Sustainability 06 December 2023

How Supply Chains Can Lead the Way to a Sustainable Future

Amid the daunting challenges posed by climate change, CPG supply chains confront a pivotal question: Can they weather the adaptations required for a rapidly changing world? The stakes are immense, extending far beyond the environmental sphere, as climate change threatens the very fabric of the global economy. Prateek Jain breaks down the possibilities for a sustainable supply chain that addresses risks and protects the value chain down the lines.

Amid the daunting challenges posed by climate change, Consumer Packaged Goods (CPG) supply chains confront a pivotal question: Can they weather the adaptations required for a rapidly changing world? The stakes are immense, extending far beyond the environmental sphere, as climate change threatens the very fabric of the global economy.

As the spectre of climate change looms large, CPG supply chains find themselves at the intersection of risk and opportunity. The disruptions caused by this global phenomenon, from extreme weather events to shifting policies and market dynamics, necessitate a profound transformation in strategies and operations. The pressing query becomes twofold: How can supply chains navigate the turbulence of a changing world? And, crucially, how can they seize the opportunities inherent in transitioning to a low-carbon economy, emerging not just as survivors but as pioneers in sustainability and innovation?

This urgency is underscored by a report from BCG and CDP, revealing that, on average, supply chains generate 11.4x more emissions than in-house operations. This statistic not only underscores the significant impact CPG companies have on climate change but also highlights the immense potential to reduce their carbon footprint and align with the ambitious goals of the Paris Agreement. However, a stark reality looms large, as only 36% of companies disclose their scope 3 emissions, covering purchased goods and services, exposing a critical lack of transparency and accountability in their supply chains.

Climate Change Risks

Climate change risks can be classified into two types: transition risks and physical risks. Transition risks arise from policy and market changes as we shift to a lower-carbon economy. Physical risks stem from the increasing frequency and intensity of extreme weather events and longer-term shifts in climate patterns.

Transition risks and how to mitigate them

Transition risks are associated with the changes in regulations, technologies, and customer preferences that aim to reduce greenhouse gas emissions and limit global warming. Gartner has identified the possibility that fossil fuel assets may become “stranded and lose value” if the cost of carbon and regulations on emissions increase. This could severely impact industries that rely on oil, gas, and coal, including transportation, manufacturing, and power generation.

To mitigate these transition risks, businesses will need to align their strategies with the goals of the Paris Agreement and invest in low-carbon technologies and solutions. They also need to monitor and disclose their carbon footprint and engage with stakeholders to influence policy outcomes.

Some specific actions that businesses can take to manage transition risks are:

1. Setting science-based targets for reducing greenhouse gas emissions across the value chain;
2. Switching to cleaner energy sources and improving energy efficiency;
3. Developing new products and services that meet customer needs and expectations for sustainability;
4. Collaborating with suppliers, customers, regulators, and peers to share best practices and advocate for supportive policies;
5. Reporting on environmental, social, and governance (ESG) performance and risks using standardized frameworks.

As an example, Shell, a major oil and gas company, aims to become a net-zero emissions energy business by 2050. To achieve this, Shell plans to reduce its own emissions, help customers reduce theirs, and invest in renewable energy sources, carbon capture and storage, and nature-based solutions. See the Shell Sustainability report, 2022, for more information.

Physical risks and how to mitigate them

Physical risks to supply chains can be caused by either short-term or acute events or be symptomatic of the longer-term chances in climate patterns, creating a chronic concern. Acute risks can cause sudden and severe disruptions to supply chain operations, requiring rapid response and recovery measures. Chronic risks can erode the productivity and profitability of supply chains over time, requiring adaptation and resilience strategies. Particularly acute risks can include floods, wildfires, droughts, storms, and heat waves, all of which can damage infrastructure, disrupt transportation, and reduce productivity. Chronic risks include rising sea levels, changing precipitation patterns, and shifting temperature zones that can affect crop yields, water availability, and biodiversity.

To cope with physical risks, businesses need to assess their exposure and vulnerability to climate hazards and implement adaptation measures. These could include:

1. Building resilient infrastructure that can withstand extreme weather events and sea level rise;
2. Developing contingency plans that can ensure business continuity and recovery in case of disruptions;
3. Diversifying suppliers and locations that can reduce dependency on single sources or regions;
4. Enhancing emergency response capabilities that can protect employees, customers, and assets.

Some instances of how physical risks have impacted supply chains (as suggested by Wired) include:

• The Texas freeze in February 2021 caused the worst involuntary energy blackout in U.S. history, affecting millions of residents and businesses It forced three major semiconductor plants in Austin to close temporarily, worsening a global chip shortage that impacted the automotive and electronics industries. The outages also disrupted rail transportation, cutting off supply chain links between Texas and the Pacific Northwest for several days.
• Flooding in central China in July 2021 triggered by heavy rainfall devastated the Henan province, killing more than 300 people and displacing millions. The floods damaged roads, railways, airports, and power grids, affecting the movement of goods and people. A Nissan plant in Zhengzhou had to suspend production due to the floods. The floods also disrupted the supply chains for even basic commodities.
• Droughts in Europe and South America in 2021 lowered the water levels of the Rhine River, Europe’s most important commercial waterway. The reduced shipping capacity affected manufacturers that rely on the river for transporting raw materials and finished products, especially in the automotive, chemical, and steel sectors. The drought also reduced hydropower generation and increased the risk of wildfires along the riverbanks.
• Wildfires in California in 2021 burned more than 2.5 million acres of land, destroying thousands of structures and causing hazardous air quality. The fires threatened major ports in Los Angeles and Long Beach, which handle 40% of U.S. containerized imports. The poor air quality from the fires posed health risks for workers and residents, and also disrupted logistics operations such as warehousing and trucking.

Climate change opportunities and strategies

Climate change also presents opportunities for businesses that can innovate and adapt to changing customer preferences and market demands. There is a growing demand for renewable energy sources, electric vehicles, energy-efficient products, circular economy models, and climate-friendly services. To seize these opportunities, businesses need to identify and anticipate the needs of their customers and markets and develop new products and services that offer competitive advantages. They also need to collaborate with partners across the value chain to create shared value and positive impact.

Some examples of supply chain strategies that companies have adopted to seize climate change opportunities:

• Walmart: The retail giant has set a goal to achieve zero emissions across its global operations by 2040, without relying on carbon offsets. To do this, Walmart plans to power its facilities with 100% renewable energy, electrify its vehicles, and transition to low-impact refrigerants and cooling systems. Walmart also aims to protect, manage, or restore at least 50 million acres of land and one million square miles of ocean by 2030. Walmart works with its suppliers to reduce their emissions through its Project Gigaton initiative, which has avoided more than 230 million metric tons of emissions since 2017.
• Unilever: The consumer goods company has committed to achieving net-zero emissions from all its products by 2039, from sourcing to point of sale. To do this, Unilever plans to source 100% of its agricultural raw materials from regenerative farming practices, eliminate fossil fuels from its cleaning products, and use recycled or biodegradable packaging materials. Unilever also works with its suppliers to improve their environmental and social performance through its Responsible Sourcing Policy and Supplier Development Program.
• Nike: The sportswear company has set a target to reduce its carbon footprint by 70% by 2030, compared to 2015 levels. To do this, Nike plans to source 100% renewable energy across its owned and operated facilities, use more recycled and organic materials in its products, and increase the circularity of its business model. Nike also collaborates with its suppliers to reduce their emissions and waste through its Manufacturing Index, which measures and incentivizes sustainability performance.

How can CPGs benefit from this?

CPG companies are at the forefront of a transformative era, holding a unique opportunity to lead in sustainability and innovation. In the pursuit of a low-carbon approach, CPGs not only mitigate climate change risks but position themselves as industry pioneers in sustainable practices. Aligned with the goals of the Paris Agreement, investing in low-carbon technologies, and fostering collaborative stakeholder engagement are not just strategies for resilience but pathways to market differentiation, as emphasized in the book Supply Chain 5.0 – The Next Generation of Business Success.

The integration of advanced low-carbon technologies into core operations signals a commitment to environmental stewardship, enhancing both operational efficiency and overall competitiveness. Collaborative efforts with stakeholders, spanning suppliers to regulatory bodies, create a cohesive approach to sustainability, amplifying the impact of individual initiatives. The insights from Supply Chain 5.0 underscore the imperative for businesses to embrace customer centricity, human rights, sustainability, and advanced digitalization for future success. In navigating this transformative journey, CPGs not only fortify their operations but also emerge as beacons of responsible business practices, shaping an industry where sustainable innovation is not just a choice but a defining characteristic.

Conclusion

In conclusion, climate change presents both a challenge and a defining opportunity for CPG supply chains. The adoption of a proactive low-carbon approach not only serves to mitigate the risks associated with climate disruptions but positions CPGs at the forefront of market competition. The roadmap to success involves strategic collaboration with stakeholders, a resolute alignment with the goals outlined in the Paris Agreement, and substantial investments in low-carbon technologies and solutions. By embracing this paradigm shift, CPGs not only secure their competitive edge but also contribute meaningfully to a sustainable and prosperous future for their businesses, stakeholders, and the planet at large.