Small and medium-sized enterprises might make up the majority of the world’s companies, but multinationals really wield the purchasing power.
It is this fact that is leading to the development of programs that can drive energy efficiency across global supply chains — from family-run factories all the way up to the chain stores that sell their goods.
Using the supply chain to drive down energy use is a hot topic right now, but actionable insights are still in their infancy. Carbon disclosure is growing in popularity, as evident by the recent success of CDP’s Supply Chain Program, which now counts members with a total of more than $2 trillion in purchasing power.
But provoking real reductions across the whole supply chain remains a much thornier challenge.
Supply chain emissions often account for around 80 percent of the total carbon footprint of large, typically consumer-facing, corporations. Therefore, any action taken to reduce emissions has great impact.
However, there is a growing gap between the environmental performance of some of the world’s largest purchasing companies and that of their suppliers. Both purchaser and supplier companies face many market and non-market barriers that are stymieing their ability to capture energy efficiency opportunities across the supply chain.
The numbers speak for themselves: in 2014, 83 percent of members of CDP’s Supply Chain Program reported monetary savings due to emissions reduction activities, compared to 33 percent of their suppliers.
Purchasers are well ahead in their sustainability and energy performance — and they often wish to help suppliers, but they don’t tend to have experience in providing technical assistance or have dedicated resources to doing so.
Further, suppliers (often SMEs) commonly lack the knowledge and capital to undertake energy efficiency projects, and they also do not have a strong enough consumer brand to drive them toward a responsible corporate image. Financing of sustainability projects also can be difficult because of SME creditworthiness and aggregation issues.
The need for new models
Rather than expecting companies to work through these challenges alone, international supply chain programs are becoming an increasingly effective way of stimulating action.
I had the pleasure of working with CDP on a supply chain initiative called Action Exchange, which works by helping suppliers identify energy efficiency measures that yield the best return on investment.
The pilot phase of the program involved five leading CDP members: the Bank of America, L’Oréal, PepsiCo, Philips and Walmart. A total of 65 of their core suppliers participated in the pilot phase. Action Exchange has tripled its number of suppliers this year to nearly 200 companies.
And that’s just scratching the surface: if all CDP supply chain members engaged their entire supply base, it would represent some 4,000 suppliers with over 1,000 MT CO2-e in greenhouse gas mitigation potential by 2020.
I can’t help but wonder what we could achieve if all multinationals made it their mission to improve energy efficiency across their supply chains. Action Exchange is just one program, and we can’t achieve this vision by ourselves. More initiatives such as this need to be implemented across the world.
There are already some in place, it’s true, but not enough that provide clear pathways for change. In my experience, supply chain programs need to do several key things to be successful:
1. Demonstrate the value proposition to purchasing and supplier companies — that is, improved competitiveness, productivity, business relationships and resilience, and lower energy costs.
2. Leverage purchasing companies’ purchasing power to encourage action and provide recognition or rewards for achievements, such as preferential contracting arrangements (and multinationals should be careful in exhausting their goodwill through relentless cost pressures in exchange for energy savings at supplier facilities).
3. Share best practices, case studies and technical resources.
4. Provide support and training for the implementation of energy management systems and energy audits, engaging employees in smart low-cost/no-cost operations and maintenance improvements, as well as larger capital projects.
5. Connect technical recommendations with project financing, and with energy efficiency programs run by governments, utilities or development banks that offer technical support, financial incentives and recognition of purchasers and their suppliers.
Philips, a participant in the Action Exchange program, told us that its key supply chain energy efficiency goals were greenhouse gas reduction and cost reduction. This really comes as no surprise.
Industry is the most energy-hungry sector in almost every country in the world. According to the U.S. Energy Information Administration, industry accounts for around 50 percent of global energy use on a primary energy basis, and around 28 percent of all greenhouse gas emissions. But this figure is even higher in the countries that act as the powerhouses for global manufacturing, such as China.
It’s because of numbers such as this that companies such as Walmart are taking steps to green their supply chains. Walmart has been active in the clean energy space for many years, and is considered a leader on supply chain energy efficiency, especially in the U.S. and China.
It even has developed its own supply chain programs to improve its environmental performance and that of its suppliers.
For example, two of Walmart’s Chinese shoe suppliers were found to be paying pollution fines rather than dealing with their environmental impact. Why? Because it was cheaper than investing in new technology. Walmart insisted that the suppliers clean up their act, and then assisted them to do so. At last report, they were still producing for Walmart.
By wielding their purchasing power with such steadfastness, it’s highly likely that Walmart will achieve its goal of getting its top 200 Chinese suppliers to improve energy efficiency by 20 percent.
Supply chain programs also offer governments a sure-fire way of reaching SMEs, a notoriously difficult policy target because of the large number of individuals heading up small businesses and their diverse nature. The U.S. alone counts more than 5.5 million SMEs, but the government hasn’t yet developed effective policy to help them reduce their energy use.
Programs such as Action Exchange are not constrained in the way that governments are and they can leverage the global nature of supply chains. Without a connection to a broader program, individual jurisdictions are not able to intervene because of corporations’ complex and often distant supply chains throughout a number of regions.
Governments, NGOs, businesses and the finance community need to work together to develop more and deeper supply chain initiatives. CDP’s new supply chain disclosure partnership with the U.S. General Services Administration, the U.S. government’s leading procurer of goods and services, is a significant milestone in this regard, particularly given that the federal government is the largest single purchaser of energy in the country.
But we also need supply chain partnerships that foster action, and not just disclosure. This means strengthening connections with existing policies, leveraging energy efficiency program resources and incentives, making information on energy efficiency technology widely available and ensuring that policies reinforce, recognize and incentivize actions taken by businesses in their supply chains.
Finally, supply chain efficiency offers a great avenue for aggregation of project financing but to date we have seen few, if any, companies or development banks (let alone commercial banks) step up to soften up the conditions of lending to this community.