by Rachel Delacour, CEO of Sweep
The volatility of global supply chains has become the norm, with ongoing instability impacted by the Russian-Ukraine war, climate change, and the combined fallout of the pandemic and Brexit. With so much uncertainty now and yet to come, it is essential that businesses make smart procurement decisions when it comes to their suppliers. Gaining strong visibility over suppliers’ emissions, which make up around two-thirds of an average company’s carbon emissions, is a key part of the puzzle. With an incoming wave of global climate regulations, failure to understand supply chain emissions will expose businesses to reputational damage and non-compliance penalty charges. By contrast, businesses who get a grip on their suppliers’ carbon footprints will be able to make the best decisions for their overall carbon reduction strategies and meet regulations head on, protecting their bottom line at a time when it is severely under threat.
Scope 3 emissions, many of which stem from the supply chain, account for more than 70% of a company’s emissions and need to be effectively measured and managed if companies want to achieve climate targets. These notoriously hard-to-measure emissions are indirect greenhouse gas emissions that come from sources not directly controlled by a company but are still a result of its products or services sold. Understanding and managing these emissions is a vital part of every company’s sustainability efforts and can futureproof companies from a number of potential risks, as well as providing them with several benefits.
According to the World Economic Forum, over 50% of the world’s carbon emissions come from only eight supply chains: food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services, and freight. Tackling emissions across these industries will therefore significantly help the world achieve its goal under The Paris Agreement of limiting climate change to 1.5 C above pre-industrial levels.
One of the notable benefits for companies that understand and effectively track their carbon data is the relative ease in which they can identify carbon hotspots across their supply chain. This makes it easier for companies to introduce plans to improve energy efficiency in key areas, reducing both costs and emissions.
Carbon accounting can also help companies determine which suppliers are committed to taking action on climate change, allowing businesses to take coordinated action with their suppliers towards joint climate goals. In an age where consumers are becoming increasingly conscious of sustainability and brands’ action – or inaction – being able to demonstrate sustainability in business purchasing decisions can help prevent greenwashing accusations and sustain a company’s reputation.
Effective carbon management across supply chains also allows companies to futureproof their operations against incoming regulations, which are already coming into force in several parts of the world. Germany’s Supply Chain Due Dilligence Act, for example, became operational in January this year and is the first law which prohibits German companies from acts of environmental degradation across global supply chains, with non-compliance resulting in fines of up to €8 million. Similarly, the EU’s Corporate Sustainability Due Dilligence Directive will require large companies and SMEs across Europe to identify “adverse environmental impacts” along their supply chain and put pressure on their suppliers to meet net zero. Those who do not comply will be hit with reputational damage and non-compliance fees.
The UK requires large companies to report on their climate-related risks under the Taskforce on Climate-related Financial Disclosures (TCFD) framework, and in Canada, large suppliers to the government will be compelled to disclose their GHG emissions as soon as April 1st this year. These regulations are just the tip of the iceberg, and companies need to brace themselves for an avalanche of further supply chain and climate related regulations in the near future.
As well as helping to anticipate potential risks, companies with a strong grasp of their supply chain emissions will be better placed to transition to a low carbon economy and gain a competitive edge in their industry. These companies, for example, will be much better prepared for the EU’s Carbon Border Adjustment Mechanism (CBAM). This aims to put a fair price on the carbon emitted during the production of carbon intensive goods that enter the EU, meaning that companies with lower carbon emissions will benefit from reduced costs compared to competitors.
A strong understanding of supply chain emissions is a key starting point for businesses trying to decarbonise, providing companies with a springboard for taking climate action and transitioning to a low carbon future. It is essential that companies realise that accurately measuring and reducing their supply chain emissions is no longer a moral decision, but a necessity compounded by consumer demand and government regulation. It is also a way for businesses to gain a competitive advantage and protect their bottom line from an increasingly unstable market.