Managing Director & Senior Partner
The CDP Supply Chain Report 2022, written in collaboration with BCG, reveals that companies’ supply chains generate 11.4 times more emissions, on average, than their in-house operations. Yet just 36% of companies reported their scope 3, category 1 purchased goods and services emissions, which are relevant for almost every sector. For those that did report, these emissions made up the largest proportion of scope 3 (43%).
To avert continued catastrophic climate change and ensure a deforestation free, water-secure future, companies must transform the way they work, and they must do it soon—engaging not only the entire company but the supply chain as well.
The main challenges for companies in measuring and disclosing scope 3 emissions in supply chains include:
Only 39% of the over 18,600 businesses submitting data in 2022 say they are engaging their suppliers on climate-related issues. Nonetheless, some companies are leading the way, with the top 20% engaging over 80% of their suppliers, while the bottom 50% engage less than 25%.
Companies are engaging more on some aspects of their impact than others, with climate change as their key focus, despite evidence of the need for action across all areas, including conserving, protecting, and restoring ecosystems; adopting more sustainable agriculture and forestry practices; preserving water resources; and supporting the circular economy.
For companies hoping to understand and quantify their environmental impact, measurement is the key entry point. This data feeds into leadership decisions, transparency initiatives, and reporting to show that progress is being made. And, given that the majority of environmental impact lies within a company’s supply chain, that impact is a leading indicator of the efficacy of a company’s environmental strategies. Yet there is a clear pattern of companies assessing their own direct operations and not looking at their wider impact.
Transforming the environmental effects of a company’s supply chain will require both board-level oversight and support from the internal organization—in particular, from procurement teams, which are at the forefront of supplier engagement. Currently, 74% of companies report board-level oversight of climate change issues. Of those that do not have this oversight, 41% plan to introduce it in the next two years. While this is promising, making change happen will require responsibility to be cascaded down the full organization, with buyers and procurement teams being incentivized to act.
Businesses also need to incentivize their suppliers more adequately. One in every ten companies today includes climate-related requirements in its supplier contracts. But 1.5°C climate science needs to be built into purchasing operations. And only 0.04% of companies report requiring suppliers to set science-based targets.
For water security, for example, most companies set a requirement to adhere to a code of conduct regarding water stewardship and management. But just 23% incentivize water-related action, such as by integrating water management and stewardship into supplier evaluations.
For deforestation, despite a relatively high proportion of companies engaging with suppliers on the topic, incentivizing action throughout the supply chain remains difficult. Just 1% of companies provide financial and technical help to their direct suppliers to set deforestation and conversion commitments across their entire operations and develop public, timebound action plans with clear milestones to achieve this.
To avert an environmental crisis, companies will need to accelerate the scale of climate actions taken, and particularly actions taken throughout company supply chains. Too many companies are continuing purchasing as usual, while others are focusing solely on climate change without working on their wider impact across nature.
Incentives from policymakers could support companies as they grow their efforts, especially ahead of upcoming regulations. But making change happen is not just a companywide responsibility: the entire supply chain must be involved.
This article is adapted from a report created by CDP Worldwide, a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states, and regions to manage their environmental impacts, working with BCG as a knowledge partner and in collaboration with Norway’s International Climate and Forest Initiative and Incite Insight. Read the CDP report.