To Become Sustainable, Finance Must Partner Up With Their Supply Chain Leaders
Ramachander Raja, Global Head of Finance, GEP, a leading provider of procurement and supply chain solutions to Fortune 500 companies.
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In most organizations, sustainability has been the purview of the company’s corporate social responsibility (CSR) team and marketers who tailor brands to environmentally conscious consumers.
Until now, CFOs have been limited to tracking and reporting their company’s environmental, social and governance (ESG) progress in annual reports, detailing everything from energy used and saved in its LEED-certified spaces, to recycling programs, to the elimination of paper and single-use cups. However, to battle the ruinous effects of climate change, CFOs must go far beyond reporting on the environmental impact of their own operations.
According to McKinsey, “The typical consumer company’s supply chain creates far greater social and environmental costs than its own operations, accounting for more than 80 percent of greenhouse-gas emissions and more than 90 percent of the impact on air, land, water, biodiversity, and geological resources.”
Exponential growth in home deliveries is creating massive amounts of additional waste and carbon. Yet, most companies fail to validate suppliers’ sustainability declarations. This lack of visibility lays waste to companies’ net-zero declarations.
Meanwhile, the expectations that companies are directly responsible for the impact of their global supply chain is growing. Investors are actively seeking out companies with strong ESG credentials. In fact, according to a 2020 International Institute for Sustainable Development report, between 2014 and 2019, sustainable investing in developed countries rose 68% to reach $30.7 trillion in assets under management. While new legislation, such as the newly enacted German Supply Chain Due Diligence Act (GSCA), has begun to hold organizations legally accountable for managing their suppliers, and their suppliers’ suppliers, environmental activities.
If we are to have any hope of mitigating the worst impacts of climate change, CFOs need to immerse themselves in the environmental impact of their organization’s global supply chain. Today, the vast majority of companies are blind to the impact of their value chain on the environment—and that must quickly change.
But where does one even begin? Here:
1. Have Your Chief Supply Chain Officer on Speed Dial: The symbiotic relationship that should exist between finance and supply chain might not be obvious. Many perceive finance, with its focus on controls, share price, treasury, EBITA and investors, as heady and remote. Supply chain management is seen as the sober, gritty, practical operations-oriented discipline where the rubber quite literally meets the road. The two functions operate very differently. Begin by gaining a better understanding of what supply chain leaders are facing in terms of disruptions, uncertainty, material and component shortages, and inflation. Then partner with them to identify synergistic opportunities and prioritize the specific areas that your organization and suppliers want to focus on first—whether it’s sourcing cleaner energy, cutting waste, reducing water consumption, recycling plastics, etc.
2. Evaluate All Suppliers Using Six Environmental KPIs: Sustainability must be considered when awarding business. To properly evaluate suppliers, use these six key performance indicators (KPIs): carbon dioxide emissions; product recyclability rate; water consumption per ton; product produced; packaging materials recycling rate; and waste recycling rate. Add these six KPIs to existing supplier scorecards to evaluate suppliers on a sustainability scale. Furthermore, by providing benchmarks, setting reduction goals and tracking performance, you can ensure your value chain takes action to achieve your company’s commitments.
3. Find Suppliers That Solve: Walmart has successfully held its suppliers accountable for their carbon footprint for years. Its Project Gigaton aims to avoid one billion metric tons of greenhouse gases from the global value chain by 2030. The company notes that more than 2,300 of its suppliers are on board with the mission.
4. Measure ‘Scope 3’ Emissions: Measuring Scope 3 emissions—indirect emissions that occur within your value chain, both upstream and downstream—is a particular challenge. Use cloud-based supply chain software to both track raw materials and components from the point of origin and to validate suppliers’ employee practices declarations.
5. Cut Costs and Environmental Impact: Challenge the myth that sustainable solutions are more expensive. Packaging is an opportunity to reduce carbon emissions and drive down logistical costs. For instance, major global consumer products manufacturers, such as Unilever and Pepsi, have committed to significantly reducing their use of plastic. The problem is that plastic packaging continues to be more cost-effective than corrugate or other more sustainable products. Marketers, especially in the U.S., tend to convey value through volume. The larger the package, the greater the perceived value. Detergents stand as a good example, where the bulk of the content is water.
By tracking and demonstrating the cost of bulky packaging, CFOs can accelerate investment in alternative materials such as sugar cane fibers, wood pulp fibers and other biodegradable materials. This is what Nestle is doing by developing biodegradable water bottles.
Lastly, don’t forget to support your small and medium-sized enterprises (SMEs) that are at the heart of innovation. Establish a formal mentoring program to help them with resources, including technology and know-how, and perhaps even follow Walmart’s lead and assist suppliers in gaining working capital.
Working in conjunction with HSBC and CDP, Walmart launched a new Science-Based Targets for Supply Chain Finance Program. By introducing enhanced standards, tools and capacity building, the program helps their private brand suppliers (SMEs) to upskill and align their operations with transparent sustainability objectives.
Also, SME Climate Hub provides SMEs with everything they need to make a globally recognized climate commitment and join the United Nations’ Race to Zero campaign.
I wish you luck and speed in your journey to net-zero.
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