Who will pay to decarbonize the supply chain?

Who will pay to decarbonize the supply chain?

August 15, 2023

To decarbonize the world, the world must decarbonize the supply chain, and quickly.

Some 75% of all greenhouse gas emissions fall under Scope 3 emissions, which includes the upstream supply chain as well as the end use of a company’s goods and services. 

To cut those emissions enough to avoid catastrophic climate change will take technology, infrastructure, operational changes — and money. 

The total cost of transitioning the global economy to net zero emissions could cost an extra $3.5 trillion a year in capital spending, or roughly half the profits of the world’s global corporations, according to a 2022 McKinsey estimate. 

As more businesses look to reduce the carbon footprint of their supply chains, the question of who will pay for the necessary changes — buyers or suppliers — will become more pressing. Even the world’s wealthiest brands are discovering the true cost of decarbonizing their supply chains. 

“The amount of internal investment being put into decarbonization activities varies enormously between organizations,” said Simon Geale, EVP of procurement at the consultancy Proxima. “It’s not just suppliers that are struggling with ‘How do I pay for this?’ It’s organizations.”

And while some major brands are investing to help suppliers lower their emissions, some may simply be dumping the issue and its costs onto their supplier base for them to figure out on their own. 

In some industries, such as fashion, those suppliers are already struggling with tight operating margins. “How are they going to invest when there’s no cash flow? Cash flow is the problem,” said Chana Rosenthal, principal of reDesign Consulting. “That makes it challenging to invest in green [technologies].”

‘The biggest hill’ in climate action

At many companies, cost-control — not carbon reduction — remains the top priority.

In an Efficio study this year, only a third of surveyed executives and managers said they were “very confident” in their ability to hit their carbon reduction goals. The study shows cost control remained a top responsibility for procurement leaders over others, including sustainability. 

Even within environmental reduction investments, cost reduction is the top driver, according to a GEP survey of executives this year.

“Behind closed doors, a lot of CFOs are saying, ‘Well, I know that I’m going to have to do it. But when do I have to do it?’” Geale said, referring to action on supply chain emissions. “Because there’s an immediate cost rather than an immediate payback.”

Unfortunately for humanity and the rest of Earthly life, the climate is indifferent to budget plans and profit targets. The world needs to cut greenhouse gas emissions by 43% by 2030 to avoid some of the most extreme outcomes of climate change, according to the United Nations’ Intergovernmental Panel on Climate Change.

“Behind closed doors, a lot of CFOs are saying, ‘Well, I know that I’m going have to do it. But when do I have to do it?’ Because there’s an immediate cost rather than an immediate payback.”

Simon Geale

EVP for procurement, Proxima

Scope 3 emissions, specifically those tied to the supply chain, present an especially steep challenge and cost burden. Simply understanding the extent of a footprint takes time, data and often technology. All of that takes money. Because these emissions occur outside the company’s purview, they are the most expensive to track, while also often being by far the biggest chunk of most carbon footprints.

“The biggest hill is Scope 3,” Jackie Sturm, Intel VP for global supply chain operations, told Supply Chain Dive in an interview earlier this summer. “If you look at Scopes 1 and 2, we have converted to renewables — well before this was popular.” In 2022, Intel’s U.S. and European operations ran on 100% renewable energy, and the company aims to operate on 100% renewables across global operations by 2030, according to its corporate responsibility report.

“But to bring that back to our supply chain is challenging because, as a semiconductor company, we use almost everything on the periodic chart.”

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