Collaborate with peers to set and meet supplier targets

Scope 3 emissions can account for 75-90% of many companies’ GHG emissions, especially in industries with long and complex value chains (e.g., ~85% of emissions are Scope 3 for food and fast-moving consumer goods companies) (1). The supply chains of just eight industries are responsible for more than 50% of global emissions: food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services and freight (see Table below) (2). Therefore, most companies must engage their suppliers to meet GHG reduction targets.

Pressure to address Scope 3 emissions is mounting. For example, Scope 3 targets are a requirement under the SBTi Net-Zero Standard (3), and disclosure on such emissions is already required in the EU and by the US Securities and Exchange Commission’s proposed rules on Scope 3 disclosure (not yet finalized as of August 2023) (4).

Figure 1: Eight supply chains are responsible for more than 50% of global emissions

Source: BCG, WEF: Net-Zero Challenge: The supply chain opportunity (5)

From the perspective of a company with a complex value chain, engaging and working with suppliers is critical to addressing Scope 3 emissions. One potential near-term focus area is to transition to renewable energy (particularly renewable electricity). The cost of renewables has plummeted in recent years, making them affordable. However, companies with large Scope 3 emissions often have fragmented and potentially less climate mature supplier base. Therefore, companies can engage their suppliers in two ways:

Collaborating with peers to set targets

Companies can work together with industry peers to align and set common targets for their suppliers. While companies can set such targets individually, doing so together serves to level the playing field and create a greater demand-side pull to encourage supplier engagement. Setting targets could mean requiring suppliers to set and reach specific renewable energy targets (e.g., wind and solar). Other potential requirements might include disclosing their emissions in a standardized fashion, or setting science-based targets, etc.

The collaboration process could involve defining best practices and providing certification guidance for suppliers. Additionally, leading companies can join forces in cross-sector (e.g., steel and aluminum) policy advocacy groups to garner further regulatory support for renewables across value chains. Shared policy recommendations send a particularly strong message to policymakers that businesses need government support to decarbonize.

Helping suppliers meet targets

To complement supplier decarbonization targets (e.g., switching to renewables), companies can leverage their collective scale and resources to significantly boost the likelihood of suppliers meeting said targets. Different approaches are emerging in the marketplace. Companies can sign long-term Power Purchase Agreements (PPAs) and share the necessary payments for purchases, as well as the produced renewable energy credits with the suppliers. In this way, companies can provide suppliers ready access to inexpensive renewable power while removing the many hurdles that a typical (smaller) supplier may face in procuring low-cost clean power. As a variation, companies can sign virtual PPAs (typically) as a group to facilitate the construction of even larger renewable installations for more inexpensive power.

Other steps for reducing supply chain emissions

Please refer to chapter: Reduce, Step 2

Examples of leading corporate initiatives for setting industry-wide supplier targets and aggregating demand commitments follow below.

Sustainable Markets Initiative (SMI): Health Systems Task Force

The Sustainable Markets Initiative’s Health Systems Task Force is a public-private partnership comprising AstraZeneca, GSK, Merck, and Sanofi, as well as NGOs and government entities like the UK’s National Health Service (NHS), UNICEF, and the World Health Organization (WHO). In 2022, the Task Force published a white paper that commits to taking collective, concrete action to accelerate the decarbonization of healthcare supply chains, including setting near-term science-based targets aligned to the 1.5°C pathway and setting targets for renewable power[DB3] . In 2023, they have further shared their aligned joint supplier targets and published an open letter to suppliers. The requirements, particularly, include suppliers’ commitment to switch to at least 80% renewable power (excluding nuclear) by 2030 and make commitment public, as well as cascading the targets further upstream. The Task Force is also jointly looking into ways to sign renewable corporate Power Purchase Agreement (PPAs) for suppliers in China and India in 2023.

Energize

Another coalition of pharmaceutical companies, including AstraZeneca, Pfizer, Johnson & Johnson, GSK, and Novartis, has launched a program to encourage their energy-intensive suppliers to transition to clean electricity by aggregating demand. Coordinated by Schneider Electric, the initiative aims to educate suppliers on renewable electricity options and aggregate their demand, thus enabling them to pool resources, benefit from scale economies, and ultimately create a more financeable and feasible arrangement.

Climate impact

Targeted emissions sources

Supplier decarbonization solutions (generally speaking, beyond the renewable electricity example focused on here) facilitate emissions reductions primarily in:

Scope 1 (of suppliers): emissions from heating

Scope 2* (of suppliers): emissions from electricity

Scope 3 (of purchasing company):

• Category 1* (Purchased goods and services)

• Category 2* (Capital goods)

• Category 3 (Fuel- and energy-related activities not included in S1 or S2)

• Category 4* (Upstream transportation and distribution)

• Category 5 (Waste generated in operations)

• Category 9* (Downstream transportation and distribution)

*Emissions sources more directly addressable by renewable electricity

Decarbonization impact

The decarbonization impact of helping suppliers decarbonize varies by sector, based on proportion of Scope 3 emissions, but supplier engagement represents a crucial component of addressing GHG emissions for most industries. Industries that are closer to the consumer will often have a higher proportion of Scope 3 (upstream and downstream) emissions than manufacturers and others further upstream in the value chain. Examples of these industries include (i):

• Apparel: ~85%+ Scope 3 emissions

• Biotech: ~75%+ Scope 3 emissions

• Food & Beverage: ~85%+ Scope 3 emissions

• Retail: ~90%+ Scope 3 emissions

Ultimately, all upstream Scope 3 emissions boil down to the operational (Scope 1 and 2) emissions of a supplier somewhere in the value chain. Therefore, transitioning suppliers to renewables is imperative to reducing overall emissions. The contribution from renewable electricity in decarbonizing Scope 3 emissions is hard to generalize but would primarily depend on the mix of heat versus power used by the suppliers, industry manufacturing trends in the geography, and regional availability of clean fuels and clean power.

Business impact

Benefits

Strengthened supplier relationships: Fostering collaborative relationships by helping suppliers gain access to inexpensive renewables.

Potential cost savings and revenue: Renewable energy can be cost-competitive with conventional energy sources in many circumstances (6) due to the stability of long-term contracts in the case of PPAs, reduced grid use and the potential to sell energy back to the grid in the case of on-site power generation, and government action, including tax credits for renewables and/or carbon taxes in certain areas (including the US and EU), among other factors.

Advanced compliance: Anticipating and meeting evolving environmental regulations and avoidance of potential penalties and reputational damage.

Improved brand reputation: Market positioning as a sustainability leader and attracting environmentally conscious consumers, investors, and employees.

Increased operational resilience: Reducing supply chain disruptions by minimizing exposure to fossil fuel-related risks in the value chain (ii).

Costs

According to BCG analyses, end-consumer costs for many products may increase as little as 1-4% by using decarbonized raw materials, as raw materials represent only a small share of final prices (7). However, the increase in cost is not evenly spread (e.g., cost of steel may go up 50% for decarbonized steel, but the cost of the full car may only increase 2%). As the cost increases are predominantly placed on suppliers, the challenge is to work collaboratively to help make all parts of the decarbonized value chain financially viable. Extensive coordination across the value chain is necessary to ensure there is close matching between costs incurred and potential value of implementing decarbonization approaches, such as renewables.

• Investment required: Upfront investments in renewable energy infrastructure, energy-efficient technologies, and process optimization; potential investments in batteries/energy storage to compensate for intermittency, and other grid integration; potential cost of negotiating a PPA or virtual PPA for off-site generation.

• Eventual subsidies used:

  • Regional and country-specific subsidies apply based on location (e.g., IRA and IIJA in the US for renewable energy, European Green Deal).

  • Possible incentives available from financial institutions looking to promote decarbonization (e.g., green bonds, cheaper supply chain financing for green suppliers).

• Relevant dependencies: Potential for pushback from suppliers if transparency, support, and a realistic timeline for renewables installation is not established.

Indicative abatement cost

Within the range of strategies to decarbonize supply chains, switching suppliers to renewable energy, along with implementing energy efficiency, ranks as one of the most cost effective – with negative costs of up to €10/tCO2e. In contrast, many other decarbonization approaches come at a much higher cost (e.g., switching fuels or implementing carbon capture cost over €100/tCO2e) (8).

Impact beyond climate and business

Co-benefits

• Improved air quality: Reduced air pollutants, along with fewer GHG emissions, especially from on-site clean power, leading to better public health and safer living environments.

• Technological innovation: Incentivizing supplier decarbonization can motivate the development of cleaner, cheaper, and more efficient technologies.

• Collaboration and partnerships: Supply chain decarbonization can foster knowledge sharing and industry-wide improvements.

• Community value: Economic stimulus to communities through creation of new jobs originating from supply chain decarbonization, such as renewable energy.

Potential side-effects:

There is potential for secondary adverse impacts in communities dependent on the suppliers, as supplier manufacturing sites transition to renewables. A just transition is essential to ensure communities do not suffer undue harm from downturns in the fossil fuel industry. Engagement should account for suppliers’ local community context (e.g., real estate needs for solar energy, loss of jobs from non-renewable energy industries), and seek to ease the community’s transition to a greener supply chain on a case-by-case basis. Various sources of renewable energy also have potential negative environmental externalities that should be considered. For example, the production of solar panels involves the use of hazardous materials, wind turbines can negatively impact bird and bat populations, many critical elements of the equipment are non-recyclable, and installation of new infrastructure could harm natural habitats. To mitigate these externalities, it is essential to conduct rigorous environmental impact assessments before the installation of renewable energy infrastructure, and ensure continuous monitoring, adaptive management, and end-of life management to minimize unintended negative effects.

Typical business profile

All industries, especially those with long and complex upstream value chains, with emissions concentrated in Scope 3 (e.g., food, construction, fashion, fast-moving consumer goods, electronics, automotive, healthcare).

Stakeholders involved

An array of internal and external stakeholders must be brought along to facilitate setting supplier targets (e.g., in relation to transition to renewables), for example:

• Executive Management:To set decarbonization goals and set targets to invest in new technologies such as renewable energy.

• Finance & Accounting: To approve business case for renewables and align on any Capex budget needs or Opex considerations.

• Procurement: To implement a roadmapfor engaging suppliers on renewable energy, and to use data and analytics to identify new opportunities and track performance.

• Legal & Compliance: To renegotiate contracts with suppliers and ensure the company is staying ahead of the curve on current and upcoming regulations.

• Marketing & Sales: To develop a sales strategy that targets customers’ willingness to pay for products made using clean energy.

• Government Relations: To engage regulators and policymakers to help shape the legislative environment around decarbonization initiatives.

• Investors: To engage with companies on their supplier decarbonization plans and invest in companies that are effectively decarbonizing their value chains.

• Customers: To engage with companies (or suppliers directly) regarding their supplier decarbonization plans and choose products from companies that are committed to supply chain decarbonization.

• Store/site associates: To advocate for supplier decarbonization in the workplace and educate consumers on supplier decarbonization efforts.

Key parameters to consider

Solution maturity

Helping suppliers switch to renewable power is one of the most mature and cost-effective solutions to abate carbon. See Reduce 2.2: Decarbonize your own operations from the Net Zero Guidebook for the maturity of specific abatement levers.

Implementation and operations tips

Beyond establishing clear industry targets for suppliers and helping aggregate supplier demand, consider some additional factors:

• Start with tier 1 suppliers and high-emitting products/components: Prioritize efforts with tier 1 suppliers and those associated with high-emissions products/components to effectively address supply chain emissions.

• Generate supplier trust: Build collaboration with suppliers by offering sustained support, including potentially procuring renewable energy, thus helping foster mutual benefits and effective supplier engagement in decarbonization efforts.

• Publicly report on progress: Enhance transparency and accountability by publicly reporting progress on supply chain decarbonization initiatives, such as renewables, showcasing the company's commitment and encouraging stakeholder engagement.

Additionally, disclosure requirements or standards will provide crucial support in shaping Scope 3 strategies. This includes working with partners like SBTi, the CDP, and the Partnership for Carbon Transparency (PACT).

Footnotes:

(i) Note: BCG analysis based on recent CDP Questionnaire

(ii) Note: It is important to note that renewable energy sources can sometimes be unreliable themselves, as storage is currently limited and expensive. While using renewable ameliorates the risks of fossil fuel-based energy production, it is not without its own risks for the time-being.