Supply chain decarbonization, what’s to be expected in 2022?

Many companies are recognizing the effectiveness of decarbonizing their supply chain. But which measures can ideally be implemented in 2022? Which trends can companies follow in order to efficiently reduce CO2 emissions along their supply chain?

The biggest challenge of the 21st century is to successfully implement climate transformation. Climate change is noticeable worldwide: fires, floods and species extinctions are already paramount during this decade. If the global surface temperature warms by 2 degrees, a quarter of the world will regularly suffer from extreme heat waves. Even if the widely discussed 1.5-degree target was being achieved, extreme heat still affects about 1 billion people worldwide. 

The global economy plays a central role in making substantial impact. Although emissions in Europe have been declining since the 1990s (Fig. 1), this is the result of global crises rather than that of successful climate management. Our climate transformation measures have a large scope for improvement.

Fig. 1

GLOBAL REGULATIONS

Regulations are being put into place worldwide to enable the implementation of climate targets (Fig. 2). At the COP26 climate conference in Glasgow, agreements were made to eliminate the use of fossil fuels and to reduce emissions worldwide by at least 55% by the end of 2030. Such targets are also increasingly being set in Europe. The “Fit for 55” program was adopted in summer of 2021, also with the goal of reducing emissions by 55%. Earlier this year, Germany reaffirmed its intention to work towards a 65% reduction by 2030 and to achieve climate neutrality by 2045 (however, whether 2045 is a feasible target year is still a matter of debate). 

These targets are having an impact on businesses. Companies must adapt, commit to reducing emissions and help meet the 2-degree target. However,  last year we realized that it is not enough to simply set these climate targets. We also need to talk about how we put them into practice. 

Fig. 2

The EU taxonomy has been in force since January 1, 2022. It aims to classify companies according to how their actions contribute to climate and sustainability. The EU taxonomy is considered to be the first framework for such a classification. The framework provides tangible criteria to measure the degree of sustainability and climate compatibility of business activities. It analyzes whether they positively influence one of the six environmental goals of the EU (Fig. 3) without violating another while at the same time complying  with all social standards. Companies will soon have to transparently disclose how they contribute to adhering to this framework and assess whether their own business model is climate-compatible. Heavily discussed within this framework is the inclusion of nuclear power. 

Fig. 3

A second framework is a proposal from the Taskforce Climate Related Financial Disclosure (TCFD), which was developed at the request of the EU to show the other perspective: How can companies show what risks climate change poses to them? And how can businesses set up strategies to address these risks and seize opportunities? Although this framework is only a recommendation so far, 60% of the world’s largest 100 companies are already using it in order to assess especially financial related climate risks.

The CSRD (Corporate Social Responsibility Directive) aims to bring these two perspectives together. The goal is to create a framework for 2023, which companies may refer to, instead of the currently existing Non-Financial Reporting Directive (NFRD). It is already known from publications that the CSRD builds on existing standards and takes into account the 6 EU climate targets. For now, this framework will apply to companies with over 250 employees with €40 million net sales and €20 million balance sheet. From 2026 it will also apply to listed SMEs.

These frameworks are emerging not only at the European level, but also at the international level. Companies are already aligning with the TCFD requirements. In the meantime, the International Sustainability Standard Board (ISSB) has also been established, whose task is to create an international concept for the disclosure of climate-relevant ESG data. This will also consider governance, strategy, risk metrics and KPIs.

2022 – GET YOUR DATA RIGHT!

In order for companies to make the impact of ESG criteria measurable and manageable along the value chain, climate data analysis is necessary. The obligations for companies to disclose their climate impact are increasing, not only from the customer side, but also due to the regulations mentioned previously. As a starting point, it helps to identify the biggest emission sources within the company. The majority of a company’s negative climate impact is not caused by direct emissions, but the emissions that are generated within  its supply chain (Fig. 4).

Fig. 4

Emissions from the supply chain can account for up to 90% of corporate emissions. If a company aims to improve its climate impact, the biggest lever is the supply chain.

HOW CAN COMPANIES OPERATE IN A CLIMATE-COMPATIBLE MANNER?

To drive climate transformation within a company, the first step is to implement a structured climate management system. It is insufficient to measure CO2 and simply offset emissions- CO2 emissions must be avoided and reduced. In addition, it is necessary to transparently disclose climate-relevant data. 

Decarbonization through climate-relevant procurement makes supply chain transparency ever-so important. Dealing with Scope 3 emissions is essential for companies to meet requirements pertaining to their climate transformation. This is accompanied by various challenges (Fig. 5). For example, climate-relevant data is often missing, which impedes companies from enabling a climate-compatible procurement practice. Moreover, there are still no clear climate targets and standards along the value chain, by which companies can measure whether their suppliers are abiding by established  climate standards.

Fig. 5

An alliance of international corporations- “Transform To Zero” (Fig. 6), was formed in order to successfully address these challenges. Participants across different industries benefited from working together to decarbonize their supply chains. Engaging a fragmented supplier landscape across multiple industries requires collective action. 

The biggest challenge of supply chain decarbonization: There are many small and medium-sized companies in supply chains that are not yet ready to manage their climate impact, resulting in a lack of climate-relevant ESG data. Only 28% of companies with decarbonization goals are on track to meet their targets. This mainly results from the fact that they have not yet addressed supply chain challenges. The following is a step-by-step guide to supply chain decarbonization.

STEP-BY-STEP SUPPLY CHAIN DECARBONIZATION

When decarbonizing the supply chain, the following questions need to be addressed:

  1. How climate-relevant are my suppliers?
  2. How do I help them decarbonize?
  3. How can I foster collaboration between buyers and suppliers? 

No matter what process you implement, according to Gartner, a company should first find a way to collect data and analyze it, in order to provide expertise from the different areas of transformation.

To help companies move towards climate-compatible supply chains, one must consider the following five steps:

  1. Comprehensive climate management system – addressing climate regulations and customer needs.
  2. Engagement – collaborating with suppliers on climate reporting and emission reduction effort
  3. Data collection implementation – developing a method to manage climate-related ESG data from suppliers
  4. Data-driven – using software to enable suppliers to identify emission reduction opportunities
  5. Data-driven procurement – making smart decisions and allocating capital properly

HOW ZERO-CARBON SOLUTIONS DECARBONIZE SUPPLY CHAINS

40% of emissions in supply chains could be reduced via easily accessible and affordable means (<€10 per ton CO2e), which equals current offsetting prices (Fig.7).

Fig. 7

WHY IS CLIMATE TRANSFORMATION PROFITABLE?

The assumption investing in Climate Transformation contradicts the company’s goal of generating profit still prevails. But investing in climate solutions is profitable for businesses. According to World Economic Forum, a sustainable supply chain increases a company’s market value, as procuring companies improve their performance and reduce costs directly in the supply chain as well as suppliers benefitting from sustainable practices and reducing their own costs.

WRAP-UP SUPPLY CHAIN DECARBONIZATION:

The past year has shown the need to effectively implement CO2 emission reductions along the entire value chain. Companies need to transform their supply chains and implement climate-relevant sourcing by actively engaging with suppliers and empowering them to manage their own climate data and reduce CO2 emissions. Climate-relevant sourcing includes enabling a collaborative sourcing-supplier relationship that empowers suppliers to become climate champions themselves.

THE CLIMATE CHOICE supports this goal. As a software-as-a-service platform, it provides reliable climate ratings and a collaborative, data-driven tool for decarbonizing companies and their supply chains. As a detailed analysis, the action-oriented and easy-to-use climate scorecard provides insights into the company’s climate-related opportunities, potentials and risks. The smart technology platform supports companies in identifying fields of action and implementing decarbonization measures together with suppliers and trading partners. This drives forward a holistic transformation. By working with a consistent methodology to evaluate its own climate performance, effective measures for supply chain decarbonization can be implemented in collaboration with a strong CLIMATE network. This way companies can target CO2 reduction and promote transparency.  

Make your company a CLIMATE Champion! Contact us right now to schedule a free consultation. 

Game Changer: CSRD. How to transform your business and value creation.

Big things are happening in the Climate and Sustainability Reporting Field

Make sure you are prepared! In the following you find the most important key takeaways about the upcoming Corporate Sustainability Reporting Directive (CSRD) and how it changes the way you do business today. 

Summary: The new sustainability reporting standard is leading a future-oriented change of business relations. Investors, customers and business partners will be able to discover the impact of companies and their actual measures to improve it. Companies will therefore report annually on how they manage their social and environmental dimensions as well as governance. Reported information will need to be robust, transparent, and verifiable. Therefore, an internal management system as well as external audits will be mandatory for companies, in order to continuously measure and monitor their impact along the supply chain. 

What is the CSRD? 

Let’s start at the beginning. The Corporate Sustainability Reporting Directive (CSRD) is today still a proposal from the EU Parlament, but will soon replace the Non-Financial Reporting Directive (NFRD) in the EU. Until then, certain details and requirements can still change. However, the objectives of the directive are clear. The policy objective of the new Directive is to ensure that stakeholders can assess the climate and sustainability risks of companies. The practical objective is to bring climate and sustainability reporting to the highest level of maturity, in order to make it transparent and comparable. The process involves the challenge of creating sustainability reporting standards, digitize impact reports and overview them – such as financial reporting.

Who is affected? 

The CSRD proposal is suggesting that all “large” companies need to report. Large is defined by 2 out of these 3 criterias:

It is estimated today that in the EU 50.000 companies and more will be affected by the CSRD – compared to about 11.000 that are currently falling under the non-financial reporting requirements. 

When will the CSRD come into effect? 

In 2024 large companies will need to fulfil the CSRD requirements, reporting on the business year of 2023. SMEs will have a little more time to adapt. But large companies are likely to request the respective information from their suppliers – and they might need to ask their suppliers to report, too. This way, the CSRD will have an indirect effect on more or less all companies. Over time, until 2026 it is also addressing listed SMEs directly. 

Large companies are addressed first, but SMEs will most likely be indirect affected.

Which information needs to be reported? 

The CSRD refers to existing ESG-guidelines, therefore it requires information about environmental, social and governance aspects of companies. Right now the EU Financial Reporting Advisory Group (EFRAG) works on concrete proposals for binding criterias. However, it is already clear that the directive will be aligned to international ESG-standards such as the work of the Global Reporting Initiative (GRI). 

What comes next? 

Scheduled for summer 2022, a first set of requirements and final standards will be published. Those will be required for the reporting year 2023. The new update will include guidelines for two main concepts: 

  1. The double materiality concept: This concept requires companies to report both on how sustainability issues affect their own performance, position and development (the ‘outside-in’ perspective), and on their impact on people, stakeholder and the environment (the ‘inside-out’ perspective). It will further demand the disclosure of: 
    1. Climate and environmental impact of a company and its supply chain. 
    2. Social impact and responsibilities across the value chain. 
    3. Climate related risks and financial uncertainties. 
  2. Quality of information: Guidelines on how comprehensive data needs to be collected, managed and reported. 

Double Materiality and Data Quality along the entire value chain

A year later, in summer 2023, a set of additional guidelines regarding the reporting standards and its quality will be published. These will focus on the integration of non-financial and financial reporting, the depth of collected and managed data from companies and their supply chains as well as future-oriented metrics to improve companies’ sustainability performance.

How to prepare? 

Start preparing now! Ask how your company collects already climate related data and ESG information, use systems to standardise and prepare to be able to share them. This is not only a matter of digitalisation and software-tools, but it requires a transformation for status quo management. CSRD and its implications will be central to a company’s whole strategy as well as to its internal and external stakeholders. Each company needs to start now with mapping out which resources need to be activated in order to be able to meet the necessary criteria. As mentioned, the EU Parlament is still in the process of defining and discussing the proposal. Nevertheless, decision makers, sustainability officers and supply chain managers are now preparing best by focusing on the strategic means to be able to report on past and future-oriented criteria of the CSRD. 

The sooner the better! Focus on climate impact and ESG information.

Conclusion: Which next steps to take? 

The CSRD will follow the suggestions of the TCFD*, especially for climate relevant ESG-information. Moreover, it will be in line with the EU Taxonomy as well as the existing NFRD.  This means that companies will very likely have to report against:

Get your data managed: From information collection to actions.

Lead the transformation!

The new CSRD is meant to make impact transparent and to simplify investment decisions. For companies this will bring opportunities to position themselves as pioneers and to empower business partners along the way. Meanwhile, the whole process demands attention and needs to be implemented as collaborative transformation within companies and together with stakeholders. Do not hesitate if you want to learn how our software service is enabling you to take the next steps forward. Contact us for more information