In the aftermath of COP26, many companies pledged to reduce carbon emissions. Many too overlooked the importance of tackling their supply chains. Frederik Dahlmann, Professor of Strategy and Sustainability at Warwick Business School, explores how they can set this right.
How Can Supply Chain Emissions Be Reduced? by Frederik Dahlmann. With kind acknowledgements to COREInsights at Warwick Business School. Related research: Dahlmann, F., Stubbs, W., Griggs, D. and Morrell, K. (2019) “Corporate actors, the UN sustainable development goals and earth system governance : a research agenda“, Anthropocene Review, 6, 1-2, 167-176; Dahlmann, F. and Röhrich, J. K. (2019) “Sustainable supply chain management and partner engagement to manage climate change information“, Business Strategy and the Environment.
COP26 has sparked many companies into announcing plans to reduce their carbon emissions, but what many are not doing is including their supply chain.
This is bad news for the environment, as supply chains contribute significantly to a firm’s carbon footprint and can amount to as much as four times the organisation’s own operational emissions. In fact, the Carbon Disclosure Project (CDP) – a charity running the global disclosure system on carbon emissions for investors and other interested parties – found just 36 per cent of companies responding to its annual survey are engaging with their suppliers.
This is disturbing on two fronts. More and more regulators around the world now require publicly listed companies to include measurements of their greenhouse gas (GHG) emissions in their annual reports, including the UK, which introduced ‘streamlined energy and carbon reporting’ in 2019, and this includes supply chains.
Moreover, it is increasingly important firms engage with their supply chain on working collectively to reduce carbon emissions. COP26 has highlighted the urgency for action to reduce the impact of rising global temperatures and climate change, with campaigners like Greta Thunberg and public pressure building on firms to not just use their carbon reduction action as good PR, but to lead society in the move towards a sustainable future.
Talk to your supply chain
By analysing the CDP annual survey from 2014 to 2017, my research partner Jens Roehrich, of the University of Bath, and I found 1,686 listed companies from all over the world that are actively collecting environmental data and engaging with their supply chain – and that refers to customers and suppliers. Indeed, of those, 28 per cent only engage with their customers and 21 per cent just with their suppliers, while the rest talk to both ends of the chain.
Although two thirds of firms are not doing any of this, we can at least see that engaging with your supply chain is on the rise, with the number of firms talking to some or all of their supply chain increasing by 57 per cent in the three years we looked at.
We were able to categorise the firms into three levels of activity with their supply chain – basic, transactional and collaborative. And it is at the collaborative stage where we see the most comprehensive approach to managing supply chain partners and customers.
First steps for firms
The basic level sees companies typically send their suppliers a survey to fill in on their emissions. US software firm Symantec produces an annual report on its suppliers’ GHG emissions, while Bank of America has done a CDP supply chain survey since 2009.
This is the first step for a comprehensive carbon reduction plan, measuring and collating data. Perhaps tellingly, responses from firms engaging in only basic engagement were relatively shorter in length and qualitatively less detailed.
More advanced firms, at the transactional and collaborative levels, are using that data for more productive means. At the transactional level firms are calculating their carbon footprint and identifying opportunities for improvements. Those with more experience in this area are then using the data to provide their supply chain with targets and incentives.
Virgin Atlantic Airways, for example, aims for reductions in emissions from its supply chain each year, while nuclear power firm Exelon sets goals for its suppliers to reduce energy usage and GHG emissions.
How to use data to reduce greenhouse gas emissions
This data is also being used to develop ‘key performance indicators’ that can be utilised to select a supplier or worked into contracts to assess a supplier’s performance. They can then send warnings to companies who are not hitting the required performance levels and demand improvements, so the emissions data is becoming part of their selection criteria for suppliers.
For instance, pharma giant Pfizer reported that the aim of its data collection is “to provide benchmarking to suppliers regarding their GHG emission reduction and water conservation programmes, in order to identify sustainability improvement opportunities”.
At the collaborative level, though, firms are working with their suppliers to develop shared goals and values around sustainability. This means more meetings, seminars on best practice, phone calls, emails and even the establishment of online discussion groups as firms and suppliers build mutually beneficial relationships designed to develop innovations to reduce their carbon footprint as well as encourage greener products and services.
And the discussions and information is built into supportive supplier training and development courses, briefings, summits and even award ceremonies to identify joint development and innovation projects.
Food multinational Kellogg’s has built a Sustainability Consortium with its supply chain to “drive scientific research and the development of standards and information technology tools to enhance the ability to understand and address the environmental, social and economic implications of products”. And InterContinental Hotels Group is working with the International Tourism Partnership to reduce the environmental impact of the cotton used in its bed linen.
All part of a system
Firms at the collaborative level also seek to engage customers and consumers, persuading them through marketing and PR of the benefits of new, greener products and how to use them in a way that is less harmful on the environment.
In the B2B sphere two-way engagement with customers is used, with a more proactive and strategic approach on show. Chemicals giant Ecolab partners with its customers to reduce their energy demands and GHG emissions through innovations.
There are also partnerships with industry associations and university research teams, with French hospitality firm Sodexo funding a Professor of Sustainable Sourcing at the Euromed School of Management in Marseilles.
We found that some firms are able to employ transactional and collaborative modes of engagement simultaneously with different suppliers and customers.
If firms are having to report all their emissions, from the supply chain to the customer, then what each one does affects the other, which makes the collaborative approach increasingly important. Companies need to understand that they are all part of a system that has to work together, rather than use it as another supply chain management tool.
How supply chains need to work as a system to reduce emissions
When you look at the life cycle of a product, such as a plastic travel mug, there are the raw materials – which needed energy in order to be extracted – while more energy is used in the production. Then at the end of the mug’s life, what happens to it? Does it end up in a landfill site? Should that be included in the measurement of each company’s carbon footprint and how is that measured? Working with the whole supply chain, both customers and suppliers, will help solve these problems and ultimately bring down emissions for all firms along the value chain.
To do it across the whole value chain can be incredibly complex for a company like Walmart and the amount of data involved is probably why we are seeing tech companies leading the way in reducing their carbon footprint. Their data analytics skills mean it is natural for them to not only collate data but to put it to good use and work up and down the supply chain.
Their experience of handling and managing data also means they see this trend and increasing requirement to record and measure emissions for companies as an opportunity. If they figure out and produce a comprehensive software package that does all this effectively, they can then sell that platform to other firms looking to manage their whole carbon footprint. Verizon, for example, now sees its Internet of Things products, designed to reduce carbon emissions, as “providing significant revenue opportunities”.
It is clear, with the youth of today engaged as never before in the climate change political battle, that sustainability will be the issue of this generation. If businesses are to prosper in this climate they need to include their whole supply chain to claim they are truly on the planet’s side and not be accused of creative carbon accounting.
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