Moving toward more sustainable operations is no longer an option for corporate supply chains—it’s a necessity. Although restructuring supply chains to make them more sustainable can cause some short-term pain points for businesses, those that respond quickly to these initiatives will enjoy a long-term competitive advantage over those that lag behind.
The push for sustainability is coming from many different sources including investors, customers, workers and governments.
“There’s increasing investor pressure from financial analysts saying we will not invest in companies that do not have some kind of Environmental, Social, Governance (ESG) plan,” said Polly Mitchell, VP of industry outreach and thought leadership at Kinaxis, which provides supply chain planning and decision-making software. “Investors are focusing on risk reduction. A sustainable supply chain is a more resilient supply chain, and investors are realizing that if there’s a sustainability risk on the balance sheet, that is a financial risk as well.”
People’s increasing concerns about climate change are playing a role. “Consumers are expecting that the products they’re buying are coming from sustainable sources, that the companies that they’re buying them from have sustainable practices. There are statistics out there that say almost 80% of consumers are changing what they buy based on sustainability performance,” said Joe Terino, who leads the global supply chain practice at Bain & Company, a consulting firm.
Attracting talent is another factor. “It’s a really competitive marketplace right now, and particularly in supply chain…I think there’s a belief, and a well-founded one, that you have a better chance of getting the top talent if you have a good answer when they ask you about your sustainability profile,” said David Correll, a lecturer and research scientist at the MIT Center for Transportation and Logistics.
Regulators, especially in Europe, are requiring companies to operate in a more sustainable way as well.
Cascading sustainability down the chain
Global companies like Unilever, Proctor & Gamble, Walmart and Apple have been working on sustainability issues for more than a decade. They are committed not only to measuring and improving their own ESG scores, but also to restructuring their supply chains to ensure that their suppliers at every tier are taking those steps as well.
“We know anywhere from 60 to 80%, of the company’s carbon footprint comes from a supply chain. So if you’re concerned about sustainability, you are ergo concerned about your supply chain,” said Mitchell.
Investors want to see companies set science-based emission reduction targets for the next five to 15 years, and 94% of those targets include the reduction of indirect emissions from the supply chain, according to Simon Fischweicher, head of corporations and supply chain for CDP North America. CDP is a non-profit organization that helps companies and cities report their environmental impact.
“Hewlett Packard Enterprises has set a target that 80% of their manufacturing suppliers’ spend will have set science-based targets themselves,” Fischweicher explained. “So they reduce their own emissions, but they’re setting a target that involves their suppliers taking the same actions. That really demonstrates that you can cascade environmental leadership down a value chain, or up a value chain for supply chain.
“Cascading action down a supply chain is really critical,” he continued. “The further you go down a value chain, the more you get connected with businesses who have never been asked what their carbon footprint is or who have never been told that they should be considering these environmental risks … The supply chain engagement conversation doesn’t end with you as a supplier reporting to your customer, but includes you as a customer engaging your own suppliers as well.”
He said that 73% of CDP’s supply chain members have said they expect to de-select suppliers based on inadequate environmental performance. “So if you’re not providing data, if you’re not disclosing at all, there is a risk to that business relationship,” said Fischweicher.