ESG and Supply Chains are Inextricably Linked in 2023
It’s hard to escape the news of the myriad ways climate change is being writ large on our planet right now. With global temperatures rising and various natural disasters wreaking mass devastation on parts of the world, the need for immediate action on the climate emergency is growing rapidly.
We all know how our global supply chains are one of the biggest contributors to climate change, with our reliance on airfreight and fossil fuels pumping enormous quantities of CO2 into the atmosphere, not to mention the energy which goes into manufacturing the materials other organizations in the value chain need supplied. This is why many stakeholders in the supply chain business are increasingly waking up to the notion they need to prioritize ESG goals in their operations and reduce this impact.
The net result of this is that ESG concerns and supply chains are inextricably linked in 2023 and any organization dealing with these factors needs to find ways of continuing to operate whilst dramatically reducing their environmental impact.
Sustainable Sourcing
One of the biggest challenges in this area as far as procurement teams are concerned is sourcing sustainable products and materials from global suppliers. For example, green steel, recycled aluminum, and recycled plastics have all seen a significant rise in demand in recent years.
However, many producers of these more sustainable materials are reporting that demand is currently far outpacing production rates – a problem which is only predicted to worsen as demand for these kinds of products continues to increase. According to research from McKinsey demand for green steel in Europe alone could be twice as great as the available supply.
"Our analysis suggests that demand for green steel in Europe will rise to 45 million to 50 million metric tons per year by 2030, if it increases at the pace necessary to meet the European Union’s target of a 50 percent emissions reduction,” reports the consulting group. "Steelmakers have said that they will have more than a dozen green-steel factories up and running in Europe at the end of the decade, enough to provide about one-third of the continent’s flat-steel production capacity. Even so, there could be a supply shortfall of more than ten million tons in 2030.”
Global shortages of recycled aluminum and plastic are also predicted by the data.
This means procurement teams need to work on developing the relationships and strategies which will give them the best chance of securing the sustainable materials they need to meet the demands of an increasingly environmentally conscious customer base.
Planning for Sustainability
The next stage for building more sustainable supply chains is to develop insights into emissions and weigh them against supply and demand for all materials and products your organization requires to operate effectively. This will allow you to strategize based on real world data on the manufacturing of all products and materials you procure and their exposures to supply, demand, and price volatility for those inputs.
The next step is to create a robust plan which seeks to cut emissions in these areas over tiered and realistic time frames. According to McKinsey, the shift to zero emissions will play out over three distinct time frames: the next twelve months, the two or three years after that, and the ensuing period out to ten years from now.
"Over the next two horizons, continued decarbonization will depend on the pace of such developments as commercialization of new low-carbon materials, capital investment by suppliers, and innovation for hard-to-abate materials,” says the company. "Production of some low-carbon supplies, such as electric-vehicle (EV) batteries and chemically recycled plastics, is being scaled up. Other supplies, such as inert-anode aluminum, will take longer to reach the market.”
Smaller companies with less buying power may need to form so-called buyer clubs. These cooperative arrangements will allow them to put pressure on suppliers to invest in sustainability by agreeing to jointly purchase large quantities of low-carbon products.
The third stage is to implement low-emission sourcing plans at speed.
"Green-material sourcing has already begun to disrupt traditional buyer–supplier relationships, as CEOs at front-running companies negotiate new low-emissions procurement contracts among one another,” continues McKinsey. "To keep up, other companies will need to adjust their own procurement practices quickly. Leading players use their strategic goals for supply chain decarbonization to define targets that procurement teams can reflect in the requirements and specifications they send to suppliers.”
Final Thoughts
ESG concerns are going to continue to dominate supply chain conversations as we move through 2023 and companies need to act now to ensure they aren’t left behind. The three-stage plan laid out below will allow your procurement organization to best prepare for this shift and set realistic and achievable goals over the next ten years.