04-05-2022 13:35

Supply chain emissions engagement, Part 2: The how

In this second part of our series, we outline some methods of engaging with supply chain emissions in order to manage risk and generate opportunities.
Supply_chain_shipping

In the first installment of this article series, we discussed the importance and benefits of addressing supply chain emissions, as well as some of the challenges faced as a result of supply chain complexity and data uncertainty. In part 2, we present some methods for how to take ownership of emissions from the value chain, also known as scope 3 or indirect emissions.

Comprehensively addressing issues relating to supply chain emissions can require more than one type of approach. Here we address two broad categories of approach to supply chain decarbonisation: engagement and strategy integration. While engaging directly with companies in the supply chain can improve risk management, devising a broader business strategy to limit supply chain emissions can also be a source of opportunity and innovation for proactive companies.

Although the two approaches can be carried out independently, a combination of both engagement and strategy integration is a prerequisite for the most robust decarbonisation or zero-emissions plans. Instead of conflicting, engagement and strategy integration can be complementary, aiming to limit both the impact of the supply chain and reliance on it.

Approach to engagement

Engaging directly with the supply chain can be an effective method of reducing scope 3 emissions. Depending on the maturity of a company’s supply chain management, this process can be viewed as an expansion of existing risk management measures. As highlighted in the previous article, communicating intent can be an appropriate first step in the process. Follow up and more targeted engagement can range from requesting emissions data to incentivising improvements in performance.

As there can be considerable time lags involved in the process – between initiating requests, gathering and reporting data, and initiating change – it is recommended to initiate engagement as early as possible, even if longer-term internal targets have not yet been set. Supply chain engagement can be a collaborative and ongoing process, so small steps, such as requesting high-level emissions data, can be taken before more intensive requests are made.

An engagement strategy may incorporate the following steps:

  1. Communicate intent and request baseline data from companies in the supply chain. This can help with mapping supply chain emissions and associated risks.
  2. Set expectations for improvement. This can address different areas, first targeting improvement in data quality and availability and then in performance.
  3. Integrate emissions performance standards into procurement requirements.
  4. Collaborate with supply chain partners. Both through general or sector initiatives and one-on-one. It is this collaboration that will drive lasting change.
  5. Report and monitor. Reporting on own emissions, as well as supply chain emissions, can benefit the whole ecosystem.

Flexibility should be built in to any supply chain emissions engagement plan in order to accommodate varying levels of influence and control. For example, engagement should account for the level of influence that the engaging company has with the supply chain partner, and the level of control that the supplier has over their own emissions. Effective engagement is a two-way, often iterative, process.

Desired outcomes

While it is important to communicate desired outcomes as part of the engagement process, these outcomes should not be too restrictive. Ultimately, the supplier is best placed to understand their own business model, impacts and effective decarbonisation pathways. Engagement should aim to open dialogue, incentivise action and allow the supplier to address issues that are most material to their business.

In order to facilitate effective engagement, promote buy-in from suppliers and maximise co-benefits, engagement should:

  • Communicate targeted outcomes and motivations clearly. Simple communication of both specific requirements and the broader context can assist suppliers in understanding exactly what is being requested. This is relevant for engagement at different levels, including expanding data collection, improving risk management and promoting improvements in performance.
  • Reference timeframes. Introducing timeframes may increase buy-in to the process and help suppliers absorb requests. When it comes to data collection, for example, it can help to convey to suppliers that not all underlying data is expected to be available immediately. Rather, that data collection should be improved over time.
  • Apply to companies of differing maturities. Suppliers are not likely to be a homogenous group of companies with similar sustainability data availability or expertise. Requests that are easily met by some suppliers may be a daunting challenge for others. It may be useful to establish different types of engagement for clients that fall into different categories.

Remember that engagement is a dynamic and collaborative process between parties.

Integration into broader strategy

As an alternative to direct engagement with the supply chain, reducing reliance on suppliers can provide benefits beyond reducing supply chain emissions. Integrating supply chain emissions considerations into a company’s broader strategy may promote innovation in the following areas:

  • Product design. Integrating supply chain carbon considerations into product design, or related areas such as research and development, can open up new avenues of innovation. Benefits may include redesign in order to reduce material usage, reuse production waste or use alternative, lower-impact materials.
  • Sector initiatives and partnerships. Examining partnerships through a new lens may open up new untapped opportunities. Partnerships to reduce emissions, such as improved logistics, may lead to increased profitability. Furthermore, simply asking suppliers about their own impact can open up discussions around new product lines or applications.
  • Resource efficiency and circular economy. Discussions about supply chain emissions often go hand-in-hand with those around optimising resource use and broader environmental impact. They can lead to circular initiatives – a source of massive potential, both for limiting environmental impact and driving business opportunity.

While acting proactively to reduce supply chain emissions can provide a multitude of benefits, supply chain emissions are only one component of scope 3 emissions. Yet tackling supply chain emissions as part of a broader strategy can also help reduce other scope 3 emissions.

For example, considering carbon impact when optimising product design can also be applied to the use phase of a product, not just the production. Just as it is possible to reduce scope 3 emissions by evaluating upstream impact, acting on downstream impact can provide opportunities as efforts to decarbonise increase across the economy.

GHG Protocol definitions of scope 1, 2 and 3 emissions. Source: GHG Protocol, Nordea

Stay tuned: In part 3 of the supply chain emissions series, we will aim to shed light on the detail underlying these high-level recommendations by exploring some real-world examples of successful supply chain emissions engagement.

Read more about Nordea's Supplier Code of Conduct

Resources for understanding, measuring and reporting supply chain emissions

Authors

Name:
David Ray
Title:
Nordea Sustainable Finance Advisory
Name:
Lea Gamsjäger
Title:
Nordea Sustainable Finance Advisory

Nordea Sustainable Finance Advisory

Nordea's Sustainable Finance Advisory team helps clients navigate fundamental changes in the financial markets as the global economy shifts towards becoming sustainable and low-carbon. Find out more about our sustainable product offerings and holistic advisory services.

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