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Supply chain strategies for ESG compliance

supply chain

Supply chains generate around 60 per cent of all global carbon emissions and can represent 98 per cent of an organization’s CO2 emissions but ESG reporting can be challenging due to complexity of global supply chains and the lack of transparency in data. Nick Gibson spoke to a range of industry professionals to explore supply chain issues and strategies to address Scope 3 reporting.

With supply chain emissions being on average over 11 times higher than operational emissions, tackling the climate crisis requires a transition to both carbon-neutral production and carbon-neutral value chains. But research by The Sustainability Consortium found that less than one-fifth of 1,700 respondents had a comprehensive view of their supply chains’ sustainability performance. More than half were unable to determine sustainability issues in their supply chains and of those that report CO2 emissions to CDP only 25 per cent said they engaged their suppliers in efforts to reduce emissions.

“There’s a huge range of challenges partly because for many people it’s a new area of understanding procurement and supply chain, says Edward Cox, sustainability leader at Efficio. “There are new themes we’ve had to address and deal with, and sustainability is now a key issue for procurement teams. The challenges include poor data. Supply chain teams and functions have to operate on good data and without that it’s hard to make decisions and prioritise where to focus time and effort.”

Muirhead manufacture and supply high quality leather to the aviation and automotive industries and first addressed supply chain issues in 2001 and now have a 100 per cent circular manufacturing operation. “We started our lifecycle analysis journey many years ago; we’re one of the pioneers, says Dr Warren Bowden, head of sustainability and innovation at Muirhead.

“We have a product lifecycle analysis that captures data from our supply chain. Our LCA transport internal is next to nothing because everything is done in-house. Lifecycle analysis helps quantify the environmental impact of our activities, verify our supply chains and back up sustainability claims with rigorous analysis. It covers the environmental impacts of the entire life cycle of a product; including influence of upstream farming, manufacturing process, distribution, transportation and end-of-life disposal.”

According to the ISO-accredited analysis, Muirhead’s 8kg CO2e/m2 LCA is currently lowest in the world for genuine leather. “What infuriates me is when I see the lifecycle analysis for some synthetic materials,” adds Bowden. “They may have relatively low impact but you have to replace them often, compared to something which is made once and lasts a lifetime. Once people start to understand the impact of such things I think we’ll start to see real change.”

Competing priorities add to complexity

Supply chain complexity is increased by multi-tiered structures and competing priorities within an organisation, Cox observes. “We’re starting to understand our first tier within the supply chain in more detail but understanding the second tier and third tier can be very difficult. And that’s often where some of the main issues and impacts occur. There can be conflicting priorities as procurement is a cost led function, supply chains feed products to be bought cheaply and efficiently to meet a service level so cost is still king and ESG has not been high on the list of priorities.

“Another challenge is lack of planning and joined-up thinking. While people are setting targets and thinking about a plan which may take five or ten years to deliver the current challenges remain a priority for supply chain teams. ESG has been typically focused internally on business operations, travel and buildings. Now it’s rapidly dawning on people that to make an impact, reduce carbon and reduce waste they have to address their supply chain. But getting everyone to work together can be like herding cats because a company could have 5000 suppliers.”

By 2050, consumer-packaged goods companies will have to reduce their greenhouse gas emissions by 92 per cent relative to revenues. According to CDP’s 2020 Supply Chain: Changing the Chain report one gigaton of emissions could potentially be saved if suppliers to just 125 multinationals were to increase their renewables purchasing by 20 per cent.

Freight can be the largest source of emissions in a supply chain and action is this area can make a major contribution to reducing emissions. Research by Forbes found that shipping containers sailing from Asia are 24 per cent empty and every year 61 million TEUs of containers are shipped unnecessarily, emitting around 122 million tons of CO2.  Air transport is less common than ocean freight but produces a higher carbon footprint. Heavy goods vehicles represent 18 per cent of road transport emissions (19.5 MtCO2e) and vans 17 per cent of emissions (19 MtCO2e). Supply chain product and transport lifecycle analysis has seen some companies reduce emissions by over 90 per cent.

Standardised supply chain reporting

“Reporting requirements are a mess because the data capture seems to be done differently in every sector and is reported differently even within the same sectors,” says Bowen. “We’ve backed lifecycle analysis because it is clear and transparent. It’s complex but once you have it, it’s very transferable. And you can do that on a sector by sector or product by product basis. And it delivers genuine transparency of what is included and what isn’t.”

Cox also believes that reporting regulation should be improved. “International data standards that support carbon accounting reporting, GHG Protocol, CDP and science based targets, etc, are all great initiatives but perhaps we need a more centralised system. Some private companies are trying to create a critical mass of data so instead of businesses individually asking suppliers for information and auditing that, you do it once and share the information and it’s audited by a third party.”

A range of carbon taxes could accelerate the move to supply chain sustainability, Bowden believes. “If every part of a supply chain has some kind of carbon tax liability it will naturally drive all of the supply chain to becoming lower carbon because nobody wants to pay more in carbon taxes for products,” says Bowen. “A lot of companies now want to be carbon neutral to avoid a carbon tax. They’ll be keen to offset their supply chains. And at that point, being a supplier of a low carbon scope one and two product means their carbon liability is low. It makes your product more attractive even if it may cost more to buy.  Once people embrace the change the benefits will cascade through the supply chain.”

ESG strategies create real business value

Complying with new supply chain regulation will require finance, time and additional resources but the change will create visible business value. Seventy per cent of respondents in a recent Workiva survey said their organization’s ESG reporting has already reduced long-term risk (71 per cent), generated cost savings (71 per cent) and positive impact across customer retention and recruitment (72 per cent). The majority also said that ESG reporting had improved employee morale (71 per cent), employee recruitment (69 per cent) and investor and stakeholder relationships (70 per cent). “While challenges around communicating ESG corporate value still exist, the findings show clear positive outcomes for businesses that prioritise ESG reporting,” says Julie Iskow, CEO at Workiva.

Manufacturing and production sectors represent 16 per cent of global GDP, consume 54 per cent of worldwide energy sources and are responsible for one-fifth of global carbon emissions. Their supply chains create an even bigger environmental problem and industry professionals agree that direct action is needed now.

“Organisations can start by looking at their internal skills and experience to develop a clear ESG strategy that aligns with business targets, says Cox. “It’s important that everyone’s pulling together in a cross functional way. Then you need to invest in team training to understand new processes. It doesn’t have to be complex but teams need to think in a different way. People are not being incentivised to deliver against ESG in the same way they are for on time delivery or cost reduction so there needs to be a push and pull from leadership and from within supply chain teams themselves to achieve set targets.”

While companies address the practical challenges involved in supply chain operation, reporting issues continue to frustrate those with a clear strategy. “We’ve spent a lot of time recently trying to get our ESG data onto the S.B.T. platform calculator but it doesn’t work. There are all kinds of complexities and ambiguity which is a shame because we all want to report correctly but we need a level playing field. Right now it feels like a game of chicken – and I don’t want to be the last one touching the headlights!”

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