7 Steps to Delivering Net Zero Supply Chains

The need to mitigate climate change has never been more evident; 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 up to 80% of total carbon emissions, there is a real need and expectation for business to get involved. . This is why COP26 pivoted and brought the private sector from the margins of previous summits to come to the fore.

The business leaders we talk to understand both urgency and responsibility. Promisingly, since the start of 2020, we have seen a sharp increase in net zero corporate commitments. Many organizations have begun to quickly address their direct emissions, but efforts to reduce indirect emissions, including so-called “scope 3” emissions from their suppliers, are insufficient.

At HSBC and BCG, we believed that adopting a “supply chain approach” could allow companies to take a more holistic approach and be a key catalyst for climate action. So we came together to explore what it would take to get global supply chains to go net zero as efficiently as possible.

Surprisingly, our research revealed the magnitude of the challenge. We found that no less than $25 trillion to $50 trillion of the estimated $100 trillion investment needed to deliver net zero supply chains will need to be directed to SMEs. This adds further complexity to the climate challenge given that SMEs typically have less in-house climate expertise and more limited access to capital to drive and finance climate transformation.

However, while the levers vary from sector to sector, the research also revealed the seven steps that seem to apply to all as a roadmap for the 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 around the edges and may require a wholesale reassessment of how people use products and how they are made.

2. Embrace collaboration. Supply chains are asymmetrical, with premium talent, education and resources at one end, and many smaller, less sophisticated SMEs along the chain need help. All need to collaborate to succeed: to share knowledge, technology, investments and resources.

3. Develop the capacities necessary for change. The transition will expose skills and knowledge gaps, which will be most important for SME suppliers. Capacity building and training will help accelerate change.

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

5. Develop better data structures. There is a need to create systems capable of collecting operational data across the supply chain to enable transparent, comparable and consistent ESG metrics that are widely available. This includes end consumers so they can inform point-of-sale decisions.

6. Think about policies and standards holistically. A historical lack of consistency in policies, standards, and market practices has forced companies to meet ever-changing requirements from their partners, leading to increased complexity and costs. The momentum needed to ensure coherence must be accelerated. Supply chains cross national borders and need policies that all maintain a high but achievable common standard.

7. Activate funding. Targeted, earmarked and affordable capital is a key enabler, but banks cannot do it alone. Banks must have access to mechanisms to partner (eg syndication), co-invest with companies, and form public-private partnerships to provide finance where it is most needed. This requires appropriate data structures that ensure transparency and traceability of funding – where is it directed, how is it used and by whom.

The systemic changes they bring about require a ‘leadership melting pot’ involving multiple actors. For example, large companies cannot simply impose new standards and demand more from their suppliers, as this would lead to limited progress and missed targets. Instead, they will need to co-invest and provide liquidity through supply chain finance, help spread innovation and technologies across supply chains to achieve scale, and share bridging knowledge and resources, including through funding bodies that can support small businesses in their reduction approaches.

Governments will need to put in place incentives to rebalance the economic equation or change mandates through policies in areas such as disclosure while ensuring alignment across jurisdictions. Need to ensure small business requirements can be simplified while improving accuracy of disclosures

Industry bodies and NGOs will need to spread knowledge and resources, and push for change – using their expertise on the ground to support suppliers and inform the development of industry standards. And consumers will have to demand the data that will allow them to make informed decisions and vote with their feet, even if it means changing their habits.

Banks will be uniquely positioned to support their customers, large and small, both through ring-fenced financing to finance the transition and by using their wealth of data and experience to plan high-impact projects and inform considerations. net zero risk management.

Partnerships will also be essential. First, with clients on sustainable supply chain finance programs to increase SME access to finance. Second, with governments, development banks and others to create public-private partnerships that can: extend and mobilize finance for SMEs down to deep-level providers; better inform 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 increasingly understand the “why” and “how” to address the climate challenge, we cannot lose sight of the third critical factor: the “when”. The data and the research were clear: we cannot afford to delay; and the commitments made at the COP underscore that the time has come to move from ambition to action.