ESG

COP26: We’re all in this together – driving climate improvement through the supply chain

 

“It’s not easy being green” as Kermit the Frog once sang, and as companies have been discovering since the birth of the environmental movement in the 1960s. Now, as the climate emergency deepens, the fragile ecosystems of nature are mirrored in the business world, creating interdependencies and co-responsibilities when it comes to managing and reducing the environmental impact of commerce. It is no longer enough for a company to track and reduce its direct environmental effects, it must also take responsibility for those generated within its supply chain. This is set to become a defining challenge for businesses and boards.

Deforestation pledge turns investor scrutiny to supply chain emissions

At COP26, world leaders pledged to end deforestation by 2030 – just nine years from now – as a vital element of the plan to tackle climate change. Commentators have been quick to suggest that this global commitment will give investors the leverage they need to scrutinise companies’ supply chain emissions and demand commitments on reducing raw material consumption.

Talking to investment advisors MorningStar, Leslie Samuelrich, president of Green Century Capital Management, says the COP26 commitment “dramatically increases the number of investors who are now understanding that stopping deforestation is inextricably linked to curbing our climate crisis. And what I hope it means is that investors are more willing to engage their holdings up and down the supply chain to adopt zero-deforestation commitments.”

It is not only investors who are turning their attention to supply chain impact. In May 2021, Dutch courts ruled that energy giant Shell must reduce its emissions by 45% by 2030. The landmark legal verdict stated that Shell is responsible for not only its own direct CO2 emissions, but also those of its suppliers. Commenting on the case, the BBC’s environment analyst Roger Harrabin noted that this judgement effectively means “suddenly it’s not good enough for firms to comply with the law on their emissions […] they have to comply with global climate policy too.”

For businesses this is a clarion call that the clock is ticking on gaining visibility and control over supply chain impacts.

The scale of the supply chain emissions challenge

Supply chain emissions have been dubbed the elephant in the room when companies are promoting their efforts to be more sustainable. While organisations have made progress addressing direct (Scope 1) emissions and the indirect emissions generated from purchased electricity, steam, heating and cooling (Scope 2), Scope 3 emissions remain largely unmanaged.

Scope 3 emissions are those generated by:

  • purchased goods and services,
  • business travel and employee commuting,
  • waste disposal
  • use of sold products
  • transportation and distribution (up and downstream)
  • investments
  • leased asset and franchises

It is clear from the list above that the scale of Scope 3 emissions is enormous. In fact, consultants McKinsey estimate that upwards of 80% of an average large company’s total emissions will sit in their supply chain, which means that reducing supplier emissions has to be a key priority if organisations are to meet the increasingly rigorous requirements of stakeholders, investors, and regulatory bodies.

This is not easy. It requires a multi-faceted approach encompassing everything from corporate values, mindset and expectations, through to the practical application of procurement policies, supplier contract negotiations and monitoring. It needs robust leadership from the board and executive team in setting the tone and targets for Scope 3 emissions reductions, followed by a rigorous monitoring programme.

Tackling Scope 3 emissions also requires a deeper level of engagement across the supplier ecosystem. The organisation must clearly communicate the sustainability standards it expects suppliers to reach and the progression it wants to see. When suppliers cannot meet targets, the organisation should consider engaging with them to improve performance, to create a force for continuous improvement that will have effects ranging wider than the immediate buyer/supplier relationship.

An example of an organisation that has operationalised its supply chain management is global healthcare technology leader Phillips. The company adopts a transparent approach to sustainability, engaging with all its stakeholder groups to “identify issues and opportunities and gain insights that [it uses] to refine [its] supplier sustainability strategy”. These are translated into programmes to help suppliers improve social and environmental performance.

Phillips also works with the CDP supply chain programme, inviting partners to disclose their environmental performance and carbon intensity. It adopted new ESG commitments in 2020, setting a target to actively engage 80% of its supply base to disclose scope 1 and 2 carbon emissions annually and implement de-carbonisation strategies in line with the Paris Agreement.

ESG metrics, management and reporting are crucial to progress

COP26 President Alok Sharma MP listed four key goals on the COP26 agenda, the last of which is “working together”. It includes a pledge to “resolve issues around transparent reporting to build confidence in the system and support all countries to meet their commitments”.

Accurate and transparent reporting is central to satisfying regulatory compliance and to building the shared trust necessary to bring corporate entities, national governments, and international stakeholders into consensus on what constitutes meaningful progress.

At a corporate level, organisations need to improve visibility over their environmental impacts, including those in the supply chain. This is especially critical for B2B companies, who typically have a supply chain and are suppliers themselves. The ability to identify, track, manage and share key sustainability metrics is critical to engaging in supply chain improvement initiatives. Inability to deliver this data to customers and partners could ultimately affect the organisation’s ability to win or maintain contracts.

Consequently, developing an internal structure for collecting key data, measuring, analysing and reporting on environmental impacts is essential. There is a vast amount of potentially relevant data within organisations and available from partners and third-party datasets. The challenge is ensuring that it all flows to a central location where it can be meaningfully managed.

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