The recent SEC proposal for public companies to measure and report on standardized climate-related risks is the latest development in an intensifying series of pressures being pushed down the supply chain. Building on existing requirements from large retailers and urgent UN climate reporting that “it’s ‘now or never’ to limit global warming to 1.5 degrees,” suppliers are facing unprecedented pressure to measure, report on, and set targets for emissions reduction. This is just the beginning.
Today, the question facing companies is whether they have plans to measure and improve on a host of Environmental, Social, and Governance (ESG) issues or merely to comply. The answers are often averages or estimates based on self-published data rather than the science-based emissions reduction targets that buyers’ request. While the risks of underperformance are primarily reputational now, in the future the questions will intensify and push large companies to commit to targets for Scope 1-2 and increasingly for Scope 3 greenhouse gas (GHG) emissions reduction that encompass their suppliers’ emissions.
Companies look to the supply chain to reduce emissions
A 2019 report from CDP established that end-to-end supply chain emissions can be 5X higher than the direct emissions (or Scope 1-2) from a company’s own operations. Still, many companies are lagging in terms of meeting their own ambitious climate goals and failing to leverage the supply chain to amplify their own climate impact. A new Boston Consulting Group (BCG) study reveals that less than 20% of U.S. retailers are on track to cut their Scope 3 emissions (i.e., their suppliers‘ emissions) by enough to meet the targets set by the Paris Agreement in 2015 for limiting the rise in global temperatures to 1.5 degrees.
Upstream emissions [can be] on average around 5.5 times greater than those related to a company’s direct operations.CDP Global Supply Chain Report 2019
With a clear link established between suppliers’ efforts to reduce emissions and a company’s own ability to meet its targets and the mounting pressures from the SEC, more businesses are looking to address the environmental impact of their supply chains as a point of competitive advantage. For suppliers, scrutiny of progress towards their own ESG goals will only continue to increase.
Supplier emissions reduction requirements
As large companies commit to their own emissions reduction targets, they’re increasingly mandating that suppliers align with their own goals. This isn’t entirely new, as Supplier Responsibility Programs and Supplier Code of Conduct guidelines have been the standard for some time. While such programs have historically focused more on the governance side of ESG, e.g., sourcing, pricing, and business ethics, increasingly explicit emissions reduction targets are being included in supply chain partner requirements. Companies that once engaged only a pilot group of key suppliers or those that pose the greatest material risk to financials or brand, if their emissions are not quantified and managed, are now asking for 100% supplier compliance.
With the key to emissions reduction enabled through greater transparency across the global supply chain, suppliers are now being asked to measure and track Scope 1-2 emissions, set and report a science-based emissions reduction target for Scope 1-2 emissions, and to report on progress, reduction goals, and related ESG initiatives through manual surveys or easy-to-use software based questionnaires at predetermined intervals to maintain good standing.
Supplier concerns abound around emissions reduction targets
Beyond the fear of risks to business relationship continuity should their data present a less than stellar baseline, suppliers are concerned about the costs of compliance as they are being asked to report climate performance, including all requested emissions data.
While it can be complicated to initially create that emissions baseline, with the right software tools and knowledge third-party experts can provide the guidance to facilitate calculating a baseline emissions footprint, so that the bulk of the effort can be focused on strategy and accurate target setting for emissions reduction targets or driving towards those improvements.
Suppliers worried about litigation risks related to sharing climate data or having it become part of a buyer’s SEC filings are wise to consider that careful record keeping and audit worthy data will satisfy both supply chain partners and internally set the tone for a path toward improvement for emissions reduction. Suppliers will need to embrace the digital technologies that improve transparency and encourage more interaction with suppliers and collaboration with industry peers.
Now is the time for suppliers to act on emissions reduction targets
When asked for GHG emissions and other ESG data from buyers, suppliers prepare now to readily meet the requirements. Soon, robust ESG measurement tools will become the norm, encompassing not only GHGs but also waste, water, DEI, etc. Leaders will be rewarded; and underperformance will be penalized.
At Good.Lab, we work with companies who are facing requirements from their customers e.g., Target, Walmart, and Unilever who are actively working with their suppliers to address their emissions impact. Regardless of coming requirements, if you are a supplier being asked to capture and share this data, we can help you prepare now.
We’ve brought together a network of sustainability, ESG, climate change, and technology experts who enable companies across the supply chain to accurately assess company-wide emissions and meet compliance targets with a combination of powerful ESG software and dedicated service experts. We can help you establish energy and climate goals, develop strategy, and implement solutions for emissions reduction targets in line with your buyers’ expectations.