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How to create a sustainable supply chain, or at least try

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How to create a sustainable supply chain, or at least try

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 and while most have implemented strong sustainability programs in their factories, buildings or fleet not many have yet mastered how to tap into their supply chains leading 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, created programs and built internal capabilities to reduce the #environmental impact of their directly controlled assets, or focusing in carbon emissions, reducing their scope 1 and 2 emissions. (see Green House Protocol definitions)

Optimal combinations between energy efficiency, switching to lower-emitting fuels or sourcing renewable energy programs demonstrate how productivity and sustainability are not one against the other.  

But at some point, the carbon budget for the firm starts to get depleted and the incremental gains for investing in their facilities don’t reduce significantly risks, increase reputation or lower costs. An example can be a factory that has reduced 90% of its carbon emissions and requires millions of investment for saving a few remaining CO2 tons.

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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 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 and despite the size, only 35% of companies responding declare to be engaged on climate topics with their supply chains, showing the opportunity that still exists.

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GHG Protocol scopes and emissions across the value chain (GHG protocol scope 3)

Reason 2: reduce risks. Suppliers’ risk management has become key even beyond their direct suppliers. For example, Mattel was accused of causing deforestation for sourcing from a tier two supplier (a supplier of its direct supplier). Besides, TCFD (read here my article for more information), a major initiative driven by investors, request companies to analyze, reduce and disclose the different risks and opportunities the companies are facing under different forward-looking scenarios compared with the business as usual scenario, so 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 operations

CDP supply chain report

Great progress has been done as seen in the programs developed by the 128 companies recognized as leaders through CDP Supply Chain Program, 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 like 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.

Breaking barriers

Breaking Barrier 1: Measuring the pie

You can’t manage what you can’t measure so the first step is having a proper company carbon footprint, a carbon emissions inventory from your activities.

While quantifying scope 1 and 2 emissions, usually involves a pretty straight forward process of collecting information about energy consumption and multiplying for certain standard emission factors, scope 3 emissions cannot be calculated for practical reasons but rather estimated based on some assumptions with a certain degree of confidence. An example is calculating the emissions produced by selling electric cars; you can only estimate the emissions from the number kilometres driven during its lifetime, where the cars are going to be charged or how the cars will be one day recycled.

The key to having a first carbon footprint model is first to understand your purpose, it is not the same a carbon footprint developed for reporting or answering a customer request than a carbon footprint you are going to use to design a strategy to reduce and track emissions in your supply chain.

There are three methods for calculating the carbon footprint: input-output analysis (using environmental extended input-output tables EEIO), life-cycle analysis (based on products’ LCA) and hybrid, I am not going to describe them but depending on business configuration and availability of data you may end up using a different one.

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 company carbon footprinting and if possible, build a long term relation with outside experts that can help you create the initial carbon footprint and provide support along the carbon reduction journey. Pro tip: third party verification of your scope 3 model and data will provide you with extra confidence when publicly sharing the carbon emission data.

Breaking barrier 2: Collecting data

Every year new data will be needed to track progress and you should be aiming to incorporate primary data from suppliers for better accuracy and here is where we are touching one of the most controversial points.

Every company at this point may be tempted to reinvent the wheel and develop its custom data collection processes like 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. Initiatives like CDP supply chain collect information that can be used to assess risks in the supply chain and update the 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 are getting popular that provide 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

There is quite some guidance around and some that I find quite useful is thGHG protocol scope 3Gold standard reporting guidance or the SBTi’s best practice guidance.

The strategy should be able to highlight which suppliers to be targeted, to set public targets (best SBTi targets), build internal capabilities and how to support suppliers depending on their sustainability maturity level.

Tip: Use some of the already existing information I mention and 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 that considers sustainability, cost, service, and risk, rewarding more business and providing public recognition to those that score high. Besides, one to one collaboration with critical suppliers will provide opportunities for improvement

Current Trends

Technology will provide greater transparency in reporting carbon emissions. Digitalization and blockchain will allow transparency and trust regarding where materials are sourced. Artificial intelligence and analytics will help track and analyze where risks and opportunities exist in the supply chain and 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, an economic system based on the principles of designing out waste by keeping products and materials in use (Ellen MacArthur Foundation), is another trend that will reduce costs and environmental impact across supply chains.

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Conclusions

  1. Having a sustainable supply chain is a must for having a sustainable business and using the leverage that multinationals have over their supply chains provides the cost savings and emissions reductions that society needs to survive.
  2. Setting a carbon footprint, collecting data, setting a strategy and incentivizing suppliers are still barriers for companies but solutions exist and the focus should be on improving year-on-year.
  3. Technology, Standardization and Circular economy are growing trends that 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 since this will create the wave effect required to rapidly reduce emissions and address climate change.

If you like the article please share it, like it or comment on your experience to help increase the awareness of this important topic.

Thank you,

Carlos

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