Dive Brief:

• Environmental risks to the supply chain are projected to cost companies up to $120 billion over the next five years as a result of environmental impacts and regulatory and market changes, according to a CDP report released this week. Manufacturing, food and beverage, and agriculture are the industries with the most potential cost increases.
• For 2020, suppliers reported emissions reductions of 619 million metric tons, contributing to savings of $33.7 billion. Buyers requesting supplier disclosures through CDP increased by 24%, accounting for almost 16,000 suppliers. And 37% of suppliers are discussing their vendors' emissions-reduction goals with their own suppliers.
• The report, Transparency to Transformation: A Chain Reaction, found that supply chain emissions on average are 11.4 times greater than operational emissions. The data was collected from 8,000 suppliers, up from 7,000 in 2019.

Dive Insight:

As companies look to rebound from the pandemic, many are continuing to address scope 3 emissions (the bulk of emissions for products) to cut long-term costs and build a good brand reputation. As a result, today, more corporate buyers are looking at the disclosures and actions of suppliers. 

While suppliers reported cuts in their own emissions to CDP for 2020, that level of sustainability isn't necessarily trickling up their supply chains. To get there, more supplier companies are being asked to identify and address their own supply risks. This engagement is forcing a growing level of transparency into the environmental factors impacting business. 

These environmental risks stem from climate change, deforestation and water-related impacts (pollution, scarcity, floods). From increased costs of procuring raw materials, to weather severity issues, these factors impact the market as companies simultaneously try to address changing customer demands for carbon-free, sustainable products. 

Established leaders in addressing sustainability issues, like Target and Unilever, developed plans early on to cut emissions by targeting their suppliers' product streams.

When Target announced emissions goals in 2019, it devised a plan to track its spend — follow the cash flow to each vendor, examine the vendor's carbon footprint, and make vendor changes when needed.  

Unilever decided to embed emissions data directly into its procurement process last year. By dovetailing the collection of supplier carbon declarations with its invoicing procedure, the company aims to be net-zero and deforestation-free by 2039 and 2023, respectively.

Adidas, determined to reduce scope 3 emissions, realized that suppliers don't always have the needed information to reduce their carbon footprint. So the athletic clothier designed a framework to measure its suppliers' monthly emissions and provided a reduction plan based on energy efficiency, on-site energy sourcing, offsite renewables sourcing and coal elimination.

Each of the aforementioned plans were premised on thorough, continued dialogue, where both sides were vested in cutting emissions. It's clear that collaboration between the purchaser and supplier is needed to create success in reducing environmental risk. 

For huge brands, at the top of the food chain, it may seem easier to get suppliers on board — there's too much to lose for the suppliers. For others, the climb can be a bit steeper, but the long-term results can make it worthwhile. And CDP said it sees the most movement toward sustainability from small- and medium-sized companies right now.

"The smaller companies are catching up, and they are catching up fast," Sonya Bhonsle, global head of value chains at CDP, said.

Platforms like the SME Climate Hub are making it easier for SMEs to set their net-zero targets, Bhonsle said. Also, pressure from employees wanting their places of work to take more action on climate change is having an impact, leading more companies to get involved, she added. 

Whether large or small, companies have to start by encouraging suppliers to develop good leadership practices to ascertain the risks and value of their supply chains. That entails asking questions, collaboration and support. 

Environmental risks to the supply chain put billions of dollars in jeopardy, Bhonsle said. The companies that engage for sustainability will be "competitive and resilient," and the ones that don't, she said, "risk being left behind." 

This story was first published in our weekly newsletter, Supply Chain Dive: Procurement. Sign up here.

This article was updated to clarify the makeup of $120 billion in costs.