• Economic Research
  • Responsible Investing
  • Environmental Sustainability

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.

Want more content like this?

Sign up to receive our AIQ thought leadership content.

Please enable javascript in your browser in order to see this content.

I acknowledge that I qualify as a professional client or institutional/qualified investor. By submitting these details, I confirm that I would like to receive thought leadership email updates from Aviva Investors, in addition to any other email subscription I may have with Aviva Investors. You can unsubscribe or tailor your email preferences at any time.

For more information, please visit our privacy notice.

Related views

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe, this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK, this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL) for distribution to institutional investors only. Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 138 Market Street, #05-01 CapitaGreen, Singapore 048946.

In Australia, this material is being circulated by way of an arrangement with Aviva Investors Pacific Pty Ltd (AIPPL) for distribution to wholesale investors only. Please note that AIPPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIPPL in respect of any matters arising from, or in connection with, this material. AIPPL, a company incorporated under the laws of Australia with Australian Business No. 87 153 200 278 and Australian Company No. 153 200 278, holds an Australian Financial Services License (AFSL 411458) issued by the Australian Securities and Investments Commission. Business address: Level 27, 101 Collins Street, Melbourne, VIC 3000, Australia.

The name “Aviva Investors” as used in this material refers to the global organization of affiliated asset management businesses operating under the Aviva Investors name. Each Aviva investors’ affiliate is a subsidiary of Aviva plc, a publicly- traded multi-national financial services company headquartered in the United Kingdom.

Aviva Investors Canada, Inc. (“AIC”) is located in Toronto and is based within the North American region of the global organization of affiliated asset management businesses operating under the Aviva Investors name. AIC is registered with the Ontario Securities Commission as a commodity trading manager, exempt market dealer, portfolio manager and investment fund manager. AIC is also registered as an exempt market dealer and portfolio manager in each province of Canada and may also be registered as an investment fund manager in certain other applicable provinces.

Aviva Investors Americas LLC is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aviva Investors Americas is also a commodity trading advisor (“CTA”) registered with the Commodity Futures Trading Commission (“CFTC”) and is a member of the National Futures Association (“NFA”). AIA’s Form ADV Part 2A, which provides background information about the firm and its business practices, is available upon written request to: Compliance Department, 225 West Wacker Drive, Suite 2250, Chicago, IL 60606.