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Practical Magic

The link between net zero and supply chain innovation

Cooperating with suppliers will be a necessary component of achieving corporate net-zero proclamations, but nudges and new purchasing contracts won't be enough.

Supply chain innovation

At a glance, food giant Nestle, home furnishings leader IKEA, tech services powerhouse Tech Mahindra and wireless behemoth Ericsson have very little in common. What binds these multinational companies together is their formal, publicly declared commitment to working with suppliers in their value chain to halve emissions by 2030 and reach net zero before 2050.

All are signers of the 1.5 Degrees Supply Chain Leaders pledge, which also includes BT, Telia, Unilever and Ragn-Sells. The declaration tucks into the Exponential Roadmap Initiative, which appeals to "innovators, transformers and disrupters" aligning their business with the Paris Agreement aspiration of limiting global temperature increases to 1.5 degrees Celsius by 2050. 

I love the focus on innovation, and it doesn’t surprise me in the least that as net-zero goals seep over into the Scope 3 realm, some companies are positioning their strategies for addressing the impact of their "value chain" as a point of competitive advantage. After all, oft-cited data suggests that the impact of a company’s supply chain is as much as 80 percent of its overall greenhouse gas emissions footprint — and an even higher percentage of its impact on biodiversity and nature. 

BT, which derives about two-thirds of its emissions footprint from suppliers, has been pushing its telecommunications equipment providers on climate action for some time. It embeds certain energy efficiency and environmental criteria into its purchasing contracts, much as Salesforce will require suppliers to do, and it is vocal about the carbon-reduction potential of its strategy with customers.

But getting to net zero in a supply chain will take more than nudges and new purchasing contracts. Unilever’s net-zero supply chain commitment, for example, will require weaning itself off fossil fuels as a source of ingredients for the formulations and packaging of its cleaning and laundry products. That means embracing new partners, such as Evonik Industries, which provides the renewable and biodegradable surfactant for its Sunlight dishwashing soap in Chile and Vietnam. The company set aside $1.2 billion in research and development funds for biotechnology and low-carbon chemistry technologies that support that goal.

The new "Zero Carbon Committed" partner program introduced in early May by software company VMware is another example of how a company is tying net-zero aspirations to innovation. The idea is to create "zero carbon" cloud data centers powered by renewable energy sources that use VMware’s virtualization technology to further reduce the carbon emissions associated with running data centers. 

The clear play: Help other companies, including customers and partners, achieve their own sustainability goals. Five companies — Atea, Equinix, IBM, Microsoft and OVHcloud — are already on board. VMware has long viewed sustainability as core to its long-term innovation strategy. The team even reports to its chief technology officer. 

Research from World Economic Forum (WEF) and the Boston Consulting Group (BCG) estimates that suppliers in eight industries — food, construction, fashion, consumer goods, electronics, automotive, professional services and freight — account for 50 percent of global emissions. It further suggests that about 40 percent of that amount could be addressed by circular economy practices, efficiency measures and the adoption of renewable energy with a "marginal" impact on product costs of between 1 percent and 4 percent in the medium term. I'll bet that's far less than you expected.

Where to start? Beyond technologies, the "climate-leading" companies interviewed by WEF and BCG are embracing nine high-level strategies that could be beneficial for others to consider. They include:

  1. Calculating an emissions baseline and moving to share data with suppliers. Dow, Siemens and Arcelik, for example, are collaborating on a pilot to measure emissions for a washing machine along the entire supply chain.
  2. Setting targets that "cascade" net-zero emissions ambitions down to their suppliers. For an increasing number of companies, that means encouraging them to set science-based reduction commitments — or requiring them, as is the case under the new Salesforce plan.
  3. Redesigning products. That could mean creating closed-loop systems that increase the amount of recycled materials — a strategy increasingly embraced by electronics companies including Dell Technologies and HP Inc. Or it might mean swapping out one material or component for another entirely, as Unilever is prioritizing with its cleaning products.
  4. Reconsidering sourcing. That could mean a move to "nearshoring" the location of key partners, which helps cut down on transportation emissions. It also would mean the rise of more vertically-oriented production models. IKEA, for example, is increasingly investing in direct ownership of resources vital to its future, notably forestland, which it can manage to certain sustainable forest practices.
  5. Tying emissions requirements to procurement contracts. As already mentioned, companies such as BT have been doing this for a while, and it’s becoming more common for big buyers to ask for this information. What they will do with that data remains to be seen. In the future, Salesforce may charge a fee to suppliers that don’t work on reducing their impact. Puma is taking a different approach: It provides better financing terms to organizations in its supply chain that perform well on certain ESG metrics. 
  6. Teaming up with suppliers on emissions reductions. One of the most impactful examples is the work that Apple has been doing with contract manufacturers, especially in China, to help them switch to renewable energy. Danone and others are funding farmer education programs related to sustainable agriculture. And H&M collaborated with shipping company Maersk to create a low-carbon shipping option that supports the biofuels on certain routes. 
  7. Engaging on sector-focused initiatives that could create momentum. Numerous examples include Maersk’s alliance with competitors on a zero-carbon shipping research center and Sony pushing the Japanese government to make it easier for corporations to procure renewable energy. It has threatened to move its factories to another country if these changes don’t happen, and companies including Ricoh, Kao and Nissay have its back.
  8. Bringing other buyers along. As an example, WEF and BCG cite the Clean Skies for Tomorrow coalition, a way to create more demand for sustainable aviation fuel and other technologies that can help decarbonize the airline industry. "The coalition is developing measures to stimulate demand and drive supply, promoting customer opt-in schemes, allowing customers to offset travel emissions, and aggregating demand from large air travel customers with high climate ambitions," the report notes.
  9. Introducing "low-carbon governance." This includes embedding carbon reduction considerations into product development, procurement, finance and so forth, so that management incentives are aligned around them. Increasingly, it includes executive compensation.

While practices such as these aren’t yet mainstream, they are becoming more common. And there’s a pretty obvious reason why: Cooperating with suppliers will be a necessary component of achieving corporate net-zero proclamations, and that’s where we can expect a wave of innovation in the coming decade.

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