COP26: Beyond the chatter
On Sunday, November 14, 2021, the United Nations Climate Conference, otherwise known as COP26, concluded with the signing of the Glasgow Climate Pact. The event that mooted massive reduction in coal usage for both developed and developing nations, ignited unprecedented “chatter” across the world about sustainability and climate.
The primary goal of the forum was to bring various countries and governments on the same page and unanimously agree on an effective pathway to keep the warming of the Earth to no more than 1.5°C above pre-industrial levels, a target detailed under the Paris Climate Accords. However, national commitments on global emissions reduction are likely to fall short of the 1.5°C warming target. There is no formal enforcement mechanism and consequently inter-governmental “peer pressure” and public scrutiny are expected to drive the momentum.
In a scenario where government action appears to be insufficient to tackle rapidly shifting challenges related to climate, business-led action on emission reduction strategies come into focus. What does this mean for procurement functions?
Net Zero pledges
The Net Zero concept is defined by the activities within a value chain of an entity that result in no net impact on the climate from Greenhouse Gas (GHG) emissions. The pledge to achieve this Net Zero state has become a rallying cry for action on climate change. At COP26 more than 130 countries committed to balance the amount of GHG emissions generated by offsetting or sequestering to a Net Zero level. Adding to this momentum, 3,000 global companies, including over half of all FTSE 100 companies pledged to achieve Net Zero on, or before 2050. Concern is that without a detailed action plan, these corporate pledges run the risk of being tagged as “greenwashing”.
Procurement teams will play a pivotal role in achieving the Net Zero plans. Supply chains will come under further scrutiny due to their emissions falling under ‘Scope 3’ of the GHG Protocol Corporate Standard. The GHG Protocol Corporate Standard classifies a company’s GHG emissions into three ‘scopes’ – ‘Scope 1’ relates to direct emissions from owned or controlled sources; ‘Scope 2’ constitutes indirect emissions from the generation of purchased energy; ‘Scope 3’ emissions are all indirect emissions that occur in the value chain of the reporting company, including both upstream and downstream. ‘Scope 3’ GHG emissions needs to be a key focus area as they account for 70-90% of the carbon footprint for most organisations. Sitting at the intersection of business and supply chain functions procurement teams will need to do more to deliver on an organisation’s Net Zero agenda. Procurement leaders must now navigate to a new path that integrates sustainability goals with cost, as well as quality and service objectives.
With the acceleration of Net Zero pledges, we must also close the glaring gap between set targets, supply chain operations, and the capabilities needed to deliver what has been promised. Formal procurement sustainability processes need to be embedded, not just added into operations. Overall procurement function strategies that include sustainability objectives, value delivery programmes that include responsible sourcing and sustainability indicators built in supplier performance frameworks are needed.
Research has revealed that even in Europe, few suppliers are being regularly assessed on sustainability practices with less than a quarter (24%) being measured routinely on carbon emissions. Studies have highlighted the lack of communication of corporate sustainability objectives by organizations across their supply chains as one of the reasons why implementation of sustainable goals are lagging. Suppliers themselves have indicated that over 90% of goods and services contracts do not yet include sustainability measures. The gap between current reality and the pledge is clear – procurement organisations need to uplift their sustainability practices to ensure they can step up and deliver immediate business results on sustainability and climate.
The sustainability data challenge
At COP26, the International Financial Reporting Standards (IFRS) announced the creation of the International Sustainability Standards Board (ISSB) that aims to “standardize the standards” and provide a foundation for consistent and global Environmental, Social and Governance (ESG) reporting.
For procurement functions and supply chains, new and detailed guidelines have been set on how ‘Scope 3’ emissions should be measured and reported on. Given that adoption of new guidelines and then standards is expected to be accelerated by organisations and investors, procurement must take early action to prepare for the growing requirements for ESG data in the supply chain.
And yet, data quality and availability are one of the biggest challenges for procurement organisations. Collecting ‘Scope 3’ data is complex as GHG visibility is lost through multiple tiers of supply chain. Technology is increasingly being applied to enable data collection, and there are numerous solutions in the market, from specialist sustainability products to bolt-on modules integrated into Source-to-Pay solutions.
Knowing where and how to start can be difficult for organisations embarking on their sustainability journey. To kick start, the primary focus of procurement organisations should be on identifying sustainability hotspots in their supply chain and determining how ESG data capabilities can be amplified.
To know more about uplifting your sustainability capabilities, please get in touch with Infosys Portland.