AIQ: Cleaning up capitalism

Supply-chain ripples

The positive spillovers of decarbonising upstream emissions

The world’s biggest companies are setting ambitious net-zero targets, with significant implications for their supply chains.

Anyone who has stood by a calm lake may have been tempted to throw in a pebble and watch as the soothing wavelets ripple outward in perfect circles from where the pebble broke the surface.

This image is often used in macroeconomics to talk about the multiplier effect, and nowhere is this more apt than in the role large companies can play to achieve net-zero emissions by influencing their supply chains.

Recent Boston Consulting Group (BCG) analysis shows that Western economies continue to import high volumes of emissions, especially from Asia. This means a small number of companies can reduce emissions in developing economies by engaging with their suppliers; as the effects ripple throughout supply chains, the chances of reaching net-zero by 2050 increases significantly.1

Just eight sectors emit more than half the world’s greenhouse gases (see Figure 1), and in most of them over 80 per cent of emissions are in the upstream supply chains rather than under the control of the end-consumer companies.

Figure 1: Eight sectors are responsible for more than 50 per cent of global emissions
Eight sectors are responsible for more than 50 per cent of global emissions
Note: Only selected value chain steps are shown here; value chain steps not shown at scale; FMCG = fast-moving consumer goods.
Source: BCG, as of January 2021

It could be argued decarbonisation should be the responsibility of firms across the supply chain. However, end-consumer companies have more clout to trigger ripple effects and greater financial means than their suppliers. If they redesigned procurement processes and supplier relationships to incentivise low-carbon practices, they could transform the global economy.2

“A major food retailer’s carbon footprint from transport accounts for approximately a third of its overall emissions,” explains Julie Zhuang, global equities portfolio manager at Aviva Investors. “If it can electrify its truck fleet, that is an obvious win in getting closer to net zero.

“For companies like Union Pacific Rail, seeing firms making zero-carbon pledges is a good incentive for them to encourage a switch of some truck transport to rail. Activities like transportation are good examples of going down the supply chain and finding that ripple effect.”

However, several obstacles stand in the way.

Dam busting: The challenges to a ripple effect

Consumer companies have complex supply chains. Their direct suppliers (tier one) often subcontract portions of large orders to other firms or through purchasing agents. Consumer companies typically have no contact with tier-two or tier-three suppliers, giving them little access to data on the emissions of their suppliers’ suppliers. Until consumer companies identify the sustainability problems in their supply chains, they cannot begin to work with their suppliers on solving those issues.3

Direct suppliers may be reluctant to act and anxious about potential costs and the investment required

In addition, even direct suppliers may be reluctant to act. For heavy industry or freight transport companies, undertaking decarbonisation efforts without long-term offtake commitments from their customers presents a significant investment and technology risk. In agriculture, farmers may need to invest upfront and “rest” their land before they can manage crops sustainably. Without guarantees customers will pay more for their produce, or that they will be paid for the carbon they sequester, this can be daunting.

The lack of policy support or sector-level targets from industry bodies can also make the hurdle appear unnecessarily steep, particularly for first movers.4 Yet data, relevant incentives and collective action can help remove those barriers.

Figure 2. Barriers to reducing upstream emissions
Source: BCG, interviews with 40 climate-leading CEOs and their teams, Q3-Q4 2020
Barriers to reducing upstream emissions

Multiply the pebbles, multiply the ripples

Collecting and analysing supplier data can help companies and their suppliers gain visibility over the entire supply chain and enable tier-one suppliers to audit and manage their own suppliers. Good data can also help firms evaluate product roadmaps, to ensure new products are future proofed.5

Setting procurement standards for suppliers is not sufficient in and of itself

Setting procurement standards for suppliers can then become one of the most powerful direct levers. However, it is not sufficient in and of itself. Decarbonising supply chains will often require sustained collaboration.

Incentives and rewards for suppliers’ decarbonisation efforts are also needed, such as improved payment terms, supporting suppliers to buy renewable energy through power purchase agreements, co-investments, or offtake agreements to share the risk of innovations, especially where these require significant upfront investments.6

Joint initiatives include the Mission Possible Partnership7 for harder to abate sectors, the Sustainable Apparel Coalition8, the Supply Chain Sustainability School9, which funds the development of skills within the construction sector, and the CDP Supply Chain programme.

Companies need to align all these initiatives to their own internal targets

Finally, companies need to align all these initiatives to their own internal targets, embed them into their purchasing strategy and ensure targets are adequately cascaded across the organisation.

Peer pressure, consolidated disclosure and transparency and net-zero commitments should combine to create ripples throughout supply chains. Acting as large pebbles, the seemingly calm lake of business activity could well be transformed into swirl of choppy but ultimately positive change.

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