Suppliers that fail to rise to manufacturers’ challenges to improve sustainability could find themselves “deselected,” while those that demonstrate positive step-changes could see increased demand, adds the report, which was released Feb. 6.
“For most organizations, the environmental impact within their supply chain significantly outstrips the impact related to their own operations. The decisions they make when purchasing goods and services, and the way they influence their suppliers, offers a far greater opportunity for positive change than could be achieved through acting only on areas within their direct operational control,” CDP explains in the report.
Yet, it adds, that driving sustainable change in the supply chain can be challenging for manufacturers.
“There is often limited visibility of impacts that occur away from an organization’s areas of direct control. In some cases, this can be further obscured by diversionary marketing, commercial confidentiality or simply a hesitation to address areas of risk,” it explained.
However, data, such as that collected through the CDP Supply Chain program, can give manufacturers’ a line of sight down their supply chain and empower them to make decisions based on the response and progress suppliers make towards environmental and sustainability concerns.
Indeed, 43% of CDP Supply Chain program members say they “currently deselect existing suppliers based on their environmental performance. And a further 30% [of the 115 members representing $3.3 trillion in procurement spend] are considering implementing this in the near future,” according to the report. In addition, 63% of program members either currently use or are considering using data from CDP disclosures to influence their contracts with suppliers, it added.
These figures are up dramatically from just 10 years ago – underscoring the exponential importance that consumers are placing on the environmental impact of the products they buy, which in turn is pushing manufacturers to pressure suppliers.
Specifically, in 2008, only 4% of CDP members dropped suppliers based on poor environmental performance and only 9% required environmental disclosures and data in the contracting process with suppliers, according to the report.
Reducing greenhouse gas emissions has been one of the most successful areas tracked by the CDP, which reported in 2018 suppliers reported reducing emissions by 633 million tonnes of carbon dioxide – “an amount greater than 1% of all current global emissions.”
This translated to cost savings of $19.3 billion for those companies, “highlighting the frequently compelling business case for taking action on climate change,” the report added.
Leaders from the food and beverage space in tackling climate change include Danone, General Mills and Nestle, according to the report.
Water stewardship scrutinized
Of growing concern to manufacturers is how suppliers manage risks to the water supply, including pollution and over-use.
“Without radical improvement in water management and stewardship across the economy the World Bank predicts that water scarcity, exacerbated by climate change, could cost some of the world’s regions up to 6% of GDP by 2050,” according to the report. “Even worse, a failure to protect freshwater resources can prove disastrous to communities and ecosystems.”
Responding to this risk, more than 1,700 suppliers reported investing $62 billion in revenue to identify water security risks, but the majority of these did not have C-suite involvement in oversight of the issue.
Managing deforestation risks
An emerging concern for many consumers – and by extension manufacturers – is the high rate of deforestation currently connected to commodity production.
According to CDP, between 2001 and 2015 commodity-driven deforestation accounted for nearly 30% of deforestation globally, with Latin America and Southeast Asia particularly hard hit at more than 60%.
“This forest loss increases the rate of climate change, contributes to habitat and biodiversity loss as well as greater levels of water pollution and scarcity in some regions,” CDP explains in the report. Deforestation also poses direct threats to manufacturers that ignore it, such as increased operating costs, risk of reduction or disruption in production capacity and potential brand damage.
To minimize these risks, 305 suppliers disclosed the use of key commodities that are associated with deforestation risks – timber, palm oil, cattle, soy and rubber – which is up from only 88 businesses in 2017.
While more companies are tracking deforestation risks, far fewer are taking action yet. According to the report, only 17% of suppliers report setting reduction targets for deforestation.
Four steps for continuous improvement
While manufacturers and suppliers have improved their business’ environmental impact, they still have a long way to go to reach a decarbonized production cycle. As such, CDP recommends stakeholders follow four steps in the Carbon Trust framework for developing a sustainable supply chain program.
The first step focuses on understanding and quantifying the climate and resource impacts, risks and opportunities in their current supply chain, and also understanding the challenges and opportunities to suppliers. This process will allow stakeholders to identify ‘step-change improvements and benefits’ that they can purse through the remaining three steps.
The second step is to plan how the improvements and benefits identified in the first step can be addressed. The framework recommends stakeholders work together to co-create solutions
Acting on these plans is the third step, which also includes testing, validating and scaling changes that produce the desired effects.
And finally, in the fourth step, stakeholders are encouraged to learn from the changes they made, including measuring and track their impact so that they can continuously improve.