In conversation with the Institute David Correll: Investors are pushing for sustainable supply chains

The topic overall is increasing in priority and social issues within supply chains are gaining importance rapidly. In our annual survey we found the pressure to improve supply chain sustainability has risen for four years in a row. Suppliers as well as customers are looking to learn about and implement new, interesting solutions—that wasn’t typically true just a decade ago. Investor pressure is the highest-rated and fastest growing source of pressure to find sustainability solutions in our data. And when we pair survey results with executive interviews, they say the same.

Customers increasingly want more sustainable supply chains. This is part of the reason to prioritize sustainability, to protect the brand against unknown unknowns. That’s a big challenge because it’s abstract, which makes it difficult to create incentive structures for staff to protect the firm against risks, especially when you can’t measure how many savings are booked from risks avoided.

I see three main challenges. The first is measurement. Suppliers and vendors often don’t offer the data, so it can be hard to get those vendors to offer the data, so you are always approximating the amount.

The second is non-aligned incentives, fueled by unresolved accounting issues. If I need trucking partners to change their practices to reduce my scope 3 emissions, it’s not clear how to set up the deal to get them to do that—and then who books the sustainability gain from the emissions reduction? This is complicated further if the truck is carrying some of my goods and some from other companies. These deals need to be made to make progress, but the question of how they are constructed to everyone’s mutual benefit hasn’t yet been solved.

The third big challenge is on the social side. Let’s take a warehouse as an example. Relatively speaking it’s more straightforward analytically to define how a warehouse can become green—e.g. the metrics that should be used and the technologies that should be deployed—it’s far harder to define the path towards making a socially sustainable warehouse. Most companies don’t know how to measure that versus their peers, and what you can’t measure you can’t manage.

It depends. The shocks from Covid-19 and the war in Ukraine where obviously negative for the global economy, and companies said that they did affect their commitment to sustainability. What’s surprising, is that the majority, 80%, said it had led them to increase their commitment. Anecdotally, many companies said the requirement to reappraise their supply chain due to such disruptions provided more time and budget to redraw supply chains, and that when doing so, sustainability was top of mind.

Conversely, when companies were asked about how projections of economic recession would impact their investments in sustainability, they said it would reduce them. This was in part because their investments in all areas were being reduced, and that obviously includes sustainability investments too.

In conclusion, when challenges to supply chains emerge from the upstream, sustainability is more likely to thrive. On the flipside, when challenges emerge downstream, i.e. demand is constrained, challenging margins and profits, sustainability is de-prioritized in favor of safeguarding the company’s financial health.

First, companies need to focus more on measuring emissions, particularly Scope 3, not least because this will be increasingly demanded in annual sustainability reporting. While some 50% of firms around world have Net Zero goals, action to achieve those needs to increase, also because regulations are going to force the hand of many companies and they should get ahead of this. A concrete goal should be for companies to offer more accurate self-assessments of where they are in terms of emissions.

Second, judicious regulation is important—if you don’t have the policymakers providing a basis for action, then you risk getting a race to the bottom. And I would suggest there needs to be more focus on the upstream—when we divide respondents to our survey among the upstream, midstream, and downstream of the value chain, we have seen more activity in the downstream, especially in terms of Net Zero goals. The implication is that the closer a company is to customers the more progress we see. Further upstream, the pressure from customers recedes, suggesting more is needed from other stakeholders like policymakers and investors.

I’ve been teaching about sustainable supply chains for years, but the enthusiasm of the students and the quality of the students today inspires me. Our reports go out in four languages, because students volunteer their time to translate them. Students really care about this issue and push themselves to help. That’s very heartening to me.

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