Why Supply Chains Need to Play a Bigger Role in Regulating Climate Change

By Geraint John

As the annual Earth Day takes place again on April 22nd, the world faces an all-too-familiar message: we are not doing enough to confront the impact of climate change and human-inflicted damage to our fragile environment.

Global supply chains, as the engine room of trade and economic growth, are a major source of carbon dioxide emissions, deforestation, water and natural resource wastage, and pollution  – which explains why national governments are busy introducing laws to regulate companies’ activities more tightly.

In the European Union, for instance, legislation currently in progress includes:

  • A carbon border tax on greenhouse gas emissions associated with imported products to begin operating from October 2023.
  • A ban on imported products linked to deforestation from 2024.
  • A Corporate Sustainability Reporting Directive that will require around 50,000 companies to disclose environmental impact data and set improvement targets.

In the United States, current proposals include:

  • New Securities and Exchange Commission (SEC) reporting rules. These include disclosure requirements for CO2 emissions in listed companies’ supply chains (so-called Scope 3 emissions).
  • Tough new Environmental Protection Agency (EPA) limits on tailpipe emissions from fossil-fuel-powered cars and other vehicles.

This surge in regulatory activity will, over time, certainly force many firms to improve their environmental practices. But those leading their procurement and supply chain organizations need to go beyond compliance with these laws if change is to be effective on the scale required.

Coming to Terms with the Impact of Supply Chains on the Environment Is No Small Feat

To mark Earth Day 2023, Interos conducted an analysis of its ESG risk-scoring data, ranking the best and worst countries based on their performance against a dozen environmental attributes — which will be published soon (check back here for a link).

The key finding from this analysis is that even the “best performing” countries – and the companies headquartered there – have their work cut out to meet net-zero emissions, limit temperature rises to 1.5°C, and hit other key environmental targets.

Research by the Carbon Disclosure Project (CDP) reveals that supply chains are not yet contributing at anything like the scale required to effect meaningful change. Data it collected from thousands of firms in 2022 shows that:

  • Only 41% reported any Scope 3 (supply chain) emissions, compared with 72% for Scope 1 or 2 (internal operations). This is despite the fact that Scope 3 emissions are typically more than 11 times greater.
  • Just 36% of reporting firms were able to calculate Scope 3 emissions for purchased goods and services.
  • Relatively few companies currently provide detailed reporting on water consumption or deforestation in their own operations, let alone in their supply chains.

Where Companies Calculate Scope 3 Emissions.

The CDP welcomes the regulations mentioned earlier, which will force many more companies to measure and report their broader supply chain environmental impact. But it argues that “the necessary cascade of action down the supply chain is just not happening”.

Compelling direct (tier-1) suppliers to provide data and make improvements isn’t sufficient. Active engagement, incentivization, and collaboration with a targeted group of direct and indirect (tier-2+) suppliers are necessary to drive change.

Just 39% of companies engage their suppliers on climate-related issues, says the CDP, while 23% do the same for water. The figure is higher for deforestation (69%), but this is tempered by the fact that relatively few firms disclose data on this issue.

ESG and Procurement: From Compliance to Engagement and Continuous Monitoring

A separate report on sustainable procurement by the United Nations Environment Programme also notes the growing body of legislation, but cautions buyers against a “superficial compliance oriented approach”.

It urges them to look beyond the needs analysis, supplier selection, and onboarding stages of the procurement cycle, where most activity takes place today (see chart), and put more emphasis on post-contract supplier management.

The need for continuous monitoring and intervention along the supply chain, rather than just one-time certification, is as important in environmental performance as it is for other types of supplier risk, such as labor standards and cybersecurity.

Most Effective Stage of the Procurement Cycle to Introduce Sustainability Considerations.

How Procurement Leaders Can Make ESG Progress

Chief procurement officers (CPOs) face plenty of complex challenges as they work to improve environmental sustainability in their organizations. Collecting relevant data and measuring results is certainly not the smallest one.

But, aside from it being “the right thing to do”, there are real business benefits to be gained. These include creating lower-risk, more resilient supply chains. Organizations will also enjoy commercial advantages over rivals in terms of innovation, customer perception, and sales. They also have greater attractiveness to stakeholders such as investors and employees.

A new study by Bain and Ecovadis also found that companies “at the forefront of sustainable procurement,” which focus on their suppliers’ environmental practices, are more profitable – by an average of three percentage points over other firms.

Practical steps CPOs can take to make progress on this journey include:

  • Raising internal awareness of supply chain-based climate, water, deforestation, and other environmental issues. This includes both within their own teams and others they work with.
  • Designing incentives to ensure that buyers and category managers pay sufficient attention to sustainability considerations at different stages of the procurement cycle.
  • Writing climate, water, and other requirements into supplier contracts and including sustainability KPIs in scorecards and regular performance reviews.
  • Harnessing technology to identify the highest-risk supply chain dependencies. Also, collecting environmental data to conduct analysis and support decisions.
  • Engaging suppliers not only to disclose and share information about CO2 emissions, water usage, and other activities, but also to encourage and incentivize them to take action to improve their environmental footprint.

Actions such as these mark a big change from the “traditional” procurement focus of lowering costs and ensuring supply. But CPOs in leading companies are increasingly staking their reputations and careers on it.

For the sake of our planet, the efforts of these leaders and others need to become a source of celebration on future Earth Days.

Global Supply Chains Braced for Further Disruption Over French Pension Protests

By Klaudia Kokoszka and Geraint John

Companies doing business in France should expect further disruption to supply chain operations after the country’s Constitutional Council ruled today that controversial pension reforms could proceed into law.

The move by President Macron’s government to increase the state pension age from 62 to 64 has led to mass protests and strikes across France in recent weeks. The protestors include trade unions, political activists, and citizens opposed to the change.

Hundreds of thousands of people took part in demonstrations on Thursday, ahead of the council’s decision. One group of protestors stormed the headquarters of luxury goods giant LVMH in Paris.

The protests of the past month have impacted oil refineries, utilities, railways, and financial services firms, among others.

French Protests Are Spread Across the Country

France currently has one of the lowest retirement ages among developed economies. French people, on average, stop work four years earlier than in countries such as Germany, Spain, the U.K., and the U.S. Despite this, the proposed reforms have attracted strong opposition, some of it violent, in many parts of the country.

Interos analysis of data from the Armed Conflict Location & Event Data Project (ACLED) shows that protests have taken place in more than 450 different locations across France (see map). Numbers involved range from a few dozen people in small towns to tens of thousands in major cities such as Paris and Nice.

Examining the Supply Chain Impact of Protests

A map of France on which hundreds of recent protests are plotted.

Source: Interos Insights using data from Armed Conflict Location & Event Data Project (ACLED), 2023. Image Copyright: © OpenStreetMap,Data is available under the Open Database License. 

Almost five million businesses have operations in the areas affected, according to Interos’ data. The biggest impacts of labor demonstrations so far have been property damage, disrupted operations, and transport problems. Some of these have already had ripple effects along supply chains.

Strikes at oil refineries owned by Esso and TotalEnergies had a negative impact on global markets in March. 500,000 barrels of daily processing capacity – 0.5% of global oil consumption – are thought to have been affected.

Disruptions at a lesser scale have occurred at nuclear, thermal, and hydropower plants operated by firms such as Engie and EDF. These disruptions have reduced French power capacity by 15.6 gigawatts.

This week, the transit of goods flowing on the Rhine river was disrupted for the second time during the protest period. Workers cut power to the Kembs lock south of Strasbourg, France and near the German and Swiss borders. This has halted all river traffic through the area since Wednesday evening. The Rhine remains one of Europe’s busiest rivers and a disruption of this type could heavily impede cross-border trade.

To illustrate the scale of supply chains at risk, according to Interos insights, the affected firms mentioned in this article have at least 360 direct customers, 68 thousand second-tier customers, and 18 million third-tier customers. Even small changes in supply chains of this magnitude may cause notable ripple effects.

French Action Part of a Global Pattern of Unrest

The events in France are part of a growing trend of labor strikes, public protests, and general civil unrest across Europe and around the world this year.

In Germany, protests and strikes have taken place in nearly 70 different locations since mid-March. They have been primarily concentrated in the airline, rail, postal, and public education sectors.

Industrial action has also taken place in the U.K. in these and other sectors such as healthcare in recent weeks. There workers are demanding substantial pay increases to counter high inflation and the cost-of-living crisis.

Italian trade unions, meanwhile, have organized a national rail strike today against what they see as worsening working conditions and insufficient pay.

In Israel, thousands of people continue to protest against judicial reforms initiated by the Netanyahu government. Political grievances have also been motivators for protests in Nigeria and Peru in recent months. These have created a moderate risk to global trade in commodities, particularly petroleum and precious metals.

How Organizations Should Respond to Supply Chains Disrupted by Protests

Procurement leaders and organizations with supply chain operations in France and other affected regions should:

  • Ensure they have visibility of both critical direct (tier-1) suppliers and indirect (tier 2, 3+) suppliers that could be impacted by strikes and civil unrest.
  • Keep communication lines open with key supply partners in order to get early notification of any disruptive events.
  • Review alternative sources of essential materials, parts, products, and services from suppliers in other geographic areas.
  • Monitor geopolitical events and risks in France and other strike-affected countries especially closely over the next few weeks.

With inflationary pressures stemming from Russia’s war in Ukraine and other sources continuing to be felt in many economies, it is possible that civil unrest could spread further across Europe in the near term. Organizations therefore need to be ready to respond quickly to additional disruption along their extended supply chains.