The Science Based Targets initiative (SBTi) recommends that businesses “use the most ambitious decarbonisation scenarios” that aim for the earliest reductions and least cumulative emissions. Bill Gates advocates the same in the Financial Times, arguing that in the long term, “these risky steps will be good for business” and that “consumers will remember which companies were serious about helping to avoid a climate disaster.”
To preserve their bottom line in the years to come, businesses need to address their supply chains. For some companies, this may be the greatest sustainability challenge they face. But as markets grow in their awareness, maximising the sustainable effectiveness of your suppliers is key to staying competitive with investors, consumers and talent.
This is about the bottom line
In the 2020 CDP Supply Chain Report, 8,000 suppliers reported that over the next five years $1.26tr of revenue is likely to be at risk. This could lead to an increase of $120bn for major buyers due to environmental risks – including climate change, deforestation and water insecurity – in their supply chains.
Looking beyond risks, a clear link to profits can be seen by addressing sustainability on a deeper level. A Harvard Business School study of 180 companies (90 High Sustainability, 90 Low Sustainability) showed that companies that monitored and measured the performance of their suppliers, and had a higher level of transparency in disclosing non-financial information, outperformed other companies on the stock market.
On average, over a period of 18 years, $1 in assets invested in a High Sustainability firm would have grown to $7.1, while the same would have only reached $4.4 in a Low Sustainability firm. Accounting performance showed a similar trend.
Those companies that paid attention not only to external pressures (such as laws) and committed to greater sustainability objectives saw the reward.
The difficulty of dealing with the source
Among these greater sustainability objectives, supply chains can prove the most problematic. They lie outside the direct control of buyer and for this reason some companies like the NatWest Group have chosen to purchase TIST Carbon Credits as an interim solution, counterbalancing their own and suppliers’ emissions through the planting of trees.
Carbon offsetting is an effective measure for the immediate future but even NatWest acknowledges this is only a temporary solution for the carbon they emit “until it can be eliminated at source.”
Although you may not be able to address every issue in your supply chain at once, there are hotspots you can focus on. Some may provide you with quick win opportunities, others may require long term attention.
How to take on the issue
In their discussion paper on overcoming barriers for Scope 3 action (tackling emissions in the value chain outside a company’s direct control), the WWF identifies that cooperation is key. The further down the supply chain your hotspots lie, the more difficult it becomes to address them. By engaging suppliers to set their own Scope 3 targets and to mitigate their own greenhouse gas emissions (GHG) you reduce the complexity for your own company.
In other words, the WWF suggests a domino effect can take place, in which suppliers oblige their suppliers. This is a strategy adopted by Marks & Spencer (M&S). They require their suppliers to complete the Higg Index FEM, both ranking their suppliers and supporting them to improve.
The results are seen in M&S’s Performance Report. It shows a reduction in Scope 3 emissions globally from 92,000 tonnes of CO2e in 2006/7 to 31,000 in 2020/21. This puts them on track to achieve their aim of net zero Scope 3 emissions by 2040.
Taking one sustainability step at a time
Engaging suppliers may look different depending on your sector. A report from the United Nations’ partner Principles for Responsible Investment (PRI) draws attention to Sonnedix, a renewable energy company, who were challenged by JP Morgan to determine which of their module manufacturers had done due diligence, to ensure they do not use conflict minerals.
Initially they analysed conflict mineral use through publically available independent third-party photovoltaic (PV) scorecards. These gave Sonnedix an initial insight into their suppliers and laid the groundwork for future action.
Depending on your suppliers and your industry, it may be more pressing to focus on emissions, human rights issues, or diversity and inclusion. While GHG emissions are one of the most pressing challenges, and the one with the most media attention, ESG and sustainability is about more than this.
Sonnedix’s Modern Slavery Statement outlines how, in 2018, their training programme was expanded to include modern slavery awareness training for all employees. Sonnedix made the number of employees who had received that training a KPI.
Later in 2020, as shown in their 2021 Sustainability Report, they measured their Scope 3 emissions through 20 audits of their contractors and suppliers. As a result of this audit programme they identified a high-risk incident relating to labour rights abuse. After investigation, Sonnedix ceased production with that non-compliant factory and switched to another facility.
Looking to generate systemic change
There are more creative solutions to engaging suppliers too. Anglian Water’s Water Innovation Network invites businesses, organisations and individuals to pitch innovative solutions to sustainability issues in their supply chain. Anglian Water offers expert input to those with promising ideas, and potentially development and funding too.
Their confidence in new supplier initiatives is well-founded. Over 10 years ago, as the PRI report explains, they created a collaborative delivery mechanism for suppliers linking performance with incentives. They reduced embodied carbon by 54% between 2010-15, reduced operational carbon by 41%, and reduced their accident frequency rate. To top it all, this created annual savings for them of 2-3% in capital expenditure over 10 years.
Unilever, on the other hand, works with suppliers through impact programmes, providing income diversification training for cocoa farmers. They also have similar initiatives in place with their suppliers of tea, sugar, soy, vegetables and dairy. Taking an ambitious, leading approach to FMCG, they plan to buy 1.5% of the global production of cocoa, sourcing 100% of it from low-risk deforestation sources by 2023.
As they rightly identify, engaging suppliers is not only about sourcing 100% sustainability but going “further to generate systemic change.” When this commitment is coupled with the right insight, it will mean good things for your bottom line too.
Green Bee’s expert marketplace gives you access to the specific supply chain consultants you need. Whether you’re measuring your Scope 3 emissions, protecting against social or governance risks, or looking to innovate on your supplier engagement model, we can match you with the right experts or build a bespoke team.