program have already achieved great progress. It is one of the biggest initiatives to increase sustainability in corporate supply chains. Moreover, 5,545 of their suppliers responded to the CDP requests sent by corporates.
Besides some sectors have started setting standards on how to measure emissions and benchmarking among themselves. For example, The clean cargo initiative, where 80 per cent of the global container cargo carried collaborate to reduce their environmental impact.
Still level of engagement is low as shown by the fact that only one-third of the companies responding engage in climate topics with its suppliers.
Why companies don’t yet flock to it? let’s try to identify the reasons and brake those barriers.
Supply chain sustainability barriers
Breaking Barrier 1: What is a supply chain carbon footprint?
You can’t manage what you can’t measure. Therefore, the first step is having a proper company carbon footprint. A carbon footprint is a carbon emissions inventory from your activities.
On the one hand, quantifying scope 1 and 2 emissions usually involves a pretty straight forward process. It requires collecting information about energy consumption and multiplying for certain standard emission factors.
On the other hand, scope 3 emissions cannot be calculated for practical reasons. Scope 3 emissions require to be estimated based on assumptions with a certain degree of confidence.
For example, calculating the emissions produced by selling electric cars.
You can only aim to estimate the emissions from the number kilometres driven during its lifetime, where the cars are likely to be charged or how the cars will be one day recycled.
First carbon footprint
The key to having a first carbon footprint model is first to understand your purpose.
You can design a carbon footprint for reporting or answering a customer request. Similarly, you can develop a carbon footprint to design a strategy to reduce and track emissions in your supply chain. The two models will have different efforts to be created, maintained and accuracy.
There are three main methods for calculating the carbon footprints:
- Input-output analysis (using environmental extended input-output tables EEIO)
- Life-cycle analysis (based on products’ LCA) and
Depending on business configuration and availability of data you may end up using different ones.
Tip: Don’t aim for perfection and rather a year-on-year improvement. Develop the skills internally. Use some of the great new software solutions for supply chain carbon footprinting. Furthermore, it is advisable to build a long term relation with outside experts to create the initial carbon footprint. Afterwards, they will be able to provide valuable support along the carbon reduction journey.
Pro tip: A third party verification of your scope 3 model and data will provide you with extra confidence when publicly sharing the carbon emissions.
Breaking barrier 2: Collecting data
Every year new data will be needed to track progress. Conversely, you should be aiming to incorporate primary data from suppliers for better accuracy.
At this point is where we are touching one of the most controversial points.
Every company at this point is tempted to reinvent the wheel and develop their custom data collection processes. For instance, requesting information by emails, excels, web surveys or any other specific software. But imagine a supplier with hundreds of customers answering requests in different forms and timings.
Tip: join a standard solution that other companies are already using. For example, the CDP supply chain initiative collects information used to assess risks in the supply chain. Furthermore, companies utilize this information to update their supply chain’s carbon footprint model and send the proper incentives for suppliers to report and improve their environmental performance.
For broader social, environment and governance data collection from suppliers, there are tools in the market that standard or custom surveys.
Still, some areas to improve exist like how to ensure quality data received through these platforms and how to reduce the learning curve to start disclosing.
Breaking barrier 3: setting the strategy
The strategy should:
- Highlight which suppliers to be targeted,
- Set public targets (best if they are SBTi targets),
- Build internal capabilities and,
- Support suppliers depending on their sustainability maturity level.
Tip: Use some of the already existing information I mention. Furthermore, if internally you don’t have still the required skills, external help can be useful to point you in the right direction. Many well-prepared professionals can help you build from a simple and effective initial strategy to a more complex and impactful strategy.
Breaking barrier 4: incentivizing suppliers
There needs to be an incentive for both the company and the supplier to go ahead. An incentive is something that will help suppliers to build internally their business case around sustainability.
Tip: Some supply chain leader companies, evaluate suppliers through a scorecard. This scorecard considers factors such as suppliers’ sustainability maturity, cost, service, and risk. They rank their suppliers and reward their top suppliers. For instance, companies can reward their suppliers by providing public recognition or more contracts to those that score high. Besides, one to one collaboration with critical suppliers will provide opportunities for improvement
Technology will provide greater transparency in reporting carbon emissions. Digitalization and blockchain will allow transparency and trust regarding the source of materials. Artificial intelligence and analytics will help track and analyze where risks and opportunities exist in the supply chain. Therefore, how to prioritize efforts to achieve carbon neutrality.
Data shared between companies is consolidating in a few initiatives and software, simplifying the collection and trust of data.
Circularity is an economic system based on the principles of designing out waste by keeping products and materials in use. (Ellen MacArthur Foundation). Circularity applied across to your supply chain is another trend that will reduce company costs and environmental impacts.
You can have more information about sustainability trends in this article.
Supply Chain Carbon Footprint Conclusions
- Having a sustainable supply chain is a must for having a sustainable business. Using multinationals influence on their supply chains provides the cost savings and carbon emissions reductions that society needs to survive.
- Setting a proper supply chain carbon footprint, collecting data, setting a strategy and incentivizing suppliers are still barriers for companies. Nevertheless, solutions exist and the focus should be on improving year-on-year.
- Technology, Standardization and Circular economy are growing trends. These trends will reduce efforts in collecting data, minimize risks and highlight opportunities to save costs and emissions.
Our society is in a place to demand companies to make all necessary efforts to reduce their carbon emissions in their supply chain.
Acting on their supply chains, companies will create the wave effect required to rapidly reduce emissions and address climate change.
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