7 steps for delivering net zero supply chains

The need to mitigate climate change has never been clearer; the same cannot be said of the ‘how’. The challenge is too big for governments to tackle alone and, with global supply chains accounting for as much as 80% of total carbon emissions, there’s a real need and expectation for businesses to get involved. It’s why COP26 pivoted and brought the private sector from the fringes of previous summits to join centre stage.

The business leaders we speak to understand both the urgency and the responsibility. Promisingly, since early 2020 we’ve seen a big spike in corporate net-zero commitments being made. Many organisations have started to rapidly address their direct emissions, but not enough has been done to reduce indirect emissions, including the so-called ‘Scope 3’ emissions arising from their suppliers.

At HSBC and BCG, we believed that taking a “supply chain approach” could allow firms a more holistic focus and be a critical enabler for climate action. We therefore came together to explore what it would take for global supply chains to most effectively transition to net zero.

Strikingly, our research revealed the scale of the challenge. We found that as much as $25-50 trillion of the estimated $100 trillion investment needed to deliver net zero supply chains will need to be directed towards SMEs. This adds extra complexity to the climate challenge given that SMEs typically have less in-house climate expertise, and more limited access to capital to drive and fund climate transformation.

Nevertheless, while levers will vary from one sector to the next, the research also revealed the seven steps that seem to apply to all as a roadmap for transition:

1. Rethink product design. Go back to the drawing board and revisit product design, rather than just optimizing existing processes. Net zero supply chains will not be delivered by tinkering at the edges and may require a wholesale re-evaluation of how people use products and how they are made.

2. Embrace collaboration. Supply chains are asymmetric, with top-quality talent, education and resources at one end, and many smaller, less sophisticated SMEs along the chain in need of help. All need to collaborate to succeed: to share knowledge, technology, investment and resources.

3. Build the capabilities needed for change. The transition will expose skills and knowledge gaps, which will be greatest for SME suppliers. Capability development and training will help accelerate the shift.

4. Invest in climate tech. Hitting net zero by 2050 requires investment in R&D now alongside close collaboration between industry, science and finance to accelerate bringing innovation to market at scale

5. Develop better data structures. There’s a need to build systems that can gather operational data across the supply chain to enable transparent, comparable and consistent ESG metrics that are made widely available. This includes to end-consumers so these can inform decisions at point-of-purchase.

6. Think about policy and standards holistically. A historic lack of consistency in policies, standards and market practices has resulted in businesses being held to ever-changing requirements by their partners – driving up complexity and cost. Momentum in delivering consistency needs accelerating. Supply chains cross national borders and need policies that hold all to a high but workable common standard.

7. Enable financing. Targeted, ring-fenced and affordable capital is a key enabler, but banks will not be able to do this alone. Banks need access to mechanisms to team together (e.g. syndication), co-invest with corporates, and form public private partnerships to deliver financing to where it’s needed most. This requires appropriate data structures that provide transparency and traceability of financing – where is it being directed, how is it being used and by whom.

Leadership crucible

The systemic changes these prompt require a “leadership crucible” involving multiple actors. For example, large corporates cannot just mandate new standards and demand more of their suppliers, as this would lead to limited progress and missed goals. Rather, they will need to co-invest and provide liquidity through supply chain finance, help propagate innovation and technologies across supply chains to reach scale, and share transition knowledge and resources ,including through funding organisations that can support smaller businesses with their abatement approaches.

Governments will need to establish incentives to rebalance the economic equation or mandate change via policies in areas such as disclosure while ensuring cross-jurisdictional alignment. Care will be needed to ensure the demands on small businesses can be simplified while yet improving the accuracy of disclosures

Industry bodies and NGOs will need to disseminate knowledge and resources, and lobby for change – using their field expertise to support suppliers and inform development of industry standards. And consumers will need to demand the data that will enable them to make informed decisions and vote with their feet, even if that means changing habits.

Banks will be uniquely positioned to support clients, big and small, both through ring-fencing funding to finance the transition and through using their wealth of data and experience to predict impactful projects and inform net zero risk-management considerations.

Partnerships will also be key. First , with clients on sustainable supply chain finance programmes to increase SME access to finance. Second, with governments, development banks and others to create public-private-partnerships that can: scale and leverage funding for SMEs right through to deep-tier suppliers; inform better policy-making; and drive innovation and business models that support net zero supply chains.

This path to a net zero transition is far from easy. Yet as we understand more and more about the ‘why’ and ‘how’ of tackling the climate challenge, we cannot lose sight of the third critical factor: the ‘when’. The data and research was clear: we cannot afford to delay; and the commitments made at COP underline that the time to move from ambition to action is now.