Why Getting Your Suppliers to Commit to Net-Zero is Harder than You Thought: Latent Barriers to Supply Chain Decarbonisation

Like many other sustainability advisories, ours has been inundated with inquiries on “how to go net zero” since the beginning of the year. Many, if not most, came from businesses that have explicitly been asked by their B2B customers to commit to net zero and to set science-based targets. Such requests had at times been extended as nothing-out-of-the-ordinary communications - an approach bound to fail to yield results, and one that illustrates that there is little widespread understanding of the scale of ambition dictated by the net zero transition so far. I’ll attempt to illuminate the problem.

Previously, corporate buyers may have made similar demands with regard to reporting instruments such as CDP disclosures or the Ecovadis assessment - where it could be reasonably expected that the supplier in question will 1) be able to meet the demand without significant difficulties and 2) either side will be happy to absorb the associated fee.?

However, committing to science-based targets is worlds apart. Why? Leaving aside the SBTi’s imperfections and potential conflict of interest (repeatedly pointed out by Bill Baue), the SBTi’s Net Zero Standard is effectively the first widely known sustainability reporting and accountability instrument derived from a planetary boundary - and hence the first that confronts business and sustainability leaders with the chasm between our business-as-usual and the imperatives of a livable, capable-of-sustaining-business planet. Pleading to achieve net zero emissions effectively commits a company to rethinking its hitherto strategic direction, its value proposition, business model, and so forth. In contrast, adopting mainstream reporting instruments, products of an era of so-called incrementalism (of approaching sustainability by nudging business-as-usual) do not even remotely require such radical steps.

Not having grasped this essential difference leads to ineffective attempts at supply chain decarbonisation. We are soon to see an emergence of more boundary-derived accountability instruments (such as the UN RISD’s Sustainable Development Project Indicators or SDPIs, set to be launched by the end of this year). Growing awareness of the present planetary emergency will likely lead to stakeholder calls for a fast adoption of such boundary-based instruments. It is therefore critical that business leaders and sustainability champions fully comprehend the implications of this paradigm shift now.

If your attempts to engage your supply chain over decarbonisation have not resulted in much (tr)action, you likely do not appreciate the reality of your starting position, which is that:

1. Given their context, many small and medium sized suppliers are highly unlikely to meaningfully commit to net zero emissions, due to 3 gaps I discuss in this article: the capability gap; the money gap; and the mindset gap.
2. Requesting net-zero equals dramatically revising the specifications on your sourcing, and inevitably requires a two-way negotiation. A mere “let us leverage our power” approach will not do. (This could be considered a current mindset gap on the corporate-buyer side.)

I elaborate on each of these points below, and conclude with recommendations for each side of dyad: top-of-the-food-chain buyers and small and medium sized suppliers.?

SME suppliers are unlikely to commit to net zero, given their starting point

Planning for a firm’s net zero transition may appear straightforward - make a public pledge, set your targets, get the targets verified, abate emissions and report on progress. But for most supplier businesses, it is a much bigger leap than that. From what I have observed, corporate buyers hardly ever appreciate the magnitude of the expectations they aim to pass onto their supply chain, and their practical implications.?

In this section, I will try lay out a simple gap analysis:?

• What does it take to transition to net zero
• What do most SMEs actually have at their disposal

I present this analysis through 3 separate perspectives: capabilities, money and mindset.

What does net-zero take: The Capability Angle

In short, the SBTi net zero standard requires companies to halve their current GHG emissions by 2030, compared to a recent baseline, and to commit to eliminating 95% of their Scope 1 and 2 emissions and 90% of of their Scope 3 emissions by 2050, without the help of offsets. These requirements are proportional to the “swift and radical change” called for by this year’s IPCC reports in order for us to meet “a narrow and rapidly closing window of opportunity to secure a liveable planet”. They are derived from a planetary boundary, as discussed in the introduction.

For most sectors, attaining these targets requires immediate innovations to the current business model, and a broader transformation down the road. (As opposed to nudges to business-as-usual such as increasing the percentage of recycled content in product packaging, hyped up in external communications as progress towards circularity - those will not do).?

In turn, envisioning and implementing such large-scale change requires a combination of high maturity business strategy and sustainability acumen:?

1. ability to translate climate science into future scenarios;?
2. ability to interpret the impact of these scenarios onto one’s business - to identify and quantify risks and opportunities;?
3. ability to envision a business that will thrive in these futures (likely underpinned by a reinvented value proposition and business model), to develop a corresponding strategy and to ensure that strategy’s materialization by cascading it down into programs, processes, capabilities, systems, incentive schemes, outcome and output metrics, and into review and early course-correction mechanisms;
4. ability to identify best available mitigation and adaptation options from among existing and nascent solutions (feasibility, cost, efficiency), arranging them in thought-out roadmaps, interlinked with corresponding capability development plans;
5. as well as an ability to execute and change-manage a large-scale transformation project.

Interestingly, capabilities 1, 2 and 4 are equally required for adoption of the TCFD Recommendations (which are not derived from planetary boundaries, do not even take into account the company’s inside-out impacts, and which suggest a strategy review but do not directly result in inevitable business model transformation). Note that many companies have struggled to implement TCFD disclosures.

Now, let’s revisit the context of your supplier companies:

• In all likelihood, they have only embarked on ESG disclosures within the last few years - by adopting reporting instruments embedded in incrementalism; some may have been managing their rankings - likely as the result of your own pressures or those of your peers.?
• Their sustainability agenda has likely been obligation-driven, lacking a quantified risk assessment or business case for value creation through business sustainability, and hence lacking top level leadership attention and buy-in;
• They probably do not have a dedicated sustainability function or much sustainability expertise in-house, making them dependent on external guidance for even moderately ambitious sustainability initiatives;?
• They likely have no substantial budgets for sustainability action - making even nudges to business as usual difficult to attain, and ambitious initiatives an elusive mirage;
• They likely have no formal or sophisticated strategy development process, no scenario modelling capability or experience, or the capacity to project- and change-manage a business transformation;
• Sustainability may not be on the strategic review agenda.

I summarise the gap visually in the figure below:

How does this translate into a starting point for net zero? In short, poorly.

What does net-zero take: The Money Angle

Given the implicit radical change requirement, committing to a net zero transition equals committing to making substantial investment more or less immediately, and further investments in the future. Of those, only a fraction will see returns:?

Last October, BCG and HSBC published a joint report in which they estimated US$ 100 trillion were required to decarbonise supply chains by 2050, of which up to US$ 50 trillion would be required by SMEs. (For a sense of scale, the whole global economy is about $94 trillion a year).

McKinsey, in its The Net Zero Transition report from January 2022, concluded the investment required to fund a global transition to a net zero economy will have to be front-loaded, peaking in 2025-2030.

Making a large investment decision requires a solid business case - one which demands mapping the costs and implementation requirements of initiatives necessary for meeting these targets over the current and future decades, and considers both the benefits of the transition (reduced risks, lower operating costs) and the benefits of net zero certification (such as effects on cost of capital, on talent acquisition and retention, eligibility for government incentives schemes, etc).?

For a supplier with no dedicated sustainability capacity, gathering the information for building solid assumptions alone is a rather gargantuan endeavour. This makes an educated net zero commitment ever less likely.?

What’s more, the business case, if successfully put together by your SME supplier, may not look tempting at all. Don’t get me wrong - anyone up to speed with climate science should be clear that business continuity in 10-20 years from now necessitates turning things around in the immediate term. However, to date, few companies or investors are happy to wait for returns over such long horizons. When it comes to SMEs suppliers, few may be even planning that far ahead.?

In summary, the costs of transitioning to net zero far exceed what most SMEs will be able to bear - or sell to relevant decision makers. Compare and contrast that with CDP disclosures, with a few thousand dollar fee, and where improvements in ranking can be attained through resource efficiency, which saves costs.

What does net-zero take: The Mindset Angle

Given the necessary scale of ambition and investment demonstrated above, committing to science-based net zero is not a sustainability decision, it is a business strategy decision, as one of my colleagues accurately pointed out. What she meant was that it was not a decision that could be made by a sustainability champion alone, in isolation from top level decision-making. It has to be made by the highest governing body, which first must accomplish a mindset shift.?

This underlying mindset shift can be broken down into 4 progressive cognitive realignments:

1. Acknowledging the scale and urgency of the planetary emergency;
2. Recognising the company’s role in creating the emergency and the opportunity to help abandon the current trajectory of assured planetary destabilisation, to help build a climate-positive, nature-positive, regenerative and socially just economy;
3. Shaking off shareholder primacy, embracing a definition of corporate purpose centered around serving stakeholders across the value chain (ideally, embracing a planet-centric stakeholder categorisation);
4. Transcending short-term focus and self-absorption: in essence, developing the inclination to put the interests of the whole (global community), and of the cohorts that won’t be nearing the end of their lifespan in 20 years from now, above one’s end-of-year bonus or dividend, and above the optics of one’s achievements while looking for the next opportunity. Harvard professor and author Rebecca Henderson refers to these worldviews as “me and now” versus “us and the future”.

Needless to say, attaining such mindset change does not happen overnight, nor does it happen effortlessly. To my knowledge, we don’t have all the answers yet on how to orchestrate such mindset change, but the recipe includes methodical training in empathy. Without progressing beyond shareholder primacy and greed, decarbonisation and broader sustainability efforts will always be stifled by lack of buy-in and support.?

Gap Analysis Summary

I hope it has been sufficiently demonstrated that your SME supplier is likely to fall short on all three requirements: capabilities, available investment, and an enabling mindset. In other words, “everything else held constant”, your SME suppliers are quite unlikely to commit to net zero targets (unless they do so nominally, to temporarily appease you, without actually taking the steps - which will not lead to a good outcome for either side). This is the starting point we must be aware of. We should also recognise that corporate buyers can ameliorate that starting point.?

What will it take you to decarbonise your supply chain??

In short, first, adjusting your own mindset, and then filling in the 3 gaps on the supplier side.

Adjusting your mindset

As explained in the previous section, small and medium sized suppliers are unlikely to be able to make a net-zero commitment. Corporate buyers therefore need to, at minimum, approach supply chain decarbonisation expecting a two-way (or multi-party!) negotiation, and long-term collaboration to achieve that goal. They should be equally expecting the costs will have to be borne by both sides.

This should really come as no surprise - the change to specifications of a procured product or service would naturally result in a bilateral negotiation in any other context. We can even witness this being the norm in other areas of sustainability - e.g. when Nestle needs to ensure its supply chain is free from child labour, to manage its own reputational risks, it does so by paying farmers extra to send their children to school.

Takeaways

What should corporate buyers do?

• Plan out the broad strokes of your own pathway to net zero first. If it involves substantial changes to the value proposition, business or operating model, your current and future supplier pools may not be the same - an important consideration before committing to long-term collaboration and co-investment.
• Don’t merely demand net zero commitments and science-based targets without extending a helping hand; without acknowledging that your own actions and investment are critical in making this happen, and communicating the same to your suppliers; Instead, engage in a meaningful dialogue, in partnership-building.
• Be clear that on the scale of investment required, and that you and your peers are the only source of investment in the near term: government subsidies, even if they were on the agenda in all economies, will not be in place in time for any net zero requests coming now. Consider which avenue of financing your supply chain’s decarbonisation is most suitable for your business:
• Agreeing to increasing the price of your procurement in exchange for the net zero badge of quality - an approach that might require influencing other buyers to reach the critical mass;?
• Co-investing the supply chain decarbonisation.
• To accelerate availability of government funding for decarbonisation, publicly support ongoing activist movements, which have already done the homework and only need to build the critical mass.
• Understand that knowledge and resource sharing is half of the success: such as scenario modelling capabilities, risk assessment frameworks and templates, insights on available emission abating initiatives, their efficiency, costs and implementation requirements; such as research that can underpin assumptions for quantifying the benefits side of the business case. These may seem mundane to you - but priced high for an SME supplier who would need to source them from a (big) consulting firm.?
• Explore the potential to onboard your suppliers onto your own sustainability data collection platform, which could benefit both sides. The cost of solutions varies a lot, and the levels of manual effort required for data collection and collation generally correlate with price. As we have just been reminded by an EY report , many companies still manage their data via spreadsheets. Some data collection and visualisation solutions enable supplier onboarding - check the options with your provider.
• Identify opportunities to influence mindsets: Which steps have resulted in change of motivation or ambition levels and the net-zero commitment in your organisation? Can you combine your leverage and expertise to influence attitudes among leadership of your supply chain partners?
• Share success stories of a collaborative approach with your peers.

What should suppliers do?

• Utilise publicly available resources such as this article, the BCG study and other material to educate your corporate buyers on how under-equipped you are to deliver on a net zero commitment, and on your buyers’ critical role in filling in the gaps. Compile and communicate the expertise and resource needs that your customers own and could share.?
• Influence your buyers towards collaboration and partnership building.

If the above fail, then:

• Scout the internet for freely available tools - you may be surprised how many downloadable, excel-based templates have been made available in the recent years by purpose driven individuals and entities;
• Pool resources with other players for business case building / knowledge sharing. Cooperate with competitors, as far as legally permissible, to drive sector-wide change - be the leader your customers have not yet grown to be;
• Join forces with peers to collectively pressure your large corporate buyers to adapt a more realistic, collaborative and contributing approach to supply chain decarbonisation.
• Pressure authorities for fast introduction of policies and incentive programs by publicly supporting ongoing activist movements, which have already done the homework and only need to build critical mass;
• While the SBTi allows a 2-year grace period for companies to publish their validated targets since making the public pledge, do not make a net zero commitment lightly, to appease eager customers in the short-term. If you later fail to act, whether you announce withdrawing from the commitment or not, being removed from the SBTi list of companies in 2024 would unlikely go unnoticed by activists and vigilant observers of corporate transition, and could result in serious reputational damage - and thus financial losses.

Conclusion

The SBTi Net Zero Standard has received significant attention and has been growing in adoption since its launch only last November. This momentum, if taken as a precursor for interest in sustainability reporting and action contextualised against all planetary and societal boundaries, is a source of hope that we, as a global community, stand a chance at averting (at least some) tipping points, and at reinventing our economic system so that we can all thrive in the future.?

Last January, I declared a Reformation in Corporation Sustainability had begun, and predicted that “being real about corporate sustainability” would start becoming mainstream. I claimed levels of action proportional to attainment of sustainable development would begin trickling from leaders (the first league of corporate sustainability) down to their supply chains - and thus drive change at scale.?

It is exciting to witness this effect taking place, however attempts to engage in supply chain decarbonisation can be jeopardised or delayed if started with the wrong attitude. Leaders need to be cognisant of the paradigm shift inherent in switching to accountability tools that prescribe targets derived from planetary boundaries. Small and medium sized supplier companies have only recently made it into the second league - in a nutshell, managing outer perceptions - if they have been in the game at all. Now required to set science-based targets, they are effectively requested to leapfrog into the first league, the club of companies who opt to orchestrate all of their activities, business relationships, value networks and business model around their contribution to sustainable development. They cannot make that jump alone.

Has your firm successfully partnered with its suppliers to commit to Net Zero this year? If yes, please share your experience and disseminate good practice.

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