From Compliance to Competition

Three weeks have passed since the Gartner Supply Chain Symposium in Barcelona. I’ve been reflecting on my takeaways from the event and fusing them with evolving ideas on how manufacturing brands and businesses can achieve the impossible – their 2030 Scope 3 targets! 

The result? This diagram. 

I’ll explain. According to The Climate Board (Jan 2024), 93% of companies with Scope 3 emissions reduction targets report significant challenges in reaching their goals.  

If companies stay on their current trajectory, they will fail. To change this and achieve Scope 3 targets companies must jettison their current compliance-only driven approach.  

Carbon Reduction as a Competitive Opportunity

We need a 180-degree pivot, making carbon reduction a competitive opportunity for suppliers to win more business. This motivates suppliers to bring resources, investment, and innovation to the challenge at the required speed. Suppliers are the emitters, so we need them to be eager reducers. If carbon reduction equals more business, they will take the necessary actions. 

My diagram illustrates the internal organisational factors needed for this pivot (right half of the diagram) and the external supplier engagement approach required (left half). The desired outcome, “suppliers drive carbon reduction for competitive advantage”, is in the middle. 

The Financial Cost of Carbon

We’ll start at the top, and work clockwise:

• $/CO2: An excellent presentation by Gartner analyst Sarah Watts highlighted the investment gap for achieving Scope 3 targets. Her research showed that even those companies using an internal carbon price were on average undervaluing carbon by more than $40 a tonne. (I’m yet to meet a company that has developed a sophisticated understanding of the financial cost of missing their Scope 3 target that is built bottom-up, encompassing impacts like taxation, regulation, cost of capital, share price, brand reputation, and sales. To understand the financial cost of missing a target is to understand the true value of cutting carbon to achieve it. They are opposite sides of the same coin. If we understand the value of cutting carbon, we start to understand the size of the prize for the business, which in turn means we can rationally estimate the required resources, investments, etc.)

• Ambition: Once a company understands the prize (cost avoided) for achieving its Scope 3 target, it can set rational ambitions for reduction, timelines, and investment. A fully funded plan can then be developed, expressed in terms the CFO will support, providing a clear ROI.

• Organise: Several presentations by Gartner analysts emphasised the need for Scope 3 responsibility and resources to be integrated into procurement. Successful integration examples, like the one given by Sarah C from Schlumberger, show significant investments in training procurement colleagues. It seems logical to me that training procurement colleagues is easier when companies understand the value of reducing carbon.

• Segment suppliers: Several presentations emphasised the importance of understanding the differences in supplier maturity or capability to reduce carbon. Supplier segmentation models should be used to engage suppliers effectively and support them in measuring, managing, and reducing emissions. Another crucial dimension of supplier segmentation is their importance to the customer. Segmenting by value must be more sophisticated than simple spend analysis. Understanding the real risk and cost of carbon from the bottom up is essential. For instance, pharmaceutical products with expiring patents could lose sales to lower carbon generics when selling to the UK’s NHS, which has legally binding carbon reduction targets. Therefore, targeting carbon reduction in specific product lines’ supply chains might be crucial, even if not revealed by simple spend analysis.

• Dynamic PCFs: We buy and sell products, not facilities or corporate HQs, so integrating carbon reduction into the procurement of manufactured goods requires dealing at the product level. Product Carbon Footprinting (PCF) is key to empowering suppliers to reduce carbon. Unlike most PCF solutions operated top-down by customers for visibility of product emissions, PCFs that empower and motivate suppliers are different. They are owned and produced by the suppliers, who have the agency to reduce the carbon intensity recorded in those PCFs. This is why we call them “dynamic PCFs”. Many of client corporations and their suppliers are beginning to use this next generation of easy-to-use dynamic PCF tools based on existing standards and approved data sets, which is enormously exciting!
• TCO RFPs: The final piece of the jigsaw is including dynamic PCFs in the central procurement process (RFP). This requires pricing the cost of carbon in procured products and organising tenders on a Total Cost of Ownership basis, including carbon costs. Procurement teams can then calculate the relative cost of competing bids, suppliers know that reducing carbon in their products improves competitiveness by reducing costs.

Reduce carbon. Win business. This motivational equation is clear for both buyers and suppliers.