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January 17, 2024
6 Min Read
Vladimir Razguliaev via Alamy Stock
At a Glance
- Research shows that top performing organizations boost brand affinity, bump up revenues, and reduce sourcing risks.
- Intertwined supply chains, stringent regulatory requirements, and disruptive business conditions are putting firms on edge.
- A daunting aspect, for small firms supplying raw materials or specialized components, is onerous data collection/reporting.
It’s tempting to view tech and reporting tools as a foundation for a highly effective sustainability initiative. Yet somewhere between carbon accounting software and environmental, social, and governance (ESG) checklists lies a troublesome fact: Meeting targets and lowering risks hinges heavily on relationships with suppliers and partners.
Forging effective partnerships is critical, particularly as organizations look to revamp, rewire, and reinvent the way they use raw materials, energy sources and production methods. “Today’s value chains are highly circular. It’s important to take a collaborative approach to sustainability and work toward mutual objectives,” says David Linich, a sustainability partner at PwC.
Adds Elfrun von Koeller, managing director and partner at Boston Consulting Group: “Somewhere between 70% and 90% of a typical organization’s carbon footprint takes place at the Scope 3 level. It’s impossible to reduce emissions in a significant way without focusing on the value chain.” Scope 3 emissions, as defined by the Environmental Protection Agency, result from assets a reporting organization does not own or control, but the organization indirectly affects.
Establishing strong and trusted sustainability partnerships is no small challenge. It’s vital to ensure that everyone is focused on the same goals and using common metrics. Any lapse can lead to accusations of greenwashing, regulatory penalties or supply disruptions. Yet, there´s also the more subtle challenge of understanding the needs and limitations of other businesses spanning the supply chain.
Moving Beyond ESG
The value of sustainability isn’t up for debate. Research shows that top performing organizations boost brand affinity, bump up revenues, and reduce sourcing risks. For example, 91% of business executives polled by PwC said that their ability to establish trust around sustainability improves the bottom line. The consulting firm also found that 80% of customers are willing to pay a premium for sustainable products.
Translating goals into an effective sustainability strategy is no simple task, however. Deeply intertwined supply chains, increasingly stringent regulatory requirements, and highly disruptive business conditions are putting firms on edge. As McKinsey & Company noted in a 2021 report: “Few companies have organizational structures that are designed to treat sustainability as a material business issue.”
Establishing visibility and mutual objectives -- particularly at the Scope 3 level -- can prove incredibly difficult, even with robust carbon accounting tools and reporting in place. The problem often revolves around the lack of clearly defined shared purpose. Many organizations aren’t clear about how to translate ambitious goals into action, and they are often less attuned to a supplier’s or partner’s business framework, Linich warns.
Consider: A hotel chain might announce a program to purchase towels made from recycled cotton fibers. If a marketplace for these towels doesn’t yet exist, the initiative would likely involve ethically sourcing and recycling fibers, finding weavers, and ensuring that small firms downstream can earn a profit. Ensuring that an adequate supply of affordable towels exists may require cooperation among several hotel chains within the industry, as well as support from non-governmental organizations (NGOs) and government. “It’s often necessary to bring several parties together and agree on broader objectives,” Linich says.
Indeed, all of this may require an entirely new operational framework. Yet there’s also a need to educate and upskill groups on both sides of a partnership to ensure that everyone is working with a common set of goals, data, and objectives, von Koeller says. “A sustainability partnership must extend beyond the procurement team. It touches the entire organization.”
Achieving Net Gains
The first step in establishing highly effective partnerships, von Koeller says, is to identify what an organization hopes to achieve and establish a roadmap for meeting specific goals and metrics. This requires a focus on shared values and coordination across departments and groups. “You have to understand your footprint, understand what environmental impact an action has, and how to engage suppliers to achieve alignment around your targets,” she explains.
Open and honest communication among partners is vital. Too often, larger companies fail to understand what suppliers can do and what they can’t do, particularly when they’re located in faraway countries, or a supply chain has numerous layers. Partners downstream and upstream face their own set of challenges -- environmental, political, and practical -- that can make it difficult to conform to strict standards.
A particularly daunting aspect -- especially for smaller firms supplying raw materials or specialized components -- is onerous data collection and reporting requirements, Linich notes. As a result, smaller companies may require funding and technical assistance from larger partners, including aid in setting up software and IT systems that support sustainability. They may also require help adhering to emerging regulatory standards, such as the EU’s European Climate Law.
One way to simplify the task of building out a robust sustainability ecosystem is to incorporate NGOs that establish common sustainability standards, experts say. This includes groups such as Gold Standard and the International Sustainability Standards Board (IFRS) that provide common tools, measurement principles, frameworks and methodologies. “These organizations support unbiased science-based standards,” Linich says.
In some cases, it’s also beneficial to establish an industry consortium or fund an incubator or lab focused on R&D, particularly when the ROI is questionable. Jet fuel producers, for example, have created HyShiFT to develop synthetic aviation fuels while major consumer packages goods companies (CPGs) have set up the Sustainability Consortium to promote sustainable products and packaging. The latter group includes companies like Kroger, Amazon, Walmart, and P&G as well as environmental NGOs like The Nature Conservancy and World Wildlife Federation.
A Climate for Change
A notable success story is retailing giant Walmart. In 2017, it established Project Gigaton to engage suppliers in climate action, particularly at Scope 3. Walmart introduced an online sustainability portal, science-based targets, and standardized methods for collecting and managing data. Walmart rewards participants that meet criteria by showcasing their progress and recognizing them publicly. The company says that it has avoided 750 million tons of emissions through the program.
With a strong strategic partnership framework in place, it’s possible to take full advantage of technology -- including advanced carbon accounting tools, sensors and IoT devices, analytics software, and digital twins -- to meet goals and objectives. An organization can also harness artificial intelligence, including generative AI, to design and build more sustainable products and services, but also to manage supply chain visibility. “Generative AI can spot trends and summarize highly complex data sets,” von Koeller points out.
With a roadmap, a clear understanding of what each supplier and partner can deliver, and a way to measure how everyone is performing, the guesswork goes away -- along with friction and conflicts. An organization can build trusted partnerships that lead to tangible results.
Concludes Linich: “We're have reached an inflection point where sustainability can either be an opportunity or a risk. The ability to collaborate with partners up and down the supply chain is critical for success.”
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