Despite Climate Risk Management Progress, Opportunities Remain

Emerging digital supply networks are expected to lead to the next round of improvements

Recently released data indicates that, despite progress in several areas, the global response of suppliers to climate change is falling short of what is needed. Opportunity remains for companies to expand their sustainability strategies by making strategic use of digital technology.  

First, a Look at the Progress

The 2014-2015 Carbon Disclosure Project (CDP) supply chain report found an increase in the number of companies assessing and reporting on their emissions. Further, the quantity and percentage of suppliers setting emissions targets, which contributes to climate risk management, showed a steady upward trend, with nearly half (48 percent) setting targets last year, up from 39 percent in 2012.

We also saw an increase in the number of suppliers achieving their emissions reduction—40 percent in 2014, up from 34 percent in 2012. At the same time, they realized monetary savings as their emissions declined—jumping from 29 percent in 2012 to 33 percent in 2014.

That was good news.

Despite that progress, the data suggests that it plateaued. As reported in last year’s report, 72 percent of participating suppliers identified a current or future risk related to climate change, and more than half of the companies acknowledged climate change-related opportunities. They indicated that consumers are becoming more receptive to low-carbon products and services. While reasons may vary, the data this year did not identify a proportionate response, although the analysis found high levels of climate risk in key supply chains. That is not to say that the results were the same everywhere. Indeed, they were not.

Progress Varied from Country to Country

For the first time, the study included a comparison of how well-prepared 3,396 suppliers to 66 multinational purchasers across 11 major economies were to manage and mitigate environmental risk in their supply chains. The analysis revealed that supply chains in Brazil, China, India and the United States are more vulnerable to climate risks than those in France, the UK, Spain and Germany, which were identified as the most sustainable.  

Furthermore, suppliers in the United States, China and Italy did not take steps consistent with the degree of risk to which they are exposed. For instance, the report noted that “U.S. suppliers show limited appetite for cooperation, raising concerns given the relatively high vulnerability of the country to climate-related disasters.”

Looking at the U.S. suppliers, the report noted that emissions disclosure rates remained low, although more suppliers are setting emissions targets. Barely half of U.S. suppliers established climate risk management processes and water risk assessments lagged behind the global average.  

By comparison, Japan was the only country with suppliers who were well-equipped to respond to high climate risks as they matched their awareness and actions with the high levels of risk to which they are exposed.

While suppliers in some markets advanced further than others with regard to creating and maintaining sustainable supply chains, there is more to be done. Business cases alone are insufficient in the face of competition for limited organizational resources to secure investments in sustainable supply chains. Further competitive advantage may be harnessed by expanding sustainable strategies to exploit opportunities presented by digital technologies that also efficiently leverage talent and re-imagine operating models while focusing on sustainability goals.

Emergence of Digital Supply Networks Could Further Sustainable Supply Chain Efforts

Digital technologies promise to transform how businesses operate their supply chains. They enable shifting from a traditional linear view and re-imagining the supply chain as a digital supply network that is based on an understanding of what digital technologies can enable—the art of the possible in terms of how analytics, social media, cloud, 3D printing, sensors, etc., can change the supply chain function and deliver value to the bottom line. Furthermore, as digital supply networks replace linear supply chains, there are four advantages that new digital networks can deliver that could contribute to sustainability.

First, as a result of their connectivity, emerging digital supply networks can deliver visibility, traceability and real-time information exchanges, and facilitate collaboration between supply network partners. They also can enable connected suppliers to spread awareness about sustainability practices, share other related knowledge, and co-create to find new solutions to carbon and water challenges.  

Second, information gathered as a result of the networked nature of these supply chains contributes to increasingly intelligent digital supply networks that can help companies identify carbon hotspots and water-related business risks in their value chains. In their automated environment, they use analytics, cognitive equipment and smart apps to translate data into valuable information that informs decision-making and accelerates innovation.

Third, digital supply networks, with their plug-and-play access to talent and infrastructure, are scalable and operate at speed with decision support enabled by analytics. Furthermore, as processes become easier to optimize and duplicate, and errors become easier to see, we believe that digital supply networks will contribute to further sustainability performance improvements in supply chains.

Fourth, technology also is enabling greater flexibility in operating models. While operating models were somewhat fixed, going forward, companies will increasingly have the ability to align their operating models to drive their sustainability agenda and create value. For example, companies focused on cost would find that aligning their operating models to address resource and energy efficiency-related challenges more relevant. Those that are brand or quality conscious would find supply chain traceability and brand communication more important. Each of these priorities requires involvement from different functions across the organization with varying levels of intensity.

As suppliers move from reporting to target setting to performance improvement and innovation, digital can play a crucial role. So as you re-imagine your supply chains and build out your digital supply networks, sustainability is another important outcome to consider.

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