The disruption caused by COVID-19 is a reminder of the vulnerability of our supply chains at a systems level. Within no time, borders turned into walls across the world, stopping the transport of both people and goods in their tracks. The pandemic has highlighted the fragility of our modern economy and society beyond comparison.
If anything, COVID-19 is the canary in the coal mine. Today, the nature of business risk is profoundly global. Companies must look at global issues, including pandemics, and assess how they could affect their commercial activities across the markets they and their suppliers operate in. That should form the basis of a comprehensive strategy overhaul that could even lead to restructured supply chains in the most extreme cases.
The Climate Chatter on 'Building supply chain resilience' held on 18 June addressed questions such as: how to identify and address GHG emissions and related climate risks and how to engage with partners across the supply chain. Speakers Rinske van Heiningen, Director Sustainability, AkzoNobel; Linda van Waveren, Sustainability Manager, Port of Amsterdam; Naomi Rosenthal, Deputy Director Sustainable Supply Chains, South Pole; and Charles Henderson, Director Corporate Climate Strategies, South Pole shared real-life examples, challenges and solutions. Please find the recording of the webinar here.
Building on that discussion, the following blog will cover additional questions and discussion points brought up during the Q&A.
COVID-19, climate change and the cost of non-financial risk
The current situation is a foretaste of what is to come if we do not address climate change: a slower moving, systemic risk. Climate risk is increasingly pervasive in our living environment. Extreme weather events, ranging from floods and fires to hurricanes and heat waves, are proliferating as a result of climate change. Their disruptive impact and related cost grows in parallel.
The ability of climate change to upend supply chains comes in many guises, including the aforementioned direct impacts to more indirect or secondary causes of disruption. Uprooted pathogens, increasingly linked with deforestation, are but one example. Migrating workforces, deteriorating infrastructure, and excessive workplace heat, are others. And the costs are astronomical. The International Labour Organization, in its 2019 report 'Working on a Warmer Planet', calculated the accumulated financial loss due to heat stress at USD 2.4 trillion by 2030.
Building resilience in the supply chain clearly goes beyond identifying and addressing localised vulnerabilities. Whether social, economic or environmental, local disruption often ties into wider trends playing out across regions, continents or the planet in its entirety. Tactical interventions no longer suffice. Linda van Waveren put it rightly. When explaining the concept of 'The Sustainable Port', she indicated that “Building resilient supply chains is also about building resilient communities, but it is more than that. It is about building a strong ecosystem which is resistant to changes and is able to embrace them in order to strengthen the supply chain."
Corporate climate action still touch-and-go for many
Creating shared value in the face of growing systemic risks will not become any easier for companies. Many find it challenging to see the synergies between pursuing commercial success and realising long-term environmental and social sustainability. Yet, it is exactly this challenge that is the competitive opportunity. After all, climate change is a driver of global systemic change with an impact comparable to the current pandemic.
Paradoxically, this crisis has also exposed the shortcomings of corporate resilience in the face of a rapidly changing landscape of risks. If anything, the picture looks ambiguous at best. Yes, corporate climate action has accelerated, especially since the Paris Climate Agreement, boosting existing, and giving rise to new corporate movements and platforms. Powerful initiatives include the We Mean Business Coalition, UN Global Compact, Science Based Targets initiative (SBTi), The Climate Group, and B Corp. A growing number of global brands publicly sign up and commit to these initiatives.
At the same time, the recent 23rd Annual Global CEO Survey by PriceWaterhouseCoopers found that only 24% of CEOs are “extremely concerned" about climate change. This contrasts with the growing pressure from investors to disclose physical and transitional climate risks. Also the World Economic Forum's Global Risks Report 2020 found that CEOs consider the risk of extreme weather and climate action failure among the most impactful and likely of risks.
From this we can conclude that there is a misalignment and perhaps confusion around how CEOs think climate change will impact their business. A better understanding of how different climate change scenarios, and related regulatory developments, might impact a company's supply chains or financial performance is clearly more important than ever before.
Socialising climate action internally remains a challenge
At AkzoNobel, sustainability sits at the heart of their business. Speaking about the company's sustainability journey 'People. Planet. Paint.', Rinske van Heiningen stressed that it is simply 'the right thing to do'. AkzoNobel's portfolio approach incentivises the use of safer and more sustainable products across the value chain. Sustainability can be a driver for resource efficiency and unlock cost reductions, create commercial opportunities by triggering product innovation, and enable a business to better manage future risks and opportunities.
Meanwhile, many businesses still need to overcome a wide range of challenges to achieve climate resilience, not least gaining internal buy-in for taking the required measures. South Pole's Charles Henderson pointed out a number of interlinked challenges. They sit at the heart of unlocking long-term internal recognition and planning for resiliency, essentially reflecting the sustainability governance and management of a business:
- Senior-level recognition of the long-term impacts of climate change: Stress testing against physical and regulatory transition risk assessments across a range of warming and policy scenarios reveals critical data. A materiality assessment gives a 360º stakeholder view of sustainability issues and how they are prioritised. Competitor benchmarking and gap analysis can help a business understand where it stands in the market in terms of its policies and where to focus action. For more information about measuring impacts and assessing sustainability risks, click here.
- Structural organisation of the business to respond to sustainability challenges: It is vital to understand the relative importance and prioritisation of challenges to tackle them effectively. The most successful businesses do not 'pigeon hole' these issues within one team. They lead from the top, break down silos and form cross-functional working groups across many teams, ranging from corporate functions to supply chains to communications.
- Mid-to-long-term strategic planning: Any robust planning should encompass the growing magnitude of sustainability risks and potential tipping points. This timeframe needs to be reflected in risk management, ERM processes and timeframes, as well as investment planning and the expected return on investment period.
Disclosure drives sustainable competitiveness
Creating sustainable forms of competitiveness, which outlast business models based on short-term gains, are increasingly rewarded by investors and regulators. The Task Force on Climate-related Financial Disclosures (TCFD), for example, recommends that companies disclose climate-related financial risk in their annual report. This can then inform investors, lenders and insurance underwriters about their climate-related financial risks. This market-driven initiative was established to give recommendations for voluntary climate-related financial risk disclosures. However, the TCFD guidelines are gradually becoming mandatory.
Earlier this year, the UK indicated its willingness to do exactly that, while Canada has explicitly linked it to its economic recovery programme. Closely related, the European Union is revising its Non-Financial Reporting Directive which forces large banks, insurance firms and listed companies (500+ employees) to report non-financial risk (NFR) data related to their social and environmental impact that could affect their value over time. The Directive will soon be linked to the EU Sustainable Taxonomy, an initiative under development that seeks to qualify economic activities and assets as sustainable.
The Carbon Disclosure Project (CDP) is another good incentive for companies to engage with their supply chain. CDP is currently the most popular voluntary disclosure framework, with 'thousands of companies, cities, states and regions' disclosing annually on climate change, water security, deforestation and supply chains. Charles Henderson outlined various benefits to CDP disclosure:
- Disclosures are scored and allow a sectoral benchmark, and highlight areas for improvement.
- The process of completing a disclosure is valuable in itself, as it creates a cross-functional focus and collaboration internally.
- CDP disclosures are used (and expected) by investors, rating agencies (in creating sustainability indices, for example), peers and NGOs.
There are many more initiatives around the world that seek to beef up the reporting of non-financial data by large companies. Linda van Waveren noted that the Port of Amsterdam uses the digital reporting tool from the Global Reporting Initiative (GRI), an international non-profit standards organisation that stakeholders communicate their impacts on for example climate change. They are also involved in the The Transparency Index, an initiative from the Dutch Ministry of Economic Affairs, and apply the OECD guidelines for multinational enterprises.
The main take-away here is that although many reporting initiatives are still voluntary, an evolution of accountability is emerging. Voluntary initiatives are transforming into mandatory regulations, deepening the divide between laggards and leaders. In the meantime, there is increasing harmonisation between standards, such as CDP and TCFD, for example.
Supply chain resilience as a sine qua non for commercial success
The economic fallout, including a likely recession, will test all business models. Shareholders, stakeholders, and the public will ask increasingly more difficult questions about the long-term security of their investments, pensions, and the businesses that hold together the fabric of society. Financial and planetary debt, and how they are governed, are at the top of this resilience agenda. This makes it important to team up with supply chain partners.
Under the pressure from investors, regulators, consumers and citizens at large, a growing number of industries are increasingly concerned about reducing their scope 3 emissions. About 80+% of companies' carbon footprint tends to fall under scope 3 and addressing them creates numerous co-benefits, according to Charles Henderson. This includes supply chain resilience, more robust supplier relationships, innovation and R&D. He explained that “Scope 3 is considered to be within the operational (and financial) sphere of influence of the business by main stakeholder groups, and therefore part of its climate risks (and opportunities). This is reflected in global standards such as the GHG Protocol, disclosure frameworks such as CDP and TCFD, and policies such as the potential EU Carbon Border Mechanism."
Yet, there are many ways of engaging with supply chain partners. Rinse van Heiningen mentioned AkzoNobel's 'Paint the Future' initiative, a global collaborative innovation challenge, while Linda van Waveren mentioned how the Port of Amsterdam integrates sustainable development in its lease contracts. With an important logistic position in the supply chains of other companies, the Port leverages their dependence to incentivise action. She also noted that “the Port of Amsterdam invests to facilitate the sustainable development of our customers and third parties in order to stay competitive." For example in its on-shore power supply, underground energy infrastructure and hydrogen production. The Port is convinced that companies will increasingly choose logistic hubs offering such facilities.
In terms of engaging with supply chain partners, tackling impacts means going beyond working with tier 1 suppliers. Applying this to the fashion industry, Naomi Rosenthal at South Pole highlighted that “the sector has a long history of working with tier 1 manufacturers on labor issues, accelerated by the fact that the supply chains between garment manufacturers, fabric mills, and raw material providers is very fragmented and intransparent. A lot of fashion companies are focusing on activities that could be described as 'the lowest hanging fruits.' Companies in the food sector are far better at developing strategies to address the largest (and most cost-effective) impacts first."
Where you can start to build resilience
Charles Henderson recommends starting by understanding the bigger picture of sustainability risks, their progress to date (which is often more than people realise), and their baseline. This is part of step one in South Pole's climate leadership journey, as outlined in a recent blog on 'Emissions, impacts and risks: How to start your Climate Journey'. Three 'building blocks' can achieve this:
- Materiality assessment: to help discover which factors are material, and decide which ones to prioritise.
- Carbon footprint: a baseline assessment of the annual emissions of climate warming gases along the corporate value chain.
- Physical and transition risk analysis: forward looking scenarios, exploring a range of warming and policy trajectories - to stress test business strategy.
At South Pole, we are convinced that multinationals with global supply chains have to understand and take urgent, measurable action on their climate risks to build resilience. The pressure is rising across the board and if there is one thing for sure, under pressure everything becomes fluid. The time to build supply chain resilience is now.