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BSR's 3 step framework

How to Better Manage Supply Chain Climate Risks

BSR's 3 step frameworkSupply 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.

 

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3 thoughts on “How to Better Manage Supply Chain Climate Risks

  1. The non-response of suppliers to data requests is more understandable if you have an understanding of what many supply chains actually look like. For a multinational enterprise, once you get beyond the “top” suppliers you are often dealing with small or medium size enterprises and with many who lack direct experience or knowledge with the underlying subject matter. Many of those non-respondents to the footprint request undoubtedly have not completed a carbon footprint and may very well not even know what that means. In addition, the supplier is likely confronted with a host of requests from its customers (cost reduction initiatives, quality initiatives, auditing requests, product compliance declarations, conflict minerals templates, GHG, etc.) In many organizations there is no one dedicated to some of these subjects, so the questions become who should handle the response and should it be prioritized over the twelve other pieces of data we’ve been asked for. Very few organizations, even a company as large as Walmart, can effectively engage with thousands (or tens of thousands) of suppliers and overcome that structural issue. BSR’s framework is reasonable on its face, but it is far too simplistic to offer a real pathway to improving this situation.

  2. Hi Bruce, Thank you for reading the report, and thanks for your comment. You are right to point out the complexity of supply chains and the reality that SMEs and other suppliers below first tier/ “top” suppliers may not respond to questionnaires as they will not have direct experience or knowledge with the subject matter. However, those are not the suppliers that are not responding. The CDP Supply Chain members are requesting data only from a select group of their suppliers (note that there are 75 members requesting data from just under 8000 suppliers, which tells you something about the scale). The majority of CDP supply chain members look at spend mixed with other criteria like carbon intensity so what we have are the most material suppliers for climate change. In this context, I’m sure you’ll agree we would like to drive up the response rate.

  3. Tara, you are correct in your response; I’ve managed CDP supply chain responses in the past. Some of the questions are things that suppliers must be monitoring as apart of their usual operations – or they’re just not managing their operations well. Other questions do require more focused effort. However, developing strategies to respond thoughtfully to those more complex questions will become a key differentiator for Sourcing professionals, as more focus is put on supply chain operations in a post COP-21 market. Additionally, these insights can lead to new opportunities, new business models.

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