5 minute read 20 Oct 2021
Sustainability coastline

How net zero supply chains can be the game changer in sustainability

By Alan Dickson

EY Ireland Director, Consulting and Procurement and Supply Chain

Head of Supply Chain in Ireland. Sports fanatic. Father of 3 children

5 minute read 20 Oct 2021

Supply chains are now a critical area of ESG focus. All businesses are rethinking their supply chains strategies to bring real change.

In brief
  • For achieving more sustainable supply chains focus should move from procurement to the fulfilment side.
  • In their drive towards net zero supply chains, companies will be responsible not only for their own emissions but also for those of their suppliers.
  • Supply chain will become even more important in future as companies are forced to take responsibility for their Scope 3 emissions.

Today, organisations are increasingly being evaluated on their sensitivity to environmental, social and corporate governance (ESG) issues. Before people invest in a company, purchase its products or work for it, they are increasingly considering its position on ESG criteria. In addition to these financial and societal pressures, regulators are also becoming more active in requiring progress on ESG issues, particularly where they relate to climate change and decarbonisation.

It is no surprise, therefore, to find companies announcing highly ambitious carbon neutrality goals within the next five or 10 years. Those goals, however, can be more theoretical than real and achieving them will be far from easy.

Supply chains at the core of ESG

Supply chains have become a key area of ESG focus as they are both a large source of emissions for companies and a large percentage of operating costs. They are also susceptible to the risks inherent in climate change, such as natural disasters and rising temperatures. Optimisation and simplification across the supply chain can make an important contribution to the ESG journey. Today, businesses across every sector are rethinking everything ‑ from what materials they use in their packaging to what markets they compete in and where their factories are best located.

Businesses also need to know what their other stakeholders expect of them. The EY State of Sustainability 2021 report finds that less than half of respondents say they have high-quality stakeholder engagement around sustainability. At the same time, 48% of organisations say their stakeholders are increasingly enquiring about their sustainability impact. Increased stakeholder engagement will, therefore, help guide companies on their journey towards value-led sustainability as ensuring actions taken now will bear fruit for the business in future. That engagement must extend throughout the supply chain.

We are all trying to tackle a challenge that is inherently global. If organisations and individuals adopt a “me” instead of an “all in it together” mindset, there is little chance of success. Stakeholder expectations vary depending on the organisation and its sector.

For instance, responsible sourcing is a growing issue for the global fashion industry. Similarly, sustainable production is top of the agenda for the food industry with consumers increasingly making choices based on factors such as greenhouse gas emissions, animal welfare and resource usage when the information is available to them.

Supply chain sourcing and manufacturing has long focused on human rights aspects of ESG, such as child labour and working conditions. Some large companies closely monitor their suppliers for their carbon footprint and sustainability performance indicators.

Many organisations are now starting to wake up to the fact that consumers care about climate change. The level of scrutiny has never been greater from consumers and this is driving real change in the supply chains.

Historically, supply chains have been optimised to the lowest price but now expectations are that they need to be sustainable, with a drive to net zero supply chains.  This is resulting in organisations building a lot more resilience into their sourcing, manufacturing, and distribution decision-making. 

The supply chain will become even more important in future as companies are forced to take responsibility for their Scope 3 emissions which include all indirect emissions other than those associated with purchased energy. These are the emissions that occur in their complete value chain, both upstream and downstream. In effect, companies will be responsible not only for their own emissions but also for those of their suppliers.

“Transforming businesses to unlock value from sustainability requires engagement and connectivity across the entire value chain and indeed, industry-level changes,” says Katie Flood, Head of Transformation Execution, EY Ireland.

Defining a green roadmap

Pressure is also coming from investors and consumers. In an EY survey of global institutional investors carried out in 2020¹, 73% of respondents said they will devote considerable time and attention to evaluating the physical risk implications of climate change when they make asset allocation and selection decisions. And, 71% said the same of transitionary risks.

The March 2021 EY Consumer Index² found that 49% of consumers say they will prioritise the environment and climate change in how they live and the products they buy. And, 26% say sustainability will be their most important purchase criterion three years from now.

Indeed, consumer pressure might be even greater if there was more transparency in relation to sustainability and other metrics. Greater transparency and improved access to information will come about partly as a result of regulatory changes and partly due to food industry players using them as competitive differentiators.

Actions must be collective. We can see this necessity in the approach to the home retrofitting programme here in Ireland. It relies on individual householders to find a contractor, get quotations, raise finance, and eventually get the work done. A more effective approach would see government support for neighbourhoods and communities to come together to engage contractors on favourable terms and ensure that no household is left behind.

Setting goals will not be enough to survive in the sustainability age, organisations will need to define a path forward. Carbon offsets and renewable power purchase agreements may have some value today but determining how to bring about meaningful emissions reductions should drive the debate from the beginning. This makes it imperative to scrutinise all elements of the supply chain.

To bring about change, organisations need to baseline where they are today.

There is no silver bullet around sustainability, real change will come through a series of continual interventions and improvements within a supply chain. Working in collaboration with suppliers and consumers within a virtuous sustainable ecosystem needs to be a vision for organisations to work towards.

Knowing what your carbon footprint looks like now and to what extent the supply chain contributes to that footprint is a crucial first step toward defining the way forward. You are then equipped to focus on the decarbonisation methods and levers best suited for your business and to think about the metrics required to track that activity.

Some of the steps that can be taken are:

1. The engagement should extend throughout the supply chain. An organisation’s sustainability is only as strong as its weakest link. Poor performance or behaviour on the part of suppliers can diminish a company’s ability to make progress on sustainability and damage its reputation. Suppliers must, therefore, be brought on the journey as well and at the earliest stage possible.

Collaboration across the value chain is imperative for meeting goals and commitments. Organisations should feel empowered to demand data-based targets from their suppliers rather than purely asking them to reduce emissions. Consideration should be given to including ESG criteria to supplier scorecards.

2. The traditional way of achieving a more sustainable supply chain has been through procurement. The focus now should be on the fulfilment side. For more impact, organisations should look at every aspect ‑ from ocean freight, distribution centre location and practice, to last-mile delivery.

3. Cheaper battery technology is making fleet electrification more attractive with some automakers moving away from internal combustion engine vehicles altogether. Electric vehicles are expected to achieve cost parity with internal combustion engine vehicles in about five to six years in most regions, and government incentives and regulation are adding impetus to the transition. This is a route organisations can explore as they reimagine the logistics.

4. Finally, products can be designed to have a second life or else be recycled or repurposed after their original use has ended. In the circular economy, disposal is replaced by collection and reuse, thereby closing the loop of a product life cycle.

Building a culture of zero waste

The global economy is only 8.6% circular at present but according to the Circularity Gap Report 2021, it has the potential to reduce emissions by 39%. Circularity programmes can use incentives to encourage an end-of-life product to be returned to the original manufacturer or designated ecosystem partner, thereby providing the resources needed for new products. Supply chain designs should account for durability and consistency. For instance, to account for how easily components can be dissembled to keep them in play longer.

France has been at the vanguard of pushing the circular economy with its right to repair legislation which came into force in January 2021. The rules require companies selling electronic goods in France to inform the consumer as to how easy or not a piece of equipment is to repair. With active right to repair movements springing up across Europe, including in Ireland, the pressure for greater circularity is likely to grow in the coming years.

We are moving into a new social and economic paradigm. The existing model has not worked for climate action to date and is unlikely to do so in future. Net zero supply chains may help move into that paradigm. It may be difficult to achieve or even impossible in some cases. However, setting out a roadmap to achieve that goal now can make a significant contribution to a company’s sustainability targets.

Summary

Organisations are now building more resilience into their sourcing, manufacturing, and distribution decision-making to accelerate their journey towards net zero supply chains. It is a conscious move towards a circular economy where disposal is replaced by collection and reuse.

About this article

By Alan Dickson

EY Ireland Director, Consulting and Procurement and Supply Chain

Head of Supply Chain in Ireland. Sports fanatic. Father of 3 children