One of the promising outcomes of the challenging year of 2020 was that for the first time since World War II, greenhouse gas emissions have fallen globally. However, this was due to nothing more than radically shrinking demand in wake of the pandemic. Companies still need to find ways to reduce their emissions in a sustainable way to play their part in the fight against climate change.
Supply chain emissions were long-time neglected as companies focused primarily on reducing the emissions of their production units and offices or optimising the electricity and heat purchased. Meanwhile, supply chain emissions of most companies far exceed their direct emissions from manufacturing.
A recent study of the World Economic Forum and BCG showed that it is possible to decarbonise major global supply chains with readily available technologies at low end-to-end costs.
By moving towards “net zero” supply chains – achieving a balance between the carbon emitted into the atmosphere, and the carbon removed from it – companies can play a significant role in the fight against climate change.
The report analysed the top eight global supply chains (food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services, and freight) that account for more than 50 per cent of global greenhouse gas emissions and finds that end-to-end decarbonisation of these supply chains would add as little as 1 per cent to 4 per cent to end-consumer costs in the medium term.
Decarbonisation is an extremely complex and very costly task for producers of carbon-intensive raw materials or logistics companies and individual suppliers cannot cope with it themselves. However, if we look at the entire value chain, the task is easier to solve.
The carbon-intensive raw materials content of most end-products is already low enough to cost-effectively reduce the carbon footprint of the final product.
For example, while it costs a steel producer significantly more to make zero-carbon steel, raw input materials like steel account for such a low proportion of end-consumer prices that a zero-carbon car is only about 2 per cent more expensive for the buyer in the medium term.
The question arises, if decarbonisation of supply chains is the key to the fight against climate change, then why are most companies not addressing it today? The answer is obvious: this is an extremely complex problem.
First of all, even leading companies struggle to get the data they need and set clear targets and standards to which their suppliers must adhere. Engaging an often-fragmented supplier landscape is challenging – especially when emissions are “buried” deep in the supply chain, or when addressing them might require collective action at the industry level. Even if they manage to create the necessary transparency, it is not clear how to proceed.
In addition to the knowledge and transfer of abatement technologies, close cooperation with suppliers, joint projects, continuous monitoring and longer-term partnerships are also necessary. Most companies are simply not ready for this.
Fortunately, we believe these difficulties can be overcome and we set out five pillars to efficiently decarbonise supply chains.
Create transparency: transparency throughout the supply chain needs to be improved. Data collection is essential for setting and publishing emission targets.
Optimise for CO2: based on emissions data, the products’ entire life cycle should be reviewed to minimize the carbon footprint, for example by shortening supply chains and increasing recycling.
Impose emission standards: supplies must be involved and new evaluation criteria must be set to avoid lower-emission suppliers being disadvantaged in the face of intense price competition. Setting procurement standards for suppliers is one of the most powerful direct levers to address upstream emissions.
Extensive industry collaboration: the introduction of emission standards or the development of assessment systems to encourage suppliers to be carbon neutral are impacting the industry as a whole. Frontrunner companies can now shape the directions, while the latecomers will only have the chance to adapt.
Enabling the organisation: The new approach requires a comprehensive change in corporate decision-making. Companies must be prepared to align incentives internally to ensure that decision-makers focus on lowering emissions.
Decarbonisation of supply chains offers a huge, so far untapped opportunity for companies to fight climate change.
Companies need to review the cornerstones of their operations: how do they design and manufacture their products, how do they select their suppliers, and how do they make their decisions? Most importantly, all of this can and should be done at an affordable price and with minimal end-user price increases.
The coronavirus pandemic provides the perfect opportunity for companies to review and redesign their supply chains and to begin working with their suppliers to reduce emissions. Now is the time to act!