How to Better Manage Supply Chain Climate Risks

Supply chains are responsible for up to four times the greenhouse gas emissions of a company’s direct operations and yet half of major companies’ key suppliers don’t provide requested climate data to their corporate customers, according to a study produced by CDP and written in partnership with BSR.

The report also gives examples of ways companies can encourage supplier performance. It says L’Oréal works with CDP to create supplier climate scorecards that can be easily understood in the purchasing department.

Additionally, Coca-Cola and Lego Group are both experimenting with incentives and training for suppliers that aim to improve climate performance. Coca-Cola, for example, encourages suppliers to implement sustainable agricultural practices, reduce material used in packaging, and reduce the carbon footprint of vending machines. Lego Group LEGO Group is hosting “innovation camps” that the report says not only identify projects to reduce CO2 emissions, they also strengthen partnerships with suppliers.

“Companies face a variety business risks as a result of climate change,” lead author and BSR associate director Marshall Chase told Environmental Leader. “Some of the most significant — such as regulatory impacts on the cost or availability of materials and energy, or business continuity of suppliers during extreme weather events — are supply chain risks. This report demonstrates that companies can work with their suppliers to understand and manage these risks.”

BSR and CDP say the study is the largest ever study of climate data from suppliers and their corporate customers. It follows COP21, at which major companies including Dell, Unilever and Walmart committed to reducing their own emissions and 195 countries reached a historic climate deal to reduce GHGs to net zero well before the end of the century.

Other findings include:

• 72 percent say climate change presents risks that could significantly impact their business operations, revenue or expenditure.
• 64 percent of suppliers specifically identify climate regulation as a risk, with the most commonly cited consequences being fuel, energy and carbon taxes.
• Despite the high perception of climate related risk, less than half (45 percent) of the participating suppliers have set a target to reduce their emissions and only 34 percent have lowered their GHGs in the past reporting year.

Benefits of Disclosure

Some 75 multinationals work with CDP (formerly Climate Disclosure Project) to seek data from 7,879 key suppliers on their carbon emissions and climate risk strategies. According to the new report, companies received information from 4,005 suppliers — meaning 49 percent failed to fulfill their customers’ requests.

“It makes perfect sense for suppliers and their customers to work together to overcome the shared challenges of climate change,” report author Dexter Galvin, head of CDP’s supply chain program, told Environmental Leader. “Building climate resilience elicits co-benefits.

“In the space of just one year, 3.5 million tons of carbon savings have been achieved expressly by the purchasers that use CDP to create sustainable supply chains engaging with their suppliers. Now we are seeing a greater appetite for collaboration both up and down stream.”

Companies that work with CDP are better able to manage risk — and see financial benefits from climate performance disclosure. Around three quarters of the 1,850 repeat participants in CDP’s supply chain program have climate risk management procedures in place and are actively reducing emissions, compared to fewer than half the 1,258 first time disclosers.

“Suppliers that took part in our program for the first time last year averaged $900,000 of savings as a result of each initiative to reduce emissions,” Galvin says. “That number jumps to $1.5 million when suppliers have been disclosing through CDP for three years plus. The sheer volume of identified opportunities and the scale of potential efficiencies is an attractive proposition for the bottom line of both suppliers and customers, with the double win of lowering greenhouse gas emissions.”

How to Improve Suppliers’ Performance

The report identifies ways purchasing organizations can improve the climate performance and risk management of suppliers. It says collecting, tracking, and sharing climate performance data should play a major part in supplier plans. But the organizations’ research found that firms’ perceived climate-change risk doesn’t always match up with the reality, so companies should look at how they evaluate climate risks. Finally climate management initiatives — such as buyer incentives and targets for climate change management and GHG reduction targets — should be an integral part of a broader operational strategy.

Based on its supply chain work with global companies, BSR has developed a three-step framework (see image) to build climate-resilient supply chains. The first step is to identify supply chain priorities. This includes areas of a supply chain with high GHG emissions and high climate vulnerability. It says purchasers should pay special attention to non-reporters and first-time reporters, as well as suppliers with little or no management in place. Step 2: take action and develop targets. BSR says procurement actions may include requests for information and buyer financial incentives, among others. Step 3 is to evaluate impact, which helps companies understand how different actions help (or don’t help) them achieve GHG or other climate-related targets.