The risks and opportunities for suppliers in emerging and fast-growing markets as large corporates transition to net zero
The net-zero supply chain revolution
To meet the goals of the Paris Agreement – perhaps the greatest challenge faced by our planet – and reduce carbon emissions to net zero by 2050, collaboration is crucial.
We cannot combat the worst effects of climate change without policymakers, financial institutions and companies working together.
Nowhere is this more true than for multinational companies (MNCs) and their suppliers. Our latest research report, Carbon Dated, reveals that almost three-quarters of MNC carbon emissions are generated in their supply chains.
As MNCs start to transition to net zero, it’s therefore no surprise that they are looking to their suppliers to do much of the heavy lifting. Our research shows that two-thirds of MNCs are targeting supply chain emissions as the first step on their transition journey.
For suppliers, especially those in emerging markets, the stakes couldn’t be higher: 57 per cent of MNCs are willing to replace emerging-market suppliers with ones in developed markets that are less reliant on fossil fuels if it would help them reach net zero. There is clearly an expiry date for carbon-reliant businesses, and it’s fast-approaching.
However, if suppliers can show their MNC partners that they are making progress in their transition and can become a positive link in the chain, a share of a huge market could be theirs. In 12 key emerging and fast-growing economies we reviewed exports to the tune of USD1.6tn, or around one-third, are set to be subject to MNC zero tolerance on carbon.
Suppliers cannot go it alone, but will rely on support from both banks and trading partners to reach net zero. Many of the MNCs with whom we spoke as part of our study are keen to help, with almost one in five now offering grants or loans to their suppliers to invest in reducing emissions from operations. Carbon markets and transparent carbon pricing will provide even stronger signals to reduce carbon emissions and the tools to manage the related risks.
Governments, meanwhile, need to accelerate their own net-zero plans – particularly for energy generation, switching away from electricity grids that are powered solely by fossil fuels to more renewable solutions – in order to help companies transition by 2050. The need to balance the shift with existing capacity and continued economic development makes this no easy task, although it helps that the cost of renewables such as solar and wind has fallen below the cost of installing new fossil-fuel power generation in many cases.
The role of banks such as Standard Chartered cannot be underestimated. We must provide the financing needed for companies in both emerging markets and carbon-intensive sectors to transition to
net zero. Both currently struggle to raise the capital they need, is met, as shown by our recent Zeronomics report.
We recently launched a new Sustainable Trade Finance Proposition to help companies implement sustainable practices across their ecosystems and build more resilient supply chains. Further, our Finance Transition Imperative is part of our commitment to help facilitate the net-zero transition in eight of the most carbon-intensive sectors in our portfolio.
Decarbonisation is vital for the survival of the planet, but a vibrant trade ecosystem is essential for maintaining an interconnected global economy that leaves no-one behind. Co-existence is the only option.
We must work together across the supply chain to ensure it is decarbonised in a way that delivers shared prosperity across
Group Chief Executive, Standard Chartered
The net-zero supply chain revolution
The Paris Agreement, which aims to curb the worst effects of global warming by cutting carbon emissions to net zero, has laid down a gauntlet. Governments are striving to deliver net zero by 2050 to avoid an environmental catastrophe, but without the direct engagement of business they will fail. Multinational companies (MNCs) in turn are feeling the pressure, but with 73 per cent of their total emissions sitting in their supply chain, their challenge is far from simple.
The interplay between these businesses and their MNC partners will be a defining factor in the global race to net zero.
For 67 per cent of MNCs, reducing supplier emissions is the first step in their net zero strategy, underlining the importance of supply chains in carbon transition.
78 per cent of MNCs say they will start removing slow-to-transition suppliers by 2025 (including 15 per cent who have already started this process).
MNCs expect to cut around 35 per cent of their current suppliers as they respond to net-zero pressure.
The opportunity for net-zero-focused suppliers
Our study finds that almost a third of MNCs are already taking a zero-tolerance approach to their supply chain, swiftly removing suppliers that endanger their transition. Our economic model reveals what this means for the businesses in 12 key fast-growing markets at the centre of OECD supply chains: a ringfenced USD1.6 trillion export opportunity for early movers that align with MNCs’ net-zero plans.
How are MNCs supporting suppliers to decarbonise?
The MNCs setting the pace and cascading their net-zero targets will need to collaborate with their smaller partners to make net zero a reality. Many MNCs are developing shared goals with their suppliers, and some are offering additional benefits and better prices to decarbonising suppliers. This is a trend that must grow if businesses are to embrace the challenge of global net-zero transition.
64 per cent of MNCs are developing shared sustainability goals with their suppliers.
47 per cent are offering preferred supplier status to sustainable suppliers, giving them an advantage over their less sustainable peers.
18 per cent are offering grants or loans to suppliers to invest in reducing emissions.
The net-zero supply chain revolution
Decarbonising supply chains is fundamental to net-zero transition and multinational companies are taking action on supplier emissions.
The road to net zero
2050 is a significant year in the fight against climate change. Scientists estimate that global greenhouse gas emissions will need to be reduced to net zero by this date to meet the 1.5°C target set under the Paris Agreement.
Business leaders – keen to show progress and recognising the potential for a rapid change – are starting by focusing on supply chains. Some 67 per cent of multinational companies (MNCs) say that reduction of supply chain emissions is the first step in their net-zero strategy.
The supply chain imperative
To hit their net-zero goals, MNCs are hoping for rapid transformation among the suppliers that make up their global supply-base, or to replace them with others further along in their transition journey.
It’s easy to see why. Supply chain emissions account for an average of 73 per cent of MNCs’ total emissions. Setting net-zero mandates for suppliers may seem like an easy win to MNC leaders, compared to the direct action they would need to take within their own organisations to tackle scope one and two emissions. However, this is creating significant challenges for suppliers – especially those in emerging markets and fast-growing economies.
Scope one, two and three emissions
Scope 1: Direct emissions from sources owned or controlled by the company.
Scope 2: Indirect emissions from electricity purchased and used by the organisation.
Scope 3: All other indirect emissions, including supply chain emissions.
This should be a wake-up call to suppliers. The sustainability agenda is well-established in multinational companies’ supply chains and businesses that source from emerging markets in particular have strong ESG requirements embedded into their procurement processes. However, the net-zero debate has intensified the focus on carbon emissions, and companies are working to understand the sources of emissions and their impacts in a more meaningful way.
Global Head, Environmental & Social Risk Management, Standard Chartered
Emerging market suppliers face the toughest challenge
Most multinational companies are headquartered in developed economies in the west, but many of their suppliers are located in emerging or fast-growing markets. The focus on supply chain emissions is shifting the net-zero pressure from west to east, and from big corporates to small companies, putting significant pressure on organisations that may be least-equipped to deal with transition.
MNCs recognise that this is the case. Almost two-thirds (64 per cent) believe that emerging market suppliers will struggle more than their developed market counterparts to meet MNC reduction targets, and 57 per cent are preparing to replace some of their emerging-market suppliers with developed market alternatives to hit net zero. Emerging market companies face significant challenges. More than half of the markets in our study have no net-zero government commitments (see Section 5, page 2), leaving companies with limited regulatory support for decarbonisation. Many suppliers may be meeting emissions standards in their own markets, but risk losing business as they are not meeting the standards set in the markets they are supplying.
While the MNCs headquartered in developed markets are generally the ones making the commitments, many of the suppliers that are critical to delivering these commitments are based in emerging markets. It is incumbent on everyone in the value chain to work together to close both the knowledge gap and the data gap.
The gathering and reporting of reliable, high-quality emissions data is a real issue, particularly in emerging markets, where proxies often used in place of actual data. This will improve over time but there is a long way to go, and different data providers use different metrics, making comparison difficult.
Head, Sustainable Investing, Standard Chartered
A carbon expiry date for suppliers
The majority (62 per cent) of MNCs say they will remove some suppliers that endanger their carbon transition plan in just three years’ time. By 2025, this rises to almost four in five MNCs (78 per cent). This suggests that, although companies are not ramping up action on net zero until 2030,1 they plan to start acting on supply chain emissions much sooner. On average, MNCs expect to exclude around a third (35 per cent) of their current suppliers as they transition away from carbon.
Bridging the data and knowledge gap
There are two reasons MNCs believe suppliers are failing to keep pace with their decarbonisation plans: insufficient knowledge and inadequate data.
Fifty-six per cent of MNCs believe that the lack of knowledge among emerging market suppliers is a barrier to decarbonisation. The figure for developed market suppliers is 41 per cent.
Two-thirds of the MNCs that measure supply chain emissions are using secondary sources of data to plug the gap left by supplier emissions surveys, and 46 per cent say that unreliable data from suppliers is a barrier to reducing emissions. Increasing supplier skills, knowledge and tools will play an important part in a successful net-zero transition. Collaboration between MNCs, smaller companies, finance providers and policymakers will also be critical.
The opportunity for net-zero-focused
Almost a third of multinational companies will cut suppliers who aren’t decarbonising fast enough, creating new opportunities for net-zero-focused suppliers.
A USD1.6tn incentive
Our study reveals that almost a third of multinational companies (MNCs) (31 per
cent) are taking a zero-tolerance approach to their supply chain, swiftly removing suppliers that endanger their transition. Our economic model reveals that – across 12 key emerging and fast moving markets alone – this approach could create a USD1.6 trillion opportunity for the net-zero club: those businesses reducing emissions in line with MNC net-zero plans.
This represents a major opportunity for net-zero-focused suppliers, but also quantifies the potential losses to companies not embracing net-zero transition.
Whether MNCs take a zero-tolerance approach or are more flexible with their suppliers, by 2025 the vast majority of MNCs (78 per cent) will be starting to remove suppliers that don’t meet expectations.
Size of export market subject to decarbonisation zero-tolerance:
close to a third of each market’s annual OECD exports
The net-zero premium
The pressure is on suppliers to take swift, decisive action on sustainability, or risk losing access to this market. But who absorbs the cost of this action? Fifty-two per cent of MNCs would be prepared to pay a premium – of 5 per cent on average – for a product or service from a supplier that is measurably sustainable over one that isn’t. Forty-five per cent of MNCs would be prepared to pay a premium for a product or service from a supplier that has net-zero emissions over one that doesn’t; a premium of 7 per cent on average.
*Figures modelled using projected export revenue in 2030
For the net-zero trailblazers, outsized opportunities await. Those that fail to take up the challenge, meanwhile, can expect to lose access to a significant slice of business in the near future. Everyone has a role to play; suppliers may have to spend more to align with MNC net-zero strategies, but MNCs may need to pay more for their products or services. Ultimately, this increased cost may have to be passed on to the consumer.
Global Head, Sustainability Strategy, Standard Chartered Bank
Carbon Dated markets and their net-zero commitments to date
Governments have a vital role to play in the decarbonisation agenda through incentives, regulation and investment, yet many have not made public net-zero commitments.
Suppliers need policies and infrastructure to support their decarbonisation journey but many governments in emerging markets, where much of the supply chain is located, are yet to make public net-zero commitments or outline their strategies.
Policymakers can drive the net-zero agenda incentivising decarbonisation and distributing the cost of transition, but the actions of the private sector – including MNCs, their supplier network and financial institutions – will also be important. This will bring broader rewards: when governments are negotiating trade routes, green credentials are increasingly necessary for preferential treatment.
1 China refers to its 2060 commitment as a goal
If a supplier is based in a market with a fossil-fuel-powered grid, reducing their scope two emissions will be difficult. They could face the stark choice of disconnecting from the global economy or disconnecting from the local energy grid and developing their own renewable energy supply privately, with all the costs that would entail.
As governments consider strategies for keeping global trade flowing, the decarbonisation of national energy supplies must become part of the conversation. Otherwise, we may see a two-tier system developing, as suppliers based in markets with clear net-zero roadmaps are more attractive supply chain partners for MNCs.
Executive Director, Group Public and Regulatory Affairs, Standard Chartered
How are MNCs supporting suppliers
Many multinational companies are developing
shared goals with their suppliers, and some have begun offering preferential treatment to net-zero focused suppliers.
Carbon, collaboration and compromise
Time is short and the stakes are high. As 78 per cent of multinational companies (MNCs) will have begun removing suppliers that endanger their net-zero transition by 2025, suppliers must move quickly to avoid losing business. Difficult decisions will need to be made on the journey to net zero. MNCs need to retain reliable, resilient supply chains, and net-zero transformation of their suppliers will take time.
Although decarbonisation poses serious challenges for many companies, failing to develop and implement a net-zero strategy is not an option. However, suppliers cannot do it alone. The MNCs setting the pace and cascading targets down their supply chain will need to collaborate with their smaller partners to make net zero a reality.
MNCs’ responsibility doesn’t stop at simply mandating a net zero supply chain. Multinational companies cannot expect the slack to be picked up entirely by their smaller supply chain partners. Carrots as well as sticks are needed for the net-zero revolution to be successful, sustainable and just.
Global Head, Sustainability Strategy, Standard Chartered Bank
The sustainable supplier advantages
MNCs are exploring a range of strategies to help their suppliers’ transition. Sixty-four per cent of MNCs are developing shared sustainability goals with suppliers, although these could be broad targets that encompass a range of sustainability and ESG aims rather than specific emissions-reduction measures. Almost half of MNCs (47 per cent) are offering preferred supplier status – a sales advantage – to sustainable suppliers, and 30 per cent are offering preferential pricing. A significant minority are even offering grants or loans to their suppliers to invest in reducing emissions (18 per cent) or data collection (13 per cent). While these developments are positive, there is clearly still some way to go before such incentives become the norm.
To reduce emissions, MNCs cannot just push targets down the chain. Successful emissions-reduction requires collaboration across the whole supply chain. Developing targets together is a good start, but MNCs also need to provide more concrete, specific support to suppliers if they expect them to align with their net-zero strategy.
MNCs can provide a crucial link between smaller companies and the financial institutions that could help fund their transition. For example, a small manufacturing plant in an emerging market may need to build its own renewable energy supply to unplug from a carbon-intensive grid but lack the capital to do so. A financial institution would be much more likely to provide finance if there was an “anchor” MNC that could guarantee they would continue to source from this plant – even if the cost went up marginally – so that the supplier would be able to repay the loan.
Executive Director, Sustainable Finance, Standard Chartered
The role of sustainable trade finance
The financial services sector has a critical role to play in achieving a low-carbon just transition aligned to the Paris Agreement. As a bank with a strong trade focus and a footprint in emerging markets, we are committed to supporting the net-zero and sustainability agenda in the supply chain.
Just 60 per cent of the financing needed to achieve the 17 United Nations Sustainable Development Goals in low and middle-income countries is being met. In Africa, this is as low as 10 per cent .
Innovation has been our hallmark for 160 years and we are determined to use our expertise to direct capital to where it is needed most.
Our footprint in Asia, Africa and the Middle East includes some of the markets worst hit by environmental and social challenges. We want to make the world a better, cleaner and safer place and minimise the negative impact of our financing. In other words, do more good and less harm.
Sustainable Trade Finance
Both multinational companies and their supply chain partners will need the right finance to transition to net zero.
Trade finance can help make global supply chain activities more sustainable by offering companies the products and solutions they need to achieve their sustainability agendas.
Standard Chartered’s is designed to help companies implement more sustainable practices across their ecosystems and build more resilient supply chains. It builds the Loan Market Association’s Green and Sustainability-linked Loan Principles into our trade financing framework, encouraging clients to improve disclosure, reporting and definition of use, while meeting their Environmental, Social and Governance goals.
The Transition Finance Imperative
The markets and sectors that require the most financing to transition to low carbon business models are often left out of green finance. In emerging markets, they also tend to be the sectors that are essential for livelihoods and economic growth. The same regions can be the most vulnerable and least prepared for the increasing frequency and severity of weather events from climate change.
To to reach net zero we must transition eight of the most carbon intensive sectors in our portfolio: oil and gas, metals and mining, power, manufacturing, commercial real estate, chemicals, shipping and aviation.
We want to ensure that capital flows to the best performing clients, even those in traditionally high carbon intensive sectors.
For clients who share our ambition and are ready to act, we will fund and facilitate USD75bn towards sustainable infrastructure and renewable energy. For clients who are just starting on their journey, we will provide sector-specific guidance on what they must do to prepare for a low carbon future, tailored region by region. For clients who haven’t launched their climate transition effort yet, we are helping to identify the most relevant transition levers – ensuring our clients create climate transition plans aligned to our climate ambitions.
See our sector-specific transition frameworks for more detail.
Carbon Dated examines the impact of multinational companies’ (MNCs’) net-zero plans on their supply chain. The study combines global opinion research among supply chain and sustainability leaders across the world’s largest MNCs with economic extrapolation of that data to quantify the impact on their suppliers in 12 focus markets.
The global opinion research was conducted between March and April 2021 with 400 leaders responsible for sustainability or supply chains across 400 of the world’s largest multinational corporations. Each business had at least one supplier based in either Bangladesh, China, Hong Kong, India, Indonesia, Kenya, Malaysia, Nigeria, South Africa, South Korea, Singapore or the UAE.
We used insights into MNC net-zero plans from our opinion research study and publicly available data to develop a three-stage economic model to estimate the impact of these plans within our 12 focus markets.
Stage 1 – collating the source data
We created a global database including figures for exports, production, value added and employment in the 12 focus markets. In most cases, the most recent year of data is 2018. It included 44 economic production sectors in each market, which were then aggregated to provide the eight focus sectors for this study (oil and gas, mining and metals, chemicals, transport, real estate, soft commodities and aviation).
Stage 2 – calculating the export volumes at risk to suppliers
The scale of current export activity was defined as the volume of exports to the OECD from each of the target countries, split by sector. We produced predictions for the year 2030 by combining the current data with growth rates from the baseline forecast in the E3ME macroeconomic model. These projections include an estimate of the impacts of COVID-19 on rates of economic activity.
We estimated the ‘at-risk’ share of export activity using the results from the global opinion research. This at-risk share is defined as the volume of exports to OECD countries that could not continue due to MNCs taking a ‘zero tolerance’ approach to net zero and their supply chains (defined as those MNCs that will change suppliers if they endanger their transition progress). This figure represents the export volume at risk to suppliers that are not decarbonising in line with MNC net-zero plans, and also the size of the export opportunity for suppliers that are.
Stage 3 – calculating the overall market for net-zero suppliers
In order to calculate the overall figure for suppliers that are decarbonising in line with MNC net-zero plans we summed the export volumes at risk in each of the 12 markets. This calculation included all economic activity within the markets (not just the eight focus sectors).
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Carbon Dated is based on in-depth research commissioned by Standard Chartered, designed by Standard Chartered and Man Bites Dog.
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