Global Supply Chains Face Serious Climate Change Risk

on February 11, 2015 at 12:00 PM

Syriza Government Hampers Expansion Of Chinese Run Port Of Pireaus

Global supply chains could be headed for big trouble.

“Marginal or no improvements”, tantamount to a lack of preparation, leave supply chains in the US, China, India and Brazil more exposed to climate risks than those in France, the UK and Japan finds a new global study from CDP – formerly known as ‘Carbon Disclosure Project’ – and Accenture. “Supply Chain Sustainability Revealed: A Country Comparison – CDP Supply Chain Report 2014–15” offers a comprehensive overview of climate risks and opportunities that exist for supply chains globally based on data collected from 3,396 companies worldwide on behalf of 66 multinational corporations – i.e. members of CDP’s supply chain program – that account for $1.3 trillion in procurement spend.

CDP created a so-called “sustainability risk/response matrix” to allow for “a visual comparison of how well-prepared suppliers across 11 major economies are to mitigate and manage environmental risk.” The matrix takes into account data inputs such as “climate change mitigation strategies, carbon emissions reporting, target setting, emission reduction initiatives, climate risk procedures, uptake of low-carbon energy, water risk assessment efforts and collaboration.” Paul Simpson, CEO of CDP, gives insight into the rationale of developing such a matrix: “While climate and water risks are apparent, the implications for businesses and economies reliant on complex supply chain models are less understood.”

The CDP report puts in a nutshell why multinationals and their suppliers need to strive toward achieving sustainable supply chains: “Physical climate, regulatory and consumer preference changes expose supply chains to growing levels of climate risk. Uneven responses among suppliers present threats and opportunities for companies at the top of supply chains.” Chief among the threats is economic sustainability, which is something Christiana Figueres – Executive Secretary of the UNFCCC – addressed in her foreword to the CDP report tying corporations’ bottom lines and balance sheets directly to climate change:

If there is one thing that climate change teaches us, it is that we cannot prosper in isolation. No one country can ignore atmospheric science, or the reality that our collective greenhouse gas emissions will dictate whether or not we risk tipping the world towards dangerous climate change. (…) Modern businesses depend on supply chains stretching around the globe. They appreciate that floods thousands of miles away, or drought striking a distant watershed, can make the difference between their own profit and loss.”

This statement also makes clear that publicly held companies are no ‘world-changers’ or ‘do-gooders’ per se, but simply make pragmatic decisions in the interest of their respective businesses. Note, any attempts to improve the sustainability performance of entire supply chains come with the reasonable expectation to yield a competitive advantage in the global marketplace.

Most importantly, given “[u]ncertain regulatory environments, volatile energy prices and economic challenges” companies must – to be successful – place the exploitation of digital technology at the center of their sustainability strategies in an era where traditional supply chains are morphing fast into “digital supply networks”. The CDP report outlines the advantage of doing so:

“Digital technologies promise to transform how business operates. They offer four advantages – connectivity, intelligence, scale and speed. Connectivity can promote transparency, traceability, real-time information exchange and collaboration between partners in supply networks. Connected suppliers can spread awareness, share knowledge and co-create to find new solutions to carbon and water challenges. Intelligence drawn from connected supply networks can help companies identify carbon hotspots and water-related business risks in their value chains. Plug-and-play access to talent and infrastructure, enabled by digital technologies, would help address these concerns at a scale and speed never seen before.”

Overall, the matrix results are quite revealing: “While suppliers in France, the UK, Spain and Germany – in that order – are identified as the most sustainable, suppliers in China, Italy and the US constitute the ‘quasi-diametrical’ opposite and are found to be vulnerable due to so far insufficient mitigation steps in the face of high climate risks. Japan in turn is the only country with suppliers that appear well-equipped to respond to high climate risks,” as the matrix illustrates. Also notable, suppliers in Brazil have done the least to manage climate exposures and – according to the report – “recent water shortages indicate these may be higher than the risk/response matrix suggests.”

The graphic below depicting the ‘Sustainability Risk/Response Matrix’ puts countries in relation to each other across an aggregated number of metrics. The Y-axis offers a measurement of the inherent climate risk faced by each country – i.e. comprising population, conditions of built-up areas, infrastructure, and environment – while the X-axis measures how well suppliers are prepared – using average scores – to address sustainability issues. Combining the two resulting scores places each country in one of four quadrants.

Sustainability Risk / Response Matrix roman CDP1Source: CDP; See the entire CDP report for detailed country-level analysis and commentary here.

Obviously, the results above are not set in stone, which means that there is room for improvement all around. Interestingly, the report makes positive mention of China and India where the “propensity to collaborate with supply chain partners” in order to reduce climate risk is high. The following graphic bears this out and gives the greatest return on investment potential in terms of carbon and monetary savings to China followed by India. roman CDP2

Source: CDP

In sum, built on the premise that no “meaningful assessment and management of climate change risk can be attempted without an accurate picture of the emissions footprint of an organization, preferably using standardized methodologies and with third-party verification,” the CDP report suggests that in order to be better able to tackle sustainability challenges “regulatory certainty around measurement and reporting” – see as examples the cases of Japan and France – is indispensable. “[C]ompanies that engage with one or more of their suppliers, consumers, or other partners are more than twice as likely to see a financial return from their emissions reductions investments, and almost twice as likely to reduce emissions, than those who do not engage with their value chain,” the CDP report highlights.

Another new study on the subject of ‘supply chains’ published by the World Economic Forum in collaboration with Accenture offers a framework to assess ”the value creation potential of supply chain practices” and makes suggestions that help prioritize sustainability investments. The World Economic Forum advocates in its  “Beyond Supply Chains – Empowering Responsible Value Chains” report the adoption of a so-called “triple supply chain advantage – where companies achieve profitability while benefiting society and the environment.” The report identifies a set of 31 proven so-called “triple advantage improvement measures.” By implementing those practices as part of a more “holistic strategy” – as it pertains to sustainability efforts in a changing market environment – the report sees significant potential benefits in three areas:

  1. Profitability: Revenue uplift of 5-20%; supply chain cost reduction of 9-16%, brand value increase of 15-30%, significant company risk reduction
  1. Local development and societies: Improved customer health, local welfare and labour standards (wages, working conditions)
  1. Environment: Carbon gas reduction of 13-22% on overall footprint

roman CDP3

Source: World Economic Forum

Again, this list leaves no doubt that the ‘holistic triple advantage sustainability strategy’ – theoretically balanced – is in reality heavily tilted towards the ‘business value’ side. In this respect, consider the following statement in the report: “[T]riple advantage is increasingly rewarded by positive ratings from financial analysts.” Thus, the circles in the graphic above should not be equal in size. Nevertheless, with respect to reducing carbon emissions, only results count – meaning that pragmatism wins.

Lastly, the following graphic from the World Economic Forum report provides a useful list of high-value practices and their respective “carbon exhaust reduction potentials” within the supply chain. Note, this list can be especially useful if companies heed the advice from the CDP report; namely, that no “meaningful assessment and management of climate change risk can be attempted without an accurate picture of the emissions footprint of an organization.”

High Value Practices with Carbon Exhaust Reduction PotentialsRoman CDP4 Source: World Economic Forum