Companies blind to climate risks in half their supply chains

Companies blind to climate risks in half their supply chains

Following the historic international deal agreed at the UN climate conference, COP21, and the news from Davos that climate change is the world’s most impactful risk*, leading companies such as Dell, Unilever and Walmart are establishing the extent to which impending climate regulation will impact their business. However, half their key suppliers fail to respond to requests for climate information, hindering efforts to understand and manage climate risk. So finds the largest ever study of climate data from suppliers and their corporate customers, produced by CDP and written in partnership with BSR.

The COP21 Paris agreement requires global greenhouse gas (GHG) emissions to reduce to net zero well before the end of the century. With supply chains responsible for up to four times the GHG of a company’s direct operations**, they house sizeable regulatory risk but also present ample opportunity for businesses to lower emissions.

For this reason, 75 multinationals representing over US$2 trillion in procurement spend work with CDP – providers of the global environmental disclosure platform – to seek data from 7,879 key suppliers on their carbon emissions and climate risk strategies. Information was received from 4,005 suppliers, meaning 49% failed to fulfil their customers’ requests, creating a substantial blind spot for those preparing for a carbon-constrained world.

Paul Simpson, chief executive officer of CDP said: “The science and the policy have never been clearer. Greenhouse gas emissions must decrease to net zero as early as possible in the second half of the century. Companies have a vital role to play in implementing the Paris agreement. Those that are unable to do so risk being the losers from this inevitable transition.”

Analysis of the suppliers that have disclosed demonstrates the scale of risk now facing companies: close to three quarters (72%) state that climate change presents risks that could significantly impact their business operations, revenue or expenditure. The majority (64%) of suppliers specifically identify climate regulation as a risk, with the most commonly cited consequences being fuel, energy and carbon taxes.

Despite the high perception of climate related risk, less than half (45%) the participating suppliers have set a target to reduce their emissions and just one third (34%) have lowered their GHG in the past reporting year.

Aron Cramer, president and chief executive officer of BSR said: “As we work toward catalysing business leadership for a climate-compatible world, BSR is proud to have partnered with CDP in developing this report. Collaboration between companies and their suppliers is crucial when it comes to understanding climate risks and opportunities and is key to building inclusive, resilient, and transparent global supply chains. We believe there is a great opportunity to be captured if the millions of suppliers not yet reporting follow the lead of those who are. Widening the circle of reporters will spread the message further, wider and deeper, with decisive action that aids business, climate, and public health.”

The new report – which includes commentary from McKinsey & Company – suggests that carbon emissions and climate management are increasingly factored into procurement decisions and are disrupting established supplier-based business models. L’Oréal, for example, works with CDP to create supplier climate scorecards that can be easily understood in the purchasing department. The Coca-Cola Company and LEGO Group are both experimenting with incentives and training for suppliers that will improve climate performance and generate shared value.

The climate performance of suppliers that disclose to CDP improves with time. Those that have participated in CDP’s supply chain program for at least the past three years demonstrate a more robust approach to climate management than those disclosing for the first time. For example, around three quarters of the 1,850 repeat participants have climate risk management procedures in place and are actively reducing emissions. Fewer than half the 1,258 first time disclosers can claim these advantages, clearly demonstrating that measurement and disclosure lead to better management.

Regular disclosers are also better at realising financial benefits. Repeat participants achieve an average of US$1.5 million in annual savings for each carbon cutting project, compared to first time disclosers, who average annual savings of US$900,000 per initiative.

The report goes on to note various ways that purchasing organisations can improve the climate performance and risk management of suppliers. The solutions included are scalable, and CDP has seen US Federal Government participation in its program as national administrations look to set their own supply chains in order.

To enable multinationals to benchmark their performance and drive improvements, CDP will this year score companies on the management of carbon and climate change across their supply chains, with results to be published in the 2017 supply chain report.

 

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