Supply chain decarbonization: The missing link to net zero
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Highlights
- Companies are pledging to reduce their carbon impact but struggling to measure progress across their supply chains.
- We analyzed public data from a randomly selected set of 400 public companies to identify trends and patterns about supply chain measurement and sustainability.
- Building on that research, we explore the challenges and potential of leveraging supply-chain data to measure transition into a net-zero business ecosystem.
In this article
In this article
Supply chain trends
Over the last seven decades, global carbon emissions have increased almost eightfold.
Meanwhile, since 1980, the planet’s average temperature has risen significantly, with nine out of 10 warmest years on record having been in the last nine years.1 For sustainable development, it is now widely agreed that we must achieve a shared global goal of cutting carbon emissions by 45% in the next 20 years from 2010 levels.
The good news is that businesses have started responding actively. More than 100 companies worldwide have pledged 100% use of renewables. Food companies have set a goal to reverse forest loss and land degradation by 2030. And more than 30 financial institutions with global assets worth $8.7 trillion have pledged to avoid investing in any business that can be held responsible for deforestation.
Making such a pledge is one thing—finding ways to measure, track, and implement it is entirely another. Pledges like the ones above, for instance, mean tracking data on the deforestation impact of ingredients such as soya, palm, cocoa, and coffee, which many consumer goods and retail businesses use in their food and personal care products.
To evaluate how effectively enterprises are managing their sustainability imperatives, TCS and Microsoft worked together to research and analyze publicly available data. We found that irrespective of size and revenue, enterprises are becoming increasingly conscious of sustainability. However, they are struggling to measure the true value of decarbonization efforts in their supply chains. By improving the quality of global supply chain data, enterprises can better measure their true carbon footprint—and ultimately help find the missing link to a net-zero business ecosystem.
Industry snapshots
First, the big picture. For our analysis, we looked at public data from a randomly selected set of 400 public companies with combined revenue of $10 trillion.
The sample set for our analysis included companies from around the world, from industries including energy, aerospace, automotive, hi-tech, telecom, machinery manufacturing, life sciences, consumer goods, retail, travel, transportation, and hospitality.
We assigned each company a score from 0 to 10 for their prowess in managing sustainability imperatives. This score was based on four dimensions:
Shareholder value measured by the Dow Jones Sustainability Index
Demonstrated climate resilience measured through initiatives that track and manage carbon emissions in real estate
Supply chain resilience based on Scope 3 carbon emissions (which are defined as the result of activities from assets not owned or controlled by the reporting organization)
Water resilience demonstrated through the ability to manage water-related risks and opportunities
We found that 51% of the companies we analyzed were actively participating in the Dow Jones Sustainability Index, and 52% publicized climate action. However, we also saw that a majority of companies are struggling to validate the data and insights from their supply chain emissions.
From an industry perspective, we observed higher disclosure rates from manufacturing, energy, retail, and consumer goods companies. Many companies in these sectors want to position themselves as leaders and influencers in this space, so frameworks that advance their aspirations are seen as especially valuable.
Reimagining supply chains
Only 16% of the companies we analyzed have publicly set science-based targets for operational carbon emissions.
A smaller fraction of companies (11%) have committed to science-based targets for carbon reduction in supply chains. Our findings underpin the importance of engaging with an extended sustainability ecosystem that includes customers, suppliers, and other stakeholders.
As an example, consider the carbon profile of a typical food supply chain. In our consulting experience with companies in the consumer goods space, we have observed that products and packaging account for more than 70% of carbon emissions (sometimes even more). Reimagining global supply chains can be a critical step in their journeys towards more sustainable practices.
16% of the companies we analyzed have publicly set science-based targets to reduce operational carbon emissions and only 11% have such targets for their supply chains.
Transparency for ESG
Consumers are seeking credible product labels to make informed decisions about the goods they buy.
Studies conducted in the United Kingdom and Japan2 earlier this decade indicated that consumers desire sustainability labels in the products they buy. An early adopter of carbon labels was the food industry. For instance, Walker chips from PepsiCo and Tesco carried such labels, pioneering this much-needed trend in the larger industry ecosystem such as apparel and personal care through this decade. Dasher running shoes of Allbirds, Cocokind cosmetic products, and more recently Oatly and Quorn3 are just some examples. The German discount chain Lidl has gone a step further, by piloting an ecological rating system in the year 2021 based on a traffic light concept4 to guide their customers to make sustainable decisions.
To see how this seeming public desire for transparency translated into stock prices, we analyzed 95 companies in the retail and consumer goods industry to correlate their ESG scores in the Dow Jones Sustainability Index with share prices over a period of four years.
The results were striking. An increase of 10% to 42% in the sustainability index since 2017 positively impacted the share price in the range of 15% to 233% in the same time period. Such trends show the strong influence that responsible businesses have on public perception, and by extension financial performance.
One source of truth
For all of these ecosystem examples, supply chain transparency is key.
This means making the data not only accessible, but also understandable. In reality, this transparency requires continuous engagement with suppliers—both to address their concerns and to build credibility by sharing best practices. And it’s not only suppliers: It is important to bring together all stakeholders from across the business value chain. This collaboration is key to unlock the potential of green transitions and to mitigate environmental and social risks.
Technology companies have a strategic role to play here, too, as data transformation partners for organizations. The edge-to-cloud data transition can improve disclosure, helping lead to zero-carbon, transparent supply chains. We see this carbon transition already happening in a big way in the energy, consumer goods, and retail segments. Companies are investing in emission accounting systems covering not only Scope 1 direct fugitive emissions and Scope 2 indirect emissions from electricity purchased, but also the Scope 3 supply chain emissions, which aren’t owned or controlled by the reporting organization. From our sustainability data advisory work with clients around the world, we see that Scope 3 categories such as procurement, packaging, distribution, and logistics contribute to more than 80% emissions for the consumer goods businesses.
We also see an increasing interest in companies in the energy, logistics, consumer goods, manufacturing, and food and apparel retail space wanting to address these complex challenges. Companies are looking to create “auditable” digital sustainability data accounting systems catering to an intricate supply chain that navigates geographies and markets around the world. Such demonstrated good-practice data-sharing measures must be replicated and scaled up through value-based business models.
Original equipment manufacturers are also leading the way. Many of them are setting ambitious targets to work with their extended ecosystem of suppliers and vendors on data-sharing key attributes, such as climate risk, water stress, and social impact of their business around the world.
Meanwhile, regulatory pressure is likely to increase. With emerging drivers such as the Task Force on Climate-Related Financial Disclosures (TCFD), carbon border adjustment mechanisms, and stringent supply chain laws in the European Union, companies will be forced to contribute to data-sharing platforms that help build safer, more responsible, and more resilient supply chains.
Leveraging technology at scale
Managing sustainability-related risks and opportunities requires core infrastructure and technology capabilities to be in place sooner than expected.
Supply chain sustainability data is discrete, in siloes, and often maintained in spreadsheets—which makes auditability, accuracy, lineage, and governance challenging.
With all the tools and point solutions available on sustainability, it may be tempting to pick a quick win in the marketplace. However, companies need to take a more strategic path. Curating supply chain data can help companies gain competitive advantage by making use of insights and intelligence. Organizations also must develop a shared understanding of problems or requirements in Scope 3 supply chain visibility, and there’s evident skill gap in doing this. They can address these gaps and shape their sustainability initiatives by working with experienced consulting services.
Absence of data makes digitalization and digital transformation all the more critical. While it is essential for enterprises to work with their suppliers to embark on digitalization, it is also imperative that they modernize their core IT systems and infrastructure. A strong digital core provides the ability to deliver on sustainability principles and meet sustainability goals faster.
This is where the cloud comes in. Cloud adoption provides organizations a big step towards net-zero emissions—beyond the obvious benefits of cost savings, operational efficiency, business agility, and innovations. As cloud adoption for digital data management continues to scale, various case studies demonstrate savings of life-cycle carbon emissions due to migration from on-premises data centers to cloud. For instance, research from Microsoft shows that for an organization with 10,000 users, the reduction can be between 70% and 90%5.
To build competitive supply chain data, organizations must ingest data from suppliers, then aggregate, wrangle, augment, and curate it into a single source of truth. This information allows organizations to record emissions more accurately across the entire value chain and operations, to analyze and visualize emissions and environmental impact, and to eventually set goals for reducing the environmental footprint.
As organizations progress on their technology and data maturity path, advanced technologies like AI, ML, and digital twins can be leveraged with appropriate, strategic sustainability solutions. The benefits of investments can be multifold—from cost savings and operational efficiency to business innovation to address end-to-end supply chain challenges.
An increase of 10% to 42% in the sustainability index since 2017 positively impacted the share price in the range of 15% to 233% in the same time period.
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