Is being wasteful encouraged these days? Consider the case of regular steel bridges, like the ones you see when driving on the highway. Producing just one ton of steel for use in one of those bridges emits almost two tons of carbon dioxide. That means the weight of two steel bridges is left virtually hanging in the air in the form of carbon dioxide each time a single ton of steel is manufactured. Yet no one wants to pay more to construct bridges in a way that’s less polluting.
It almost feels like large polluters are getting a free ride. Cement and steel producers, for example, are granted a free 80% emissions allowance through the European Union’s (EU’s) Emissions Trading System—and for good reason. Without that allowance, the companies would immediately shift production abroad to remain competitive or face being priced out of the market by foreign actors that don’t need to observe stringent regulations. To fix that, the EU is now trying to introduce a border adjustment mechanism, but it won’t be easy.
Change Must Come from the Market
The good news is that many large enterprises are pledging carbon neutrality. Some companies and individuals are even taking efforts a step further, including Thomas Udesen and Bertrand Conquéret, who co-founded the Sustainable Procurement Pledge (SPP), an organization dedicated to supporting procurement leaders who want to effect positive change.
“Change can only come from where deals are made,” says Conquéret, who is Chief Procurement Officer at chemicals and consumer goods company Henkel. Udesen, the Chief Procurement Officer of Bayer, echoes that sentiment, explaining, “We are witnessing a new era of responsible capitalism, where the currency is not necessarily just dollars or euros, but also carbon emissions. It’s a new way of doing business.”
In Udesen’s rationale, if greenhouse gas emissions were to become a currency, the invisible hand of the free market would push large polluters toward efficiency, forcing wasteful companies to either pay more or become greener.
Such a currency approach has been tried before, with some degree of success. Following the EU’s introduction of the Emissions Trading System, the power sector in Europe has become greener. New governmental, regional and private carbon exchanges are spreading quickly.
It seems, though, that these advances haven’t been enough to drive substantial change within larger enterprises. For change to actually happen at scale, big companies like those on the Fortune 500 list—which together represent 66% of the US economy—need to take action.
Multinationals Want Change, but It’s Easier Said than Done
Both the products and business operations of large enterprises are so complex that simple approaches like border adjustment mechanisms are not applicable. Additionally, procurement organizations might face challenges internally when attempting to change.
Executive commitments might pose challenges, too. EcoVadis, a prominent sustainability ratings company, says that while corporate commitments are rising, 46% of suppliers see their customers’ commitment to sustainability as important only on paper. It would be difficult for vendors to invest in greening if the CEOs and CFOs of the companies they serve set their own procurement goals based on widening margins from suppliers.
“The idea of integrated supply chains being driven by emissions data is exciting,” says Udesen. “There is a chain of custody, transparency and ingredients sourced based on geolocation. Great! Is this going to happen in the next five years? No, because the infrastructure is not there yet. But maybe in 15 years.”
I personally think that it’s going to happen sooner. We are already witnessing how one previously unheard-of technology, autonomous negotiations, has proliferated across enterprises in a matter of years. However, this transformation won’t be simple. According to a Sustainability Consortium survey, less than 20% of consumer goods companies have a comprehensive view of their supply chains’ sustainability performance and more than 50% report being unable to determine sustainability issues in their supply chains. Furthermore, just one in four companies that report their CO2 emissions currently engage their suppliers in efforts to reduce emissions.
Sheer complexity is a problem and procurement organizations are asking themselves where to begin, Udesen says. “Our SPP members highlight that we have some fundamental problems in our community of 1 million people,” he says. “One is that we simply don’t have the knowledge; it’s too complex, it’s too intimidating a topic. Imagine taking an incredibly complex organization and trying to optimize for diversity, deforestation, water, human rights, labor issues…it’s enormous.”
Turning Carbon Emissions into Currency
But let’s go back to the idea of turning carbon emissions into a currency and prompting the market to work its magic. Programs like The Science Based Targets initiative (SBTi) are already supporting this approach. SBTi has provided a framework to set emissions ceilings for enterprises, pushing them to find ways to become greener.
“Many large multinationals are now going out to the middlemen who historically have been reluctant to get on board with climate goals,” says Udesen. “They claim they’re small and don’t have the resources. They often look at the big enterprises and say, ‘You solve this problem.’ However, they now realize that they can’t sit on the fence anymore, so they are absolutely in the game.”
Assigning value to carbon emissions helps with getting intermediaries to reduce emissions across the supply chain. “If carbon reductions represent value, we won’t lose such value by entertaining inefficiencies in a non-optimized supply chain,” explains Udesen. “They will have to chip in. If the whole supply chain is integrated, then freight can be optimized, packaging can be optimized and product design can be optimized.”
What’s a good starting point? “Start from internal carbon pricing and hold commitments,” Udesen recommends, citing Bayer’s own efforts to introduce internal carbon pricing for all of its capital expenditures.