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The growing pains of moving to truly sustainable supply chains

Tom Mills
Image credits: TOS

Sustainability is a broad term that is difficult to describe considering the interconnected and complex systems that surround it. One way to view sustainability is as the assimilation of environmental health, social equity, and economic prosperity to create healthy, resilient communities without compromising the ability of future generations to also thrive.

With new goals set at COP26 and legislation around climate change being widely adopted across the world, we are seeing pressure from consumers and regulators being felt down the supply chain. This pressure is manifested in increasing requirements to disclose sustainability-related impacts through reporting. Below, I will look at some of the drivers for this demand, before taking a deeper dive into some of the challenges that come with reporting impact on people and the planet.

Finally, I will outline how technology and standardised reporting methodologies can play a role in shifting to more sustainable practices in both the short and long term. As Peter Drucker, the famous management theorist, said, “what get measured gets managed.” I would take this a step further to say what gets rigorously, granularly measured in a way that allows comparison, gets managed.

Growing demand for sustainable supply chains

COP26 and its lead up have seen new national and business commitments set to help combat climate change; many measures require quantification of carbon emissions and environmental impact, balanced with social inclusion across the whole supply chain. In some sectors, impact occurs most intensely at the site of production. This means measurement will have to be done at a project, rather than corporate level if impacts are to be accurately understood and targets achieved. These new targets, combined with regulatory and consumer demand for sustainable products and supply chain transparency, indicate enforcing sustainability across supply chains will be essential in the future.

Cutting down carbon leakage, the export of emissions to other countries, has been one notable focus of COP26 and will require an understanding of the carbon intensity of production of goods. For this system to work, carbon emissions need to be quantified at each stage of the supply chain. For example, the EU has committed to reducing carbon emissions by 55% on 1990 levels and published a proposed regulation to introduce the Carbon Border Adjustment Mechanism (CBAM). The UK government has also made radical climate change commitments to cut carbon emissions by 78% by 2035. Making progress against these carbon emission commitments, while avoiding exporting of emissions to other geographies will require a granular, standardised reporting across the supply chain.

As well as measuring and cutting down carbon leakage, legislation is increasingly being implemented to irradicate modern slavery and this will need to be traced at all points in a supply chain. For example, the EU’s Human Rights Due Diligence Legislation launched this year, gives guidance on “forced labour” risks across operations and supply chains including zero-tolerance policy” for forced labour, accompanied with other policies relevant to how forced labour may arise.

Changing consumer mindset also has an important role to play in the demand for sustainable supply chains. Millennials, the main demand source as well as upcoming Gen Z’s, are more environmentally conscious than generations before them. Last year, more than a quarter of millennials and Gen Z’s worldwide said their buying decisions have been influenced by the impact of certain businesses on the environment. This pressure, and the factors outlined above, show greater interest in the provenance of goods and powerful intentions to making supply chains more sustainable. However, there are many challenges that will need to be overcome.

Challenges of achieving sustainability across supply chains

What can be measured can be managed. To achieve sustainable supply chains, we need effective and comparative ways of measuring impact. As it stands, sustainability reporting is an alphabet soup of fragmented and varying frameworks. Some popular frameworks include the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), the Task Force for Carbon Disclosures (TFCD) and the Sustainable Development Goals (SDGs). These frameworks represent a substantial step towards measuring impact on people and the planet. However, each of them has varying requirements and different outputs making results difficult to understand and compare.

Supply chains start with growing, extracting or catching natural resources. These sources often have fixed geographies and combined with their capital-intensive nature; they are often where the greatest impact is felt. Resultantly, reporting at this first stage in the supply chain will be vital to meet country and businesses sustainability commitments. Reporting to date is both labour and time intensive with a requirement for special competencies. Therefore, it is difficult and expensive to adopt making it harder for smaller companies to report effectively. Research we did at TOS uncovered while most large-cap mining companies report against recognised sustainability frameworks, less than half (48.6%) of medium cap, and only 28% of small cap companies do.

At this nascent stage in the development of reporting, there is limited standardisation on the issues that are material and matter. Neither are there agreed methodologies to calculate sustainability related outputs meaning outputs vary. Thinking about this in the context of supply chains, varied outputs result in challenges in comparing like with like information and it provides companies with the ability to pick and choose to show themselves in the best light. Therefore, it will be very difficult to get the right data to measure achievement against net zero goals, even if the right commitments are in place.

Overcoming challenges

Technology has a critical role to play in achieving sustainable supply chains. It is already facilitating the mapping of complicated and challenging supply chains such as tin, diamond and cobalt. Battery product components can be traced back to their source and its role will only become more important in helping achieve sustainable supply chains.

For supply chains to be truly sustainable, sustainability must be measured to then be managed. To overcome the challenge of fragmented reporting, new tools enabled by technology must be developed to streamline the process, standardise methodologies used to generate metrics, and thus create useful, comparable outputs. The right tools will not only provide granular and rigorous data, but also make sustainability reporting affordable and accessible for small and mid-cap companies at the start of the supply chain.

Technology, together with automation will also assist in supply chain sustainability, specifically in relation to human rights, thanks to remote surveillance. Surveillance cameras and tracking will be used to easily monitor on-site activity at all hours without the need for in-person monitoring, however this will come with ethical debates around human rights to privacy and slower adoption by some supply chains than others.

Increasingly people want to make a difference in the world and are keen to act responsibly and create a future that will benefit generations to come. To achieve this, we need to understand how our consumption impacts both people and planet. Supply chains will be at the heart of this understanding. This will require a standardised way of measuring and reporting the impact of individual projects, in a way that can be easily understood and compared. There is still a way to go to fill the gap but pressure from governments, investors, multilateral institutions, and consumers is fuelling innovation around the issue, and we will see tools, enabled by technology emerging to make the problem easier to solve.

By Tom Mills, Founder and Managing Director of TOS

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