Senior Client Partner, ESG COE
The Net Zero Emissions Hurdle
As companies race to achieve net zero carbon emissions, they are discovering that they don’t have as much control over their pledges as they thought.
The Net Zero Emissions Hurdle
The problem: Companies seeking to reduce carbon emissions across supply chains are finding it more difficult than they expected.
Why it matters: Reducing carbon emissions from suppliers and other sources is vital for companies to achieve their net zero commitments.
The solution: Accelerate suppliers’ carbon emission reduction efforts through collaboration, incentives and an aligned sustainability and people strategy.
The brown truck pulls up to the curb. The driver, also dressed in brown, gets out, grabs two cardboard boxes and deposits them on the doorstep. Millions of times a day, UPS employees carry out this process, delivering packages to people across the country and around the globe.
While people often mistakenly associate UPS with packaging, the company actually produces little of the packaging used to cover the goods it moves. For environmentally conscious consumers, however, it’s a distinction without a difference. As the largest parcel delivery company in the world, they want—and expect—UPS to help ensure that the packaging it uses is produced with sustainable practices, says Penelope (Penny) Naas, President of International Public Affairs and Sustainability at UPS. Put another way, the success of UPS’s sustainability efforts don’t just hinge on the company, but also on a broader ecosystem that includes customers as well as outside suppliers.
It’s a challenge companies across industries are facing as they race to achieve net-zero carbon emissions and other environmental targets. There are three basic components to carbon emissions. The first component consists of emissions directly made by the company, so for UPS it would be the fuel it uses to operate its trucks and airplanes. Emissions from electricity a company uses but doesn’t control, like electricity for warehouses, make up the second area. Companies can devise their own solutions for reducing emissions from these categories—they can switch to electric vehicles, use more efficient fuel, or buy heat and electricity from different or renewable sources, for instance.
The third component, or Scope 3 as it is called in the industry, is where it gets tricky. Scope 3 emissions are those that come from sources that a company is indirectly responsible for, such as those that come from suppliers along its supply chain. Typically, these emissions not only account for a majority of a company’s total carbon footprint, but also are the most challenging to reduce, says Cheryl D’Cruz-Young, a Senior Client Partner in the ESG Center of Excellence at Korn Ferry. Obstacles include the lack of standardized carbon accounting practices, the need for collaboration across multiple stakeholder groups along the supply chain, and access to capital for operational and procurement upgrades.
“Scope 3 emissions present a layer of complexity that makes them hard for companies to attack,” D’Cruz-Young says.
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SGL Carbon, based in Germany, makes carbon-based products for many sectors including automotive, technology and energy. With 31 manufacturing plants around the world, the company is a heavy energy user, both directly and indirectly. When new CEO Torsten Derr joined SGL two and a half years ago, he immediately set about creating a plan to achieve net zero emissions. By centralizing energy procurement, hiring new green energy experts, shifting the sales portfolio to support more production of wind and solar energy products, and various other measures, Derr expects to cut SGL’s carbon footprint in half by 2025 and achieve net zero emissions in Scope 1 and 2 by 2038.
Setting targets for scope 3 emissions has been a bit more challenging. In a first step, SGL determined its Scope 3 upstream emissions. After that, relevant suppliers were requested to disclose details on their respective climate roadmaps as part of an extensive online survey on various ESG topics. Initially, Derr said the response rate was unfortunately rather small. After repeated follow-ups, more than 50% of suppliers disclosed their plans. “Now we have to develop strategies and measures together with our suppliers to reduce CO2 emissions in the value chain,” says Derr. “Those who do not want to support our ambitions may have to be replaced as suppliers.”
The hope is to not have to take that step. No company wants to risk further delays by shutting down a node in its supply chain - especially with the disruption caused by the pandemic still being felt- because of a vendor not being compliant, says Seth Steinberg, Senior Client Partner in Korn Ferry’s Supply Chain Center of Expertise. “Ideally you want to find ways to collaborate or incentivize them to change,” he says. Transitioning to sustainable processes can require heavy capital investments which a small or niche supplier may not have, for instance, so larger companies could help them find ways to access the tools and technology needed to accelerate in these areas.
For its part, UPS assesses the packaging processes of its partners for sustainability. The Eco Responsible Packaging Program, as it is called, evaluates packaging on certain criteria including size and materials used and permits those vendors that meet its standards to include the program’s logo on their packaging. “We are in constant communication with vendors to reimagine packaging and green up supply chains,” says UPS’ Naas.
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Earlier this year, both the U.S. Securities and Exchange Commission and the European Union enhanced environmental disclosure regulations, including outlining parameters for scope 3 emissions reporting. However, the categories and metrics aren’t uniform or standardized or even required.
In fact, one of the biggest challenges companies face in reducing scope 3 emissions is that there is no consistency in the market in terms of reporting criteria or systemized models for calculating performance. There are regulations in place, but they are more patchwork around specific industries like chemicals or specific sustainability actions such as recycling.
Take Covanta as an example. The New Jersey-based materials management company provides sustainable solutions that convert waste that would otherwise be disposed of in landfills into clean and renewable fuel sources. One way it does that is by hauling waste from cities where there are no conversion facilities to ones with conversion facilities. Under the current regulations, in certain jurisdictions waste brought in from outside cities doesn’t count towards carbon emissions reductions in the city where the conversion takes place.
Tequila Smith, who Covanta named Chief Sustainability Officer in May 2022, says that impacts calculations for obtaining credits and certifications towards carbon emission reductions and net zero commitments. She says such inconsistencies not only complicate reporting, but also make it difficult to convince suppliers to adopt sustainable practices. “Part of my job is to educate our customers on the benefits of diverting waste from landfills,” she says, adding that without clear certifications and rewards it’s hard to change behaviors.
In the absence of a reporting standard, some companies are proactively to jumpstarting the process. Finland-based Neste, which produces sustainable fuels for road transportation and aviation and feedstock for the chemicals industries, was recently part of a group of companies investing a combined total of $11 million investment round in Circularise, a digital startup that tracks the flow of renewable and recycled materials. Part of the reason for the investment is because regulations around recycling are “complex, varied, and in many cases based on old legislation,” says Mercedes Alonso, Neste’s Executive Vice President for Renewable Polymers and Chemicals. “We are not waiting for new regulations to be put in place, we are acting proactively,” says Alonso. “It is fundamentally important that the regulatory push comes from the bottom up.”
With time running out on net zero commitments—timeframes range from as early as 2025 to as late as 2050—companies must strike a delicate balance between cooperation and pressure to accelerate the sustainable journey of supply chain partners who are lagging.
SGL’s Derr, for instance, has a “bad feeling” that many companies won’t be able to meet the 2024 deadline for EU Green Deal commitments. Since half of his supplier base was unable to answer simple questions on sustainability practices, Derr suggests that they will also have difficulty responding to the disclosures resulting from the EU’s new reporting requirements. “ESG obligations are simply not yet sufficiently in focus for many suppliers,” he says.
Getting vendors and others along the supply chain up to speed on reducing scope 3 emissions takes a blending of culture change, sustainability strategy, and visionary leadership, says Greg Desnoyers, a senior client partner at Korn Ferry who specializes in energy transition across the energy, chemicals and manufacturing industries. Many suppliers are small and lack the systems infrastructure and people and investment capital to effectively progress in this area. Specifically, they are generally not equipped to devise strategies, including talent acquisition, learning and development programs, and rewards and incentives, to make the transition on their own, he says. As their supply chain partners, Desnoyers asks, can you help them be more efficient and effective in reducing their carbon footprint, and, if so, how? Do you incentivize them for getting onboard? Penalize them for failing to?
“The day-to-day decisions individuals make have a big cumulative impact on where companies are on their overall sustainability journey,” says Desnoyers. “That’s why it is so important for sustainability strategy and people strategy to be aligned and fully embedded in an organization’s operating model.”
For more information contact Cheryl D’Cruz Young at email@example.com, Seth Steinberg at firstname.lastname@example.org, Greg Desnoyers at email@example.com or Frederika Tielenius Kruythoff at firstname.lastname@example.org.