Sustainability and traceability will be a future competitive advantage

Sustainability is constantly changing requirements and conditions for operations and Supply Chains, where transparency is a key enabler

COP26 has recently ended with an agreement that keeps the 1.5C goal alive. Even though the opinions about the results are divided, one thing is certain - the world is changing and the focus on sustainability is only increasing, with more and more politicians and business leaders implementing initiatives and regulations to support the transition to a decarbonized world economy.

With Gen Z increasingly using their climate-focused buying power, building on top of the climate pathway already laid by Gen Y, we see consumer trends shifting towards a demand for greater transparency. Consumers no longer want to just see a label or sticker on a product that describes whether or not that product is environmentally-friendly, sustainable, or produced in a socially responsible way - they want full transparency regarding sustainable sourcing, the origin of recycled raw materials, and a full life-cycle footprint of the product. Increasingly, this new generation of consumers wants to know what impact their buying decisions are making on the world.

This changing buying behavior is a major opportunity for sustainable and transparent businesses. These businesses can take market share or increase their revenue by charging a premium for their products, especially with younger consumers.  EY’s Future Consumer Index shows that 43% of global consumers want to buy more from companies that make a positive difference to society, even if these products or services cost more. At the same time, 61% of consumers want more information on the product they purchase, to make more sustainable choices. Crucially, consumers are willing to pay more for products and services that offer such information.

As a further driver of supply chain traceability, increasing global environmental and supply chain regulation may also increase costs and disrupt supply chains. To better understand where new and emerging regulations will impact companies across their supply chains, we need to understand the three scopes of the international Greenhouse Gas (GHG) Protocol. Under the GHG Protocol, GHG emissions are divided into Scope 1, 2, and 3, with each scope representing a unique part of a company’s supply chain

• Scope 1: Direct emissions from company-owned and controlled resources. A company’s direct GHG impact on the wider supply chain, and its direct GHG emissions.

• Scope 2: Indirect emissions, e.g. from buying electricity from a utility provider to use in a company’s office or factory.

• Scope 3: Emissions that occur across the value chain of the specific company in question. This includes both upstream and downstream activities.

Seen through the supply chain lens, we could simplify Scope 1 and 2 emissions as relating directly to the company itself, with Scope 3 emissions relating to the end-to-end supply chain. For example, almost 99% of Apple’s carbon footprint relates to its Scope 3 emissions, with more than 80% of these emissions coming from Apple’s direct supply chain.

Most larger companies have now adopted sustainability reporting. However, this is generally done top-down, through estimates and approximation. Increasingly, regulation and traceability requirements adopted by the US, the EU, and other regulators are pushing companies to document and trace their end-to-end supply chain, with detailed operational insights being required  (bottom-up reporting).

Most companies know their immediate suppliers and tier 2 suppliers. However, as supply chains are becoming more specialized and fragmented, many companies will have to go to 4, 5, or 6 tiers upstream, to trace the origin of components in their products. This can be problematic, but this is already emerging as a clear future regulatory requirement. For example, the US government has already implemented regulations that require companies importing fabrics into the US to document child labor violations back upstream to cotton farms. If they are not able to comply, the finished product cannot be imported into the US. Similar EU regulations are in the pipeline, incl. mandatory environmental and human rights due diligence for product imports, and the taxation of carbon-intensive imports.

This means that there is a clear need for Chief Procurement Officers, Chief Sustainability Officers, supply chain professionals, and tech companies to start working more closely together at the operational level regarding the use of digital solutions for supply chain traceability. To create full transparency across the end-to-end supply chain, it will be necessary to break down new and existing reporting requirements into operational KPIs and metrics and deliver tangible supply chain-wide environmental and climate improvements on CO2e emissions, waste, water, child labor, and human rights. Supply chain visibility is the next evolution of sustainability, we see companies that are taking ownership by moving sustainability into the supply chain organization, by using sophisticated end-to-end planning capabilities. Without this traceability, there is no accountability and companies will have to mobilize and get started to build the foundation for successfully serving the consumers of the future and meeting the expectations of the wider stakeholder community. The keyword is “start”, to identify the drivers for the business, and where scale and impact reside.

The digital solutions required for this have already been developed, and our EY experts are ready to talk to you, to help you to secure the competitive advantage that this will bring to your business, both on the revenue and cost side.