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.}}

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Amit Puri
^{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.}}

^{_____________________________________________

Eugenia Koh

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.}}

_{¹ Standard Chartered, Zeronomics, 2021}

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.