For the past five years or so, global companies have started to seriously address climate change by using one of their biggest levers for impact: the supply chain. Efforts include the CDP Supply Chain initiative, industry collaborations such as the Electronics Industry Citizenship Coalition, and individual company initiatives like those from Walmart. In spite of this, most supply chain emissions-reduction activities have not been reaching their full potential.
To understand current performance and past progress, most companies focus on measurement approaches that generally fall along a spectrum between big-picture modeling (e.g. some lifecycle assessments) and fine-toothed accounting (e.g. bottom-up carbon footprinting). Companies tend to use a blend of calculation options from the GHG Protocol’s Value Chain (Scope 3) Standard or Product Standard. Unfortunately, investments do not always lead to meaningful impact.
For instance, lifecycle-assessment modeling tools, which are used to identify carbon hotspots in the value chain, often treat peer suppliers as having equivalent impacts, even though in reality their impacts may be very different. This makes it hard to see the different types of equipment, processes, and behaviors that are unique to each factory.
On the other hand, accounting tools such as the Greenhouse Gas Protocol Corporate Standard and its extensions mentioned above can pinpoint local impacts. But in order to identify opportunities for improvement, companies need insight into potential. For example, it might seem intuitive to focus on suppliers with the largest carbon footprints. But those suppliers tend to have a greater cost incentive to reduce energy waste, so it’s more likely that they have professional energy-management systems in place. Instead, the best opportunity for reductions might be to upgrade items that larger and smaller suppliers have in common, such as boilers, motors, and air compressors.
Since 2005, BSR has been coaching more than 1,000 suppliers on energy management in China, and we have found that driving large-scale impact in a cost-effective way requires working directly with individual factories to understand problems and help to address them. In this way, companies can understand suppliers’ ambition, concentrate on information that is actionable, and determine how to improve suppliers’ ability to take the next step. These “3 A’s” define an opportunity for improved supply chain carbon performance at the corporate level that many companies are missing out on.
The top success factor for carbon reduction in suppliers is support from those suppliers’ senior management, because carbon reduction is based on making real financial investments. Yet companies often overlook the supplier’s attitude toward energy and even how it feels about collaborating on performance improvement in the first place.
To understand the supplier’s level of ambition, companies can start by looking for work that has already been done, such as a list of energy-efficiency projects completed, documented carbon reductions, process improvement underway, and evidence of superior performance compared to peers.
An equally important indicator is the level of organizational commitment, which companies can understand by asking whether the supplier has allocated resources for energy projects, such as a budget, a senior owner, a cross-departmental program, or a preferential return rate for energy-efficiency projects. A third gauge is whether the supplier is willing to make time for an energy auditor, provide itemized energy data needed for the “pre-audit,” and share the results of its audit.
If the supplier is ambitious, it is far more likely that discussions around energy and data will translate into investments in efficiency and actual carbon reduction. Therefore, to get more results out of engagement with suppliers, companies should seek to understand suppliers’ level of ambition in the early stages of their engagement and make further investments accordingly.
Measurement is useful for management, but only when it provides information that is actionable. Unfortunately, companies are finding that current measurement approaches, which center on modeling and accounting, don’t on their own point the way to real, specific opportunities.
Companies can make the information actionable by first identifying a set of measures that suppliers should take, and then asking questions designed to reveal whether suppliers have either completed those actions or plan to. These questions might include:
- Have the suppliers done an energy audit?
- Have they committed to an energy-management plan?
- Have they eliminated equipment identified as obsolete?
Developing the specific questions requires upfront research to understand the energy-management issues of different suppliers’ sectors and the norms of their region. But by obtaining answers to a set of diagnostic questions like the ones above, companies will have a better understanding of which actions need to be taken for emissions reduction, as well as good examples the supplier already has to share.
Every supplier has obstacles that block progress, and companies have an opportunity to help them by seeking to locate, understand, and surmount those challenges. For example, if a supplier has not done a recent energy audit, the company is unlikely to achieve the highest carbon reduction for the money invested.
It’s critical, though, to understand why the audit has not been done, so that the company knows how to help: Maybe the supplier does not yet have a team in place to look at the problem, or maybe an assessment revealed that cost-effective resources are scarce.
Furthermore, suppliers within the same industry will have different levels of maturity, so by understanding the supplier’s specific problems, companies will be able to provide the appropriate type of resources. Some suppliers will need basic training on energy management, while others will have advanced carbon-reduction management programs and may instead need to focus on high-level problems such as finding capital for larger projects.
In this context, companies should switch from simply making requests for data to asking, “How can I help?” Armed with an understanding about what suppliers need, companies can structure cost-effective programs that help deliver the coaching, assessments, planning, technical resources, and discussion needed to drive performance improvement.
Measurement and Engagement
Modeling can suggest probabilistic opportunities, and standardized accounting—such as with the Greenhouse Gas Protocol framework—provides an important common language. But to ensure that these supplier data-management efforts are driving GHG reduction, companies should make it their business to understand individual suppliers’ unique potential and problems on the ground. Doing so can lead suppliers to take ownership over a complex engineering issue, it can help the company work with a large number of diverse suppliers at once, and it can improve mutual understanding between companies and their suppliers—all while driving carbon reduction.
Is the effort is worth it? Resource-wise, this approach adds a relatively small boost to help critical sustainability commitments (which, in many cases, are not paying off) that will make them productive. Doing so can help make reporting—from GHG Protocol-based summaries in the sustainability report to longer CDP disclosures—more relevant. The alternative may be that companies continue to lack insight into and influence over the business of actually reducing supplier emissions.
Companies that want to improve their supply chain climate impacts should consider adding the “three A’s” to supplier engagement and measurement efforts. And for BSR members with suppliers in China, the Supplier Carbon Performance initiative offers a turnkey solution for coaching, conducting on-site energy assessments, and developing plans needed to drive large-scale supplier carbon reduction.