As more businesses take a critical look to reduce the carbon footprint of their supply chains, the question of who will pay for the necessary changes will become more clearer.
As 75% of all greenhouse gas emissions fall under Scope 3 emissions, which includes the upstream suppliers value chains as well as companies’ end users product and services. Companies will have to collaborate with their suppliers and find ways to share costs in decarbonizing the supply chain, as against dumping the greenhouse gas emissions reduction cost on suppliers.
According to a McKinsey Report (2022), the total cost of transitioning the global economy to net zero emissions could cost an extra $3.5 trillion in capital spending yearly, which is half the profits of the world’s global corporations. These spending will go into technology, Infrastructure and structured operational changes to make it happen.
As hazy as the situation is at moment, both suppliers and organisations are struggling with how to off-set the cost for emission reduction. In the fashion and other industries, suppliers are already struggling with tight operating margins, which makes it challenging to invest in green technologies.
The amount of internal investment being put into decarbonization activities varies enormously between organizations. However, the world’s wealthiest brands are discovering the true cost of decarbonizing their supply chains. These brands are also investing to help suppliers lower their emissions.
The twist in climate action
Realistically, cost reduction remains the top priority in all facets of the organisation not carbon reduction, even in making effective choices for emission reduction strategies. In a 2023 Efficio study, only about 33% procurement executives and managers surveyed were very confident in their abilities to meet their carbon reduction goals. The study demonstrates that cost control remained a top priority over other drivers including carbon reduction
According to the United Nations’ Intergovernmental Panel on Climate Change, the world needs to cut greenhouse gas emissions by 43% by 2030 to avoid some of the most extreme outcomes of climate change.
CFOs are convinced they are going to do it but it’s difficult to know when because there’s an immediate cost rather than an immediate revenue. Regrettably, the climate is indifferent to budget plans and profit targets.
Scope 3 emissions are difficult to track and they attract huge tracking cost. It’s specifically tied to the supply chain because these emissions occur outside the company’s purview. They are by far the biggest chunk of most carbon emissions and the most expensive to track.
Some industries are moving towards making suppliers see climate as a competitive advantage hence investing in their own value chains to enhance their long-term strategy.
The suppliers that can afford it, may have their own incentives to invest in emissions reduction, particularly in consumer goods sectors where more customers want sustainable products.
The fact is that many suppliers may not have the resources to make investments, although some carbon-reduction investments could pay for themselves in the long run through operational changes that produce value by increasing efficiency or cutting down on energy costs. Maybe pertinent questions buyers and supplier should sit down to ask themselves are;
- How do I maybe reduce consumption?
- How do I shift my consumption to greener chemicals?
- How do I bring things in more regionally rather than transport them across the ocean?”