The Business Impact of Supply Chain Sustainability

Promoting environmental sustainability is no longer a convenient, feel-good marketing message. The boards of directors at well-run companies are pushing executive leaders to implement serious long-term sustainability improvements that align their businesses with the expectations of their investors, partners, and customers.

 Alex Saric

More businesses today are therefore assessing their environmental impact and investing in steps to mitigate harm. As one element of this, setting strict standards for clean energy adoption and lower carbon emissions is a real bottom-line concern, like protecting against cyber threats or reducing product liabilities. Companies that fail to meet widely accepted environmental standards will increasingly find themselves outpaced by competitors who prioritize this issue.

As a consequence of this push, executive thinking has evolved greatly over the past decade. According to a report by Accenture and the UN Global Compact, nearly three in four CEOs (72%) agree that they hold responsibility for their companies’ sustainability performances, compared to just 19% in a 2013 survey. And 98% of those surveyed agree that a CEO’s role includes making their business more sustainable, compared to 83% in 2013.

Managing Emissions Across the Extended Supply Chain

A critical aspect of sustainability is greenhouse gas emissions (GHGs), where corporate standards have been set out by the Greenhouse Gas Protocol. The GHG Protocol framework classifies emissions as Scope 1, 2, or 3. Scope 1 emissions encompass any GHGs generated from sources owned or controlled by a company. Scope 2 emissions come from energy consumption, such as from office heating or electricity use. Scope 1 and Scope 2 are the areas where most companies already have strong controls in place to measure and reduce their GHG emissions because they can directly control their in-house processes and systems.

A more difficult challenge involves tracking Scope 3 emissions, which include GHGs produced by external suppliers and customer activities. This area makes up nearly 70% of overall emissions for most companies, according to data by SpendMatters.com. With scope 3 emissions constituting such a large share of total emissions, any serious effort to reduce environmental impact must tackle this source. And with the bulk of those emissions coming from the upstream supply chain, the procurement function has become crucial to help businesses reduce third-party emissions.

Several issues still impede progress. Since the emissions data must come from outside an organization, companies must depend on suppliers and other third parties for information. Many smaller suppliers have difficulty tracking their emissions because they lack the resources to accurately tally emissions from their own manufacturing services, let alone those of their supply chains. In addition, some reporting guidelines have been inconsistent, incomplete, or missing, and many organizations still do not even have a complete view of their own suppliers or what they have purchased from them.

A Holistic Approach to Delivering Meaningful Carbon Emission Reductions

The pendulum is starting to shift from making sustainability pledges to taking concrete steps to truly reduce emissions. While many organizations still struggle to translate words into action, innovative leaders are showing that progress is not just possible but profitable. At most such organizations, procurement and supply chain departments are leading the way, empowered by board or CEO directives.

Here are five steps that supply chain leaders and procurement executives can take to assess and reduce emissions across their supply chains:

1. Gain control of spend and supplier data to understand precisely what you are buying and from whom. As basic as it sounds, too few organizations have a complete view of their spending. Purchases made through a variety of systems or outside of approved systems are a root cause, resulting in data being spread across the organization.

Leaders should drive towards a single source of truth for such data, whether implementing a single system for purchases or adding a data layer that consolidates this data from across the organization. This step provides the foundation for effective transparency into emissions, as well as increasing efficiency by eliminating data siloes and improving cost controls.

2. Baseline your emissions by leveraging third-party category-level data and augmenting it with more accurate estimates provided by suppliers who can generate their own data. A baseline is needed at the supplier and product category level to understand the effectiveness of existing controls and to create a plan of action. Yet measuring aggregate carbon emissions can be hard because many suppliers have difficulty compiling their own emissions totals, let alone those of their extended suppliers.

Suppliers should be asked to submit their emissions data and any gaps filled by reputable sources that can provide good estimates. Independent data is critical for developing estimates for suppliers who are unable or unwilling to provide accurate data on their own carbon emissions. Such data is available through third-party market analyst and research firms.

3. Use the baseline to prioritize efforts, focusing on the largest categories and suppliers. Leaders should build a roadmap toward their emissions targets. To maximize baseline accuracy, focus on identifying the areas that contribute the greatest volume of overall emissions. This will also facilitate driving rapid, step-change improvements. There will likely be significant low hanging fruit early in the process which can lead to large emissions reductions.

Many large companies have made rapid progress on the path to net-zero emissions. Luxury goods maker Moët Hennessy found that Scope 3 emissions made up 93% of its total carbon footprint, so the company created an initiative to extract the liquids from its harvesting processes to be reused and recycled across other operations. Likewise, auto manufacturer Volvo Group is reusing surplus green hydrogen from its steelmaking process to power filling stations and hydrogen-fueled vehicles.

4. Collaboratively define improvement targets with suppliers. Many suppliers will be eager to collaborate as it allows them to build their relationship with their customers while differentiating their products or services. Give suppliers as much flexibility as possible to tap into their own innovative ideas for lowering carbon. Such an approach will often not just lower emissions, but also mitigate or even eliminate any compromises, such as adverse cost impacts. Consider replacing those suppliers that are unwilling to work toward reducing emissions.

It is important to include sub-tier suppliers that make up most organizations’ supplier emissions. Of course, bringing along all those smaller suppliers creates more complexity due to their weaker emissions controls and inability to calculate their carbon outputs.

5. Monitor for progress and areas for improvement. An integrated software platform should become the hub for data-sharing between partners. The platform should include dashboards to help spot trends and make adjustments over time, and ideally also to manage improvement plans. In fact, dependable reporting systems are essential for this entire process. In some cases, the effort requires filling in gaps between inconsistent supplier data and independent data sources. Reporting systems should also be flexible enough to integrate different types of software and data as new information and regulations emerge.

Parting Thoughts

Any business serious about reducing its climate change transition risks and environmental impact must develop and implement a plan to reduce Scope 3 emissions. The problem of containing these emissions is complicated by many inconsistencies across various systems that connect partners, suppliers, and regulators. That is why procurement leaders must collaborate in close partnership with their suppliers to share data, identify where emissions are being produced, and alter processes and products to reduce both emissions and waste. In so doing, organizations can both reduce their transition risks, and cut their budgets for materials and production while steadily increasing profits that flow to the bottom line.

Alex Saric is the chief marketing officer of Ivalua, where he works with companies digitally transforming procurement to better manage their spend and suppliers. He has spent over 20 years in leadership roles at spend management technology providers advocating for sustainable business models through more collaborative supplier relationships. Alex holds a B.S. in Economics from the U.S. Military Academy at West Point and an international M.B.A. from INSEAD.