Decarbonising the Supply Chain: What SMEs Need to Know?

Table of Contents

In a previous article, entitled Navigating EU Sustainability Legislation Across the Global Supply Chain, we examined the implications of the European Union’s sustainability legislation for businesses in the global supply chain and how businesses around the world can position themselves for success in the European market of the future by adhering to the sustainability principles promoted by this legislation. In this article, we will delve into how engaging and transforming supply chains is critical to achieving a sustainable and net-zero future and provide some practical steps and guidance to help businesses decarbonise their supply chains. 

Why is supply chain decarbonisation significant for a sustainable and net-zero future?

There is widespread scientific consensus that global surface temperatures are rising faster than in any other 50-year period over the past 2,000 years, and this is already impacting our planet and economies. The Intergovernmental Panel on Climate Change (IPCC) has repeatedly called for urgent action to reduce emissions across all sectors to limit global warming to 1.5°C above pre-industrial levels and thus prevent the catastrophic effects from destabilising our climate. The World Economic Forum has acknowledged that decarbonizing supply chains is challenging but it must form a significant part of corporate climate action and will be a game changer in terms of impact.  

Supply chains have a substantial environmental impact, with Scope 3 emissions occurring at every stage, from sourcing raw materials to manufacturing to distribution. According to the GHG Corporate Protocol Scope 1 emissions are direct emissions from owned or controlled sources, while Scope 2 and 3 emissions are indirect emissions. Scope 2 are emissions from the generation of acquired and consumed electricity, steam, heat, or cooling. Scope 3 emissions include all other emissions across the value chain, both upstream emissions related to purchased raw materials, goods, and services, and downstream emissions related to sold goods and services. 

The guidance developed by WWF on behalf of the Science Based Targets initiative (SBTi) acknowledges that for many companies, emissions from their supply chains present a considerable challenge and constitute the most significant portion of their emissions. These emissions, averaging 11.4 times those from direct operations, so broad decarbonization measures throughout supply chains are essential for achieving global net-zero targets. 

For businesses in most customer-facing sectors, end-to-end emissions are much higher than the direct emissions in their own operations like Scope 1 and 2 emissions. Academic studies have revealed that typically Scope 3 emissions represent, on average, 84% of a firm’s total carbon emission footprint. In nearly two-thirds of all economic sectors, Scope 3 emissions represent more than 75% of their carbon emission footprint. 

In addition, as more consumers and enterprises prioritize sustainability, there is growing demand for low-carbon and carbon-neutral products. Decarbonizing the supply chain allows businesses to meet this demand, gain a competitive edge, and ensure long-term resilience.  

Finally, supply chain decarbonization can lead to cost savings and operational efficiencies for companies. By optimizing transportation, reducing waste, and adopting renewable energy sources, companies can lower operational costs and reduce environmental impact. As is more often the case than many realise, sustainable choices are frequently also good business choices in traditional terms. Growing environmental concerns, sustainability legislation, and shifting consumer preferences exert significant pressure on businesses of all sizes to decarbonize their supply chain as an essential part of ensuring a sustainable future. With EU and governments worldwide are formulating an increasing amount of legislation aimed at reducing carbon emissions, companies that proactively decarbonize their supply chains will be better positioned to comply with these regulations, avoiding potential fines and other penalties. 

How can SMEs navigate the decarbonization journey at supply chain level?

According to one recent study, calculating Scope 3 emissions based on primary data is challenging due to the complex global networks of suppliers involved. Businesses often lack the resources and expertise to gather and share the necessary data, especially smaller businesses like SMEs with limited operations and budgets. The World Economic Forum’s study underscores the challenges in decarbonizing supply chains, even for larger companies. Obtaining essential data, setting clear targets, and ensuring supplier compliance are hurdles. Complications arise from fragmented supplier networks, especially when emissions are deeply embedded or require industry-wide collective action. For Small and Medium-sized Enterprises (SMEs) navigating the complexities of supply chain decarbonization is obviously a more challenging task. 

 

In this section, we explore the steps SMEs can take to navigate the decarbonization process within their supply chain. Following these steps businesses can enhance brand reputation, achieve long-term cost savings, and bolster resilience for sustainability into business operation. 

  • Understand the relevant legislation: Awareness and understanding of relevant local legislations (for example CBAM of EU) are crucial for SMEs within the supply chain to identify what they need to do to comply with relevant regulations. 
  • Understand and assess own emissions: SMEs must understand their carbon footprint and evaluate emissions across the supply chain, including sourcing, production, transportation, and distribution.  
  • Set clear goals: Once the carbon footprint is assessed, SMEs should set clear and achievable decarbonization goals. These goals should be specific, measurable, and aligned with broader sustainability objectives and relevant legislation. For example, SMEs can reduce emissions by a certain percentage within a specified timeframe or source a certain percentage of materials from sustainable suppliers. Keep in mind that these goals must be aligned with meeting commitments under the Paris Agreement to reach net zero by 2050. 
  • Engaging and collaborating with suppliers:  Partnership plays a critical role in supply chain decarbonization. SMEs should engage with their suppliers to understand their sustainability efforts and encourage them to reduce emissions. For example, SMEs can take collaborative initiatives, such as joint emissions reduction targets or supplier sustainability assessments, to foster a culture of sustainability across the supply chain. Collaborating with suppliers to establish net-zero supply chains would allow companies to significantly increase their climate impact, drive emissions reductions in challenging sectors, and advance climate efforts in regions where they may be less of a priority.  
  • Optimising transportation and logistics: Transportation is often a significant source of emissions in supply chains. SMEs can explore opportunities to optimize transportation routes, consolidate shipments, and switch to low-emission modes of transport, such as rail or sea freight. Additionally, investments in fuel-efficient or electric vehicles and adopting route optimization software can further reduce emissions and transportation costs. 
  • Investing in emission calculation and data collection: It is important to collect accurate data and calculate Scope 3 emissions in an appropriate and a shareable way. However, SMEs may lack the knowledge and resources to do this effectively. Therefore, to investing in data collection and emission calculations it may be necessary to educate existing staff, hire new people with appropriate expertise, and/or collaborate with service providers who can help with ESG data collection and emission calculations. 

Final Notes 

  • Understanding the importance of decarbonizing the supply chain is essential for businesses of all sizes, including SMEs, despite its complexity. 
  • Setting specific targets aligned with broader sustainability goals is critical to taking effective action and making tangible progress. 
  • Collaboration with suppliers is crucial part of the decarbonization journey. SMEs need to engage with suppliers to reduce emissions collectively actively. 
  • Optimising transportation and logistics and calculating emissions to identify reduction opportunities are important investments SMEs must make. Additionally, enhancing emission calculation and data collection capabilities ensures informed decision-making and effective carbon emissions management throughout the supply chain. 
  • By actively working to decarbonize their supply chains, SMEs can ultimately reduce their supply chain complexity, enhance their brand reputation, achieve long-term cost savings, and contribute to building a more sustainable and resilient future for all. 

If your SME has not yet fully understood the supply chain decarbonisation process, we encourage you to reach out to us. Join us on this transformative journey. Together, we can create a world where businesses thrive, communities prosper, and our planet flourishes. 

Interested to learn more about sustainability-related topics? Follow MorrowX on our social media pages.