Supply Chain Sustainability – How to ensure real progress?

More than 3,000 businesses and financial institutions around the world are working with the Science Based Targets initiative to reduce their emissions in line with climate science. This represents 35% of global market capitalization. In other words, $38 trillion in market value is now linked to zero emission targets1. What’s more, the number of SBTi members doubled last year - pretty soon having net zero targets will be normal for any large company.

It’s not just about climate. Everywhere we look, society is calling for companies to make bold commitments to sustainability. Sitting on the sidelines is no longer an option. Companies are moving to align their business and set ambitious goals - even if they don’t quite know how they’re going to achieve them.

These transformations are only possible with end-to-end transparency, from design, through to sourcing, manufacturing and distribution. To avoid greenwashing, companies also need to be transparent about their journey. In other words, be open about progress and show they are moving in the right direction.

Supply chain challenge
Supply chain is often where companies find their largest risks and opportunities. For instance, for many companies, their supply chain related carbon emissions – there so called scope 3 emissions - can make up between 65 to 90% of their overall carbon footprint. It’s the same for other sustainability issues. But it’s difficult to know how to reach into the supply chain and make effective changes if companies don’t have a clear picture.

It’s also a moving target. When companies consider supply chain sustainability, they have to manage:

An increasing scope of issues. Companies are being exposed to new sustainability risks and expectations (carbon, water, waste, biodiversity, etc.) broadening the coverage of their supply chain monitoring and reporting.
Increasing demand for disclosure. Regulators have reached the same conclusion and are requiring companies to disclose more information about their supply chains (for example the SEC’s proposed scope 3 reporting requirements and the EU’s Corporate Sustainability Reporting Directive and its Carbon Border Adjustment Mechanism).
Increasing expectations for assurance. More investors and stakeholders in China and overseas are expecting independent assurance of ESG-related disclosures.

For companies to align their pledges and obligations with realities on the ground, they need a supply chain that is transparent. Crucially, they need suppliers that are able and willing to disclose information to them, and work with them in new and innovative ways.

Focus on real performance
This requires companies to move away from compliance-focused assessments, which often result in paper-based checks: as long as the supplier provides the right paperwork then they pass the assessment. Corporate commitments, data availability, government inspections and public interest are all increasing. The reason for increasing corporate ambition and external scrutiny is because society knows compliance doesn’t indicate that goals are being achieved. They don’t trust paper-based assessments and neither should companies. Companies need to focus on real supplier performance.

Moreover, if companies accept paper-based assessments knowing their limitations then not only are they fooling themselves, but they are actually fooling society. In this way, companies may find themselves facing accusations that they are incentivizing inaction and greenwashing.

How to build supply chain sustainability?
First, companies need to set strategies and goals that integrate sustainability into sourcing decisions and supplier management. And suppliers need to quickly align and find cost-effective ways to reduce their use of materials, energy, chemicals, water, etc. as well as passing on the same requirements to their suppliers so there is alignment throughout the chain.

In many cases, suppliers believe sustainability measures to be expensive and risky. They may lack the right data and insights to help them measure the opportunity and take action. Many suppliers will need support from their larger partners.

Second, companies need to establish transparent standards and monitoring guidelines. They also need to invest resources into communicating, explaining and maintaining their standards among their suppliers. In return, suppliers need to be willing and able to disclose accurate information. This requires assigning new responsibilities and building new capacity.

Thirdly – and increasingly important – companies and suppliers need to work together in new and innovative ways to design circularity into product design and procurement, and explore ways to take back used products for repair and/or re-use.

The take-away is that supply chain sustainability requires a strategic perspective, which means identifying the risk and opportunity hotspots and then prioritizing actions based on the scale of impact, feasibility and financial viability. The right solutions can then be programed. And these can range from designing out risks, making procurement changes, finding new supply chain partners, monitoring suppliers as well as supporting suppliers take action where they can secure value.

Deloitte’s approach

We recognise the challenge and work with our clients in to help design and implement these programs.

Our solutions are always underpinned with Deloitte expertise in sustainability and decarbonisation pathways; standards and best practices; transparency and traceability; data analytics and insights for decision-making; as well as thinking beyond the immediate challenge and brining an ecosystem solution together that can support sustained change.

We bring those strengths to clients in a number of different supplier engagement formats, ranging from preparing new sustainable procurement and supply chain strategies; evaluating ecosystems for more sustainable alternatives; establishing new supplier standards and guidelines; enablement training; supplier assessments and performance checks; mobilising large teams for rapid engagement programmes; supplier sustainability roadmaps; and, broader ecosystem strategies for systems-wide change.

The outcomes support transformation and transparency for companies, their suppliers and stakeholders. Ultimately, building trust that companies are moving forward in the right direction.

Positive supply chain outcomes:

Please contact Henrik Knak, hknak@deloitte.dk, or Helena Barton, hbarton@deloitte.dk, for a non-committal inspirational meeting.