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Over recent weeks Procurato has published several articles on practical actions to contribute to your supply chain sustainability strategy. This month we are fortunate to have some external perspective to share, from Melanie Wilneder. Mel is a highly experienced Procurement and Supply Chain expert who has specialised in Sustainability strategies for over nine years. Mel is a Manager of Sustainability Solutions at ENGIE Impact but has written this piece for Procurato in a personal capacity.
Introduction
Even before global political and business leaders went to Glasgow for COP26, the call for reducing emissions and decarbonizing business operations has been growing increasingly louder during recent years. And Supply Chains have always been considered key to achieving a low carbon world, while also remaining a bit of a black box.
Today, there is an understanding among C-Suite executives that corporate emissions reduction targets cannot be arbitrary, like they often used to be.
Since the Science-Based Targets (SBT) Initiative was launched in 2015, more than 1000 companies have committed to keep emissions in line with the global carbon budget and a pathway of global warming below 1.5 C. If the value chain represents more than 40% of their total emissions, they must be included in the target.
What does this mean in general terms?
To stay below 1.5 C of global warming until 2100, we have a carbon budget of 230-440 billion tons of CO2 left that we can burn safely.
It is worth pointing out that the Earth's average surface temperature has already increased by above 1.0°C since the late 1800s when we started burning coal. However, the most recent COP26 pledges take us to 2.4 C, and current policies to the even higher figure of 2.7 C.
The issue is that the increasing extreme weather events we are witnessing and that are proven to be exacerbated by climate change, along with the health impacts of burning fossil fuels, have cost the U.S. economy at least US $240 billion per annum during the last decade[1]. These costs are only going to continue to grow to cost more than the investment required to transition to a low carbon economy. In the process, business continuity is affected as we are already seeing with global supply chains whenever there is another severe weather event.
Among financial service companies, it is the insurance sector that has already understood this for a long time from a risk underwriting perspective.
But what do global carbon budgets and temperature targets mean for businesses and their supply chains?
Going back to the total global carbon budget of 230 – 440 billion tons that we can still burn to stay below 1.5 C, we can consider what different companies are emitting today.
An oil and gas company like BP burnt 374 million tons in 2020 alone. While global Services Firms like HSBC bank and big 4 EY report comparatively lower emissions above and below 400,000 tons respectively, the emissions of all service firms add up, and there is one factor companies have in common across most industry sectors: value chain emissions by far exceed own operational emissions, and this is where collective action across purchasing and commercial functions can make a difference in driving decarbonization towards the 1.5 C target – by directly and indirectly cutting demand for fossil fuels.
In 2020, British NGO CDP (formerly the Carbon Disclosure Project) found that supplier emissions are on average 11.4 times higher than operational emissions. This means that all companies can work with their suppliers to reduce emissions, and actively incorporating ‘low carbon’ and emissions reporting and reduction requirement all the way through the supplier lifecycle creates a positive ripple effect across industry sectors.
To return to the insurance sector that already understands global warming as a commercial risk to their core business, paying out insurance claims in form of preferred supplier agreements with repair and replacement providers is one area where they can actively request their partners to lower emissions.
In the Indirect area, the spend categories of insurers are similar to other service firms. Corporate offices, businesses and electricity for own operations and outsourced digital services are key hotspots for emissions to focus on for supplier engagement on emissions reductions.
Enterprise Software Suites for Sustainability Reporting and ESG Metrics allow sustainability professionals to report own emissions in collaboration with requesting procurement and suppliers to contribute their data. This is critical to transition from reporting to action. As higher spend is usually linked to higher emissions, the effort should be proportional and focus on the larger, more strategic suppliers
In addition to the above-mentioned Science-Based Targets Initiative, commitments for, as an example, renewable energy are already outstripping supply.
While originally seen as a quick win in particular for service firms, where electricity represents a large part of total emissions in absence of fossil-fuel heavy production, global firms find that in some countries of operation there is not enough renewable electricity supply available.
This sends a clear positive signal to electric utilities, which are also facing divestment from their investors and insurers refusing to underwrite their fossil fuel divisions.
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Now how to implement meaningful action across standard procurement and SRM?
At the end of the day, carbon emissions must be understood as another externality to be incorporated into Total Cost of Ownership (TCO). This can quite literally mean adopting a price on carbon across the entire organization and having standardized emissions factors for major emissions categories at hand. Supplier spend can be multiplied with their respective category-level emissions factors, e.g., ‘IT equipment’, motor repair parts purchase, or long and short haul business flights, giving us at least an estimation of emissions associated with purchases. This can then be multiplied with a price on carbon to include into TCO models, enabling better conversations with finance and preparing for the increasing risk of carbon taxes. In a forward-looking way, we can also convert spend budgets by category into emissions with the right emissions factor and start engaging with suppliers throughout the tender process upfront. Multi-national, larger suppliers that are stock market listed are likely have a level of maturity that will allow for engagement on emissions during the tender process and during the delivery of goods and services. Smaller, less mature but essential key suppliers will require more patience and a different approach. Here it is worth sharing examples of a company’s own journey towards reporting emissions and setting reduction targets, as well as case studies from working with other suppliers to illustrate that this is becoming common practice. Mature suppliers can be evaluated on emissions performance as part of an updated scorecard. A smaller supplier can agree to start measuring their own emissions during their first year of providing goods and services, and might find it useful to be able to start reporting to all their clients. In general, supplier emissions reporting and decarbonization targets are considered precompetitive as they contribute to the reduction of the global business risk that is global warming. Essentially, every year that we delay action, we are increasing the cost of adaptation and mitigation, which will fall on all companies in one way or another. Engaging with suppliers on emissions can and should be integrated with existing procurement governance, policy, and processes to be as smooth as possible. Category Leads can engage with their colleagues in Sustainability on an annual basis to include high-level emissions reduction targets across purchasing hotspots into category strategies. Buyers and SRM can lead supplier engagement as part of their BAU, thereby contributing to keeping us on track to limiting global warming to 1.5 C and meeting our carbon budget in addition to our financial budget.
The Procurato Perspective
Although companies have been focused on the qualitative side of sustainability through their Corporate Social Responsibility (CSR) agendas for many years, it has taken the recent heightening of awareness of the burning platform around ESG to translate those agendas into strategic actions and measurable outcomes. As Melanie clearly outlines above, and as we saw from the outcomes of COP26, we are still a fair way off a clear path to 1.5 C ceiling we need to come below. Our view is that Financial Services supply chains need to move quickly beyond where they have been before (predominantly offsetting emissions in the supply chain) into genuine reduction strategies. In addition, the early winners are likely to be those who can then translate those actions into evidence-based reporting which, in turn, will convertible into shareholder value through colleague and customer engagement. Senior Executives need to see the swift adoption of an ESG Supply Chain strategy as a fundamental pillar in the next five years’ strategic planning. Moreover, to genuinely have an impact that can be evidenced, companies will need to resist the temptation to simply pass down the requirement to their suppliers in expectation of delivery at no cost. To sustainably embed and achieve the goals that are expected will require investment as well as engagement, both with suppliers and customers. From our current discussions in the Insurance Sector, it seems certain that a strategy of delivering some quick wins in 2022, whilst putting in place the longer-term actions needed to reshape supply chains, will start to emerge quickly from Insurers who have already grasped the nettle at the top table. As the COP26 Twitter feed simply summarised the situation, “Now is the time”[2].
If you would like to follow up on the points in this piece or discuss how to accelerate ESG in your supply chain, get in touch.
Sources
Science and COP26 – related Science-Based Targets Initiative https://sciencebasedtargets.org/companies-taking-action Carbon Brief https://www.carbonbrief.org/guest-post-refining-the-remaining-1-5c-carbon-budget https://www.carbonbrief.org/analysis-do-cop26-promises-keep-global-warming-below-2c CNN https://edition.cnn.com/2021/11/09/world/cop26-pledges-climate-change-analysis/index.html COST OF CLIMATE CHANGE Michigan Journal of Economics https://sites.lsa.umich.edu/mje/2021/03/13/the-rising-costs-of-global-warming/ Yale Environment 360 https://e360.yale.edu/features/calculating_the_true_cost_of_global_climate_change CORPORATE EMISSIONS EXAMPLES CDP https://www.cdp.net/en/articles/media/new-report-shows-just-100-companies-are-source-of-over-70-of-emissions https://www.cdp.net/en/research/global-reports/transparency-to-transformation Reuters https://www.reuters.com/article/us-bp-emissions-idUSKBN2BE2DN HSBC https://www.hsbc.com/who-we-are/esg-and-responsible-business/esg-reporting-centre EY https://www.ey.com/en_gl/news/2021/01/ey-announces-ambition-to-be-carbon-negative-in-2021 [1] https://www.theenergymix.com/2017/10/01/u-s-paid-240-to-270-billion-per-year-for-climate-impacts-in-the-last-decade/ and https://www.nationalgeographic.com/science/article/climate-change-costs-us-economy-billions-report [2] https://twitter.com/COP26/status/1463039615229698051