Supply Chain Decarbonization: The Path to Mitigating Climate Change Impacts

In order to get the full picture of a company’s sustainability performance and decarbonization journey, it is essential to assess and measure what suppliers are doing across their own supply base.

Tryfonov Adobe Stock 247377770
Tryfonov AdobeStock_247377770

There has been a massive global shift in public opinion and knowledge surrounding climate change and the state of our earth. Forty-two percent of Americans say dealing with climate change should be a top priority and another 46% say human activity contributes a great deal to climate change. International sentiment is roughly the same.

Collectively, much of the global population has come to an understanding of the reality at hand: our survival as a species is at risk. Climate change is a symptom of human life, meaning we also have the ability to change the dire trajectory we’re currently on.

Knowing the impact our actions can have, more than one-third of the world’s largest publicly traded companies have net-zero targets. But according to the latest Net Zero Stocktake, 65% of corporate targets do not yet meet minimum procedural reporting standards. Also, of the 40 system-wide transformation indicators needed to limit global warming across power, buildings, transport and more, none are on track to reach their 2030 targets.

Setting and achieving carbon reduction goals will only become more problematic as rapidly evolving environmental, social, governance (ESG) regulations will make compliance even more challenging.

The complex ESG regulatory landscape

Year over year, the ESG regulatory landscape gets more difficult to navigate as updated regulations continue to emerge.

The Securities and Exchange Commission (SEC) proposed the “issuer rule,” which will require public companies to disclose information on certain climate-related risks and financial data likely to impact the business and greenhouse gas emissions insights in all public disclosure filings. The SEC then again proposed the “investor rule” to enhance disclosures by certain investment advisers and funds about ESG investment practices they pursue, including fund prospectuses, annual reports, adviser brochures and census-type data forms. For example, funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their investment.

The upcoming German Supply Chain Act imposes extensive obligations on companies regarding human rights in the supply chain. Beginning Jan. 1, 2023, companies are required to conduct a risk analysis with regard to their own activities and business relationships within the supply chain to observe human rights and environmental due diligence obligations.

If companies don’t adhere to the SEC rulings, they will be exposed to legal risks and greater investor and consumer confusion on how these companies will address their climate risks and performance. Moreover, in the case of the German Supply Chain Act, if companies don’t act accordingly to comply, they will get hit hard by fines and penalties over non-compliance.

With so much at stake for both business and society, organizations need to embrace an ongoing, proactive and agile process aimed at achieving continuous supply chain decarbonization.

The journey to decarbonization in the supply chain

Up to 90% of a company’s supply chain accounts for its carbon footprint, but most struggle to assess their top-tier suppliers’ activity. In order to get the full picture of a company’s sustainability performance and decarbonization journey, it is essential to assess and measure what suppliers are doing across their own supply base.

One way to achieve this is by accelerating investment in supply chain sustainability monitoring, including carbon reduction efforts, as a foundation for building long-term viability. Many companies are also looking at using carbon offsets, but those should be used cautiously and in line with the SBTi net zero standard, which emphasizes only 5-10% of overall emissions should be offset through high-quality removals. When used correctly, carbon offsets are a necessary means for ensuring that companies can reach net-zero by addressing unavoidable, remaining emissions after taking sufficient actions to reduce emissions ahead of purchasing carbon offsets.

To truly decarbonize, companies need to engage with suppliers. Companies can create frameworks and include suppliers in their own Scope 3 reduction targets; focusing on significant supply chain and emissions hotspots; developing guidelines to standardize internal carbon pricing methodology and defining minimum pricing levels for achieving the required reductions; and substituting purchased products or materials with lower-emission alternatives.

Including suppliers in the decarbonization journey is proven to be effective. In a recent mobilization by over 100 large purchasing organizations, they have rated more than 20,000 of their suppliers on their carbon management practices, including commitments, actions and reporting. These ratings are informing buyers on how to adapt strategies and action plans for engaging across the supply chain. With the right tools and insights, these companies are accelerating engagement and setting foundations for collaborative climate programs that meet their suppliers where they are and help build knowledge and momentum for continuous performance improvement.

The benefits to business and the planet

In addition to meeting new or anticipated climate disclosure reporting requirements, the benefits for organizations who work closely with their suppliers on their decarbonization journeys are undeniable:

●       Securing and optimizing access to capital. Given attention from the finance community on climate risk, all companies are feeling the pressure to report on progress against their commitments. In addition, sustainable supply chain finance, green bonds or loans, and similar trends are bringing to impact companies all across global supply chains new sources of capital, as well as incentives for better environmental performance.

●        Consumer retention and attraction. Forrester’s 2022 State of the U.S. Shopper and Environmental Sustainability study found that 38% of U.S. online adults reported that over the past 12 months, it has become more important for them to buy from companies and brands that embrace sustainable products and practices.

●        Talent recruitment and retention. Several studies show Millennials strongly weigh purpose and sustainability topics in the job selection process. Successful supplier collaboration to improve sustainability can be a powerful sign of “walking the talk” that helps win over new recruits and engages and retains existing employees.

●        More resilient value chain. Above all else, by engaging with and bringing suppliers along in an ongoing improvement and emissions reduction journey, you’re building a more resilient value chain. This strategy will help to mitigate adverse social and environmental impacts in the upstream value chain as well as help organizations comply with global ESG regulations.

While driving decarbonization efforts across increasingly complex global supply chains is a distinct challenge, it is necessary to avoid the worst consequences of climate change. But with the right tools and engagement strategies, companies and suppliers can work together to implement sustainable practices that both meet evolving regulations and work to make real climate change impact happen.