Integrating sustainability with supply chains still faces challenges
- Deciding between myriad technology options isn’t easy. Increasing sustainability and corporate social responsibility is more of a priority than a year ago. But sifting through so many varied digital offerings and capabilities is hard — there are literally hundreds of different technology solutions available.
- ESG reporting is even more difficult than before. And the technology gap has never been more critical. Between existing and proposed regulations in Europe and the United States, new requirements for supply chain traceability and expectations around non-financial reporting are substantially increasing. Many disclosures will be subject to external (or independent) assurance, and companies need digital solutions to meet these requirements quickly, accurately and efficiently.
- Scope 3 decarbonization is becoming more important.Achieving reductions in emissions both upstream and downstream in the supply chain requires a thoughtful strategy and appropriate technology to gain better visibility into data and support better collaboration with supply chain partners.
- Progress on supplier diversity has been slow.While only a small slice of respondents called increasing diversity among their suppliers a top priority, 48% indicated it’s a major or minor challenge they need to address.
How companies are addressing sustainability in their supply chains
- Tech decisions aren’t easy
- Reporting is more difficult
- Decarbonization grows in importance
- Supplier diversity can be better
Deciding between myriad technology options isn’t easy
Improving sustainability and corporate responsibility is growing in importance. When considering their priorities over the next 12-18 months, 24% of respondents said increasing sustainability and corporate social responsibility was among the top three. That’s up from 19% last year.
Operations leaders face a complex and fast-evolving landscape of digital offerings and capabilities to support things like supply chain transparency, measuring greenhouse gas emissions and meeting Scope 3 reduction targets. Almost every major software provider is making investments to build capabilities in this area, and hundreds of new and smaller players have entered this space as well. That can make it difficult to sort through solutions for the right fit. Four out of five respondents said employees’ lack of digital skills is a challenge to integrating ESG into their supply chains. Upskilling employees in this area can help companies be better equipped to identify digital solutions that would be the right fit.
ESG reporting in supply chains is even more difficult than before
Requirements such as the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD) and the Uyghur Forced Labor Prevention Act (UFLPA) are changing the type of data companies need to manage and the necessary speed of ESG reporting throughout your supply chain. Companies that don’t anticipate those changes and invest in technology to help meet those requirements could expose themselves to considerable regulatory risk and potential penalties.
Awareness of such regulatory issues has improved, our survey found. About half of the respondents told us that staying aware of legislative and regulatory frameworks poses a challenge to their supply chain function — down from two-thirds last year and possibly signaling a wider understanding of the risks of noncompliance. But survey data also shows that some companies could benefit from action-oriented steps to help them make progress. Consider that three out of 10 executives said their companies aren’t actively leveraging technology for reporting their ESG and supply chain progress externally.
Scope 3 decarbonization is becoming more important
Scope 3 emissions — those that are upstream and downstream in the supply chain — are on average more than 11 times as large as Scope 1 and 2 emissions combined. They’re the largest, most complex and most difficult emissions for organizations to tackle. But they’re also becoming more important as companies try to deliver against their net zero and science-based greenhouse gas reduction targets.
The challenge with Scope 3 decarbonization is that companies have little direct control over these emissions, which by their very nature are outside of a company’s direct operations. Still, there are many ways companies can influence these emissions, and technology can play a key role. Some approaches include having suppliers commit to a science-based target, conducting lifecycle assessments to identify hotspots of emissions, evaluating the network of warehouses and distribution centers to optimize the distance and mode of transportation, and better educating customers to lower emissions during product use or end of life.
Progress on supplier diversity has been slow
While the “E” in ESG often gets much attention, other areas are gaining traction within supply chains. Nearly three-fourths of survey respondents said their company either already has developed digital supply chain capabilities or has a plan in place for increasing diversity among suppliers, vendors and business partners. The same percentage (72%) said they’ve either already developed capabilities or have a plan in place for complying with forced labor prevention laws.
Even with those tech investments, companies may be able to do more to improve supplier diversity. Only 13% said increasing diversity and segmenting suppliers was a top priority, and that number was lower among consumer markets and industrial products companies. Nearly half of all respondents said prioritizing minority-owned, diverse suppliers was either a minor or major challenge to their supply chain function. As companies seek to expand their supplier diversity programs globally and diversify their supply chains — across geography, value chain placement, geopolitical and climate risk exposure, and other dimensions — digital solutions will be critical for adequate visibility, effective monitoring and meaningful value creation.
Where you go from here
Is your company ready to be smarter in using technology to advance your organization’s sustainability and supply chain efforts? Consider these actions as potential next steps.
- Escape the compliance mindset. Yes, regulations and requirements must be met, but sustainability commitments can be a real opportunity to reassess operations and improve how you deliver for your customers. Think less “must do” and more “what can we do?” as you integrate ESG factors into strategic decisions as a core factor of cost and growth.
- Lean into shifting customer preferences. As consumers increasingly seek products and services that have lower carbon intensity, explore digital capabilities such as life-cycle assessments, which can evaluate a product or service's environmental impact over its life cycle and reveal areas for improvement. This can better enable your company to improve operations to reduce carbon intensity and increase the overall circularity of your value chain.
- Know your tools and consider other ways they can be used. Solutions and processes such as last mile reporting, data aggregators and analytics, and others often target different areas of the supply chain. But those tools can provide valuable information that can contribute to progress on ESG goals as well. Reviewing them with sustainability in mind can help your organization get the most out of your digital capabilities.
- Get your baseline in place. If you haven’t already measured your Scope 3 emissions, this is a great place to start — and that exercise often uncovers quick-win opportunities that can reduce costs as well as emissions.
- Communicate what you’re doing and acknowledge gaps. Many supply chain leading practices can actually help cover ESG requirements. Water conservation, waste management and energy efficiency initiatives, for instance, are often embedded in plant and warehouse performance. Those can be a great place to start — and to get early credit for progress — on sustainability goals.
- Commit to upskilling for Scope 3. Obtaining Scope 3 data can be a huge challenge, but it’s also a way for your organization and your suppliers to build digital skills. Assess what investments are needed across the supply chain and collaborate on upskilling and reskilling to make measurable progress on your net zero and decarbonization goals.
