Unlocking Value post-COP26

By Cameron Jeffrey, Analyst

In 2018, more than 190 countries adopted the Paris Agreement ‘rulebook’ [1] – an exhaustive set of rules and procedures aimed at combatting climate change. This ambitious framework hoped to promote accountability and create a solid timeline for our mitigation efforts.  In the same year, State of Flux selected sustainability as the key theme for our annual Supplier Management report. The report was formally recognising the issue as the most pressing in our industry - requiring immediate call to action.  The weight and urgency placed upon sustainability truly echoed that of the time and voiced the spirited determination within the corporate world to kick-start this ‘green revolution’. Could it be that over 3 years later in the aftermath of the eagerly anticipated COP26 that the same rhetoric still stands in stagnation? The answer to this question is of course complex, if not impossible to answer. Whilst we acknowledge that this is a gradual journey, it is blatant that a lot more must be done to avert the climate crisis.

A Current Snapshot

In a year where we have all been faced with the devastating consequences of human interference on the natural environment, the requirement for businesses to manage their sustainability efforts is even more pressing than it was back in 2018. Even for the most environmentally sheltered organisations there is no escaping this stark reality – over 30% of executives say their organisations are starting to feel the operational impact of climate change [2^]. As we are on track for 2.4⁰c warming by 2030 [3], this percentage is only sure to increase, alongside the urgency in which we attempt to counteract it. This implies that if ESG is not high-up on an organisations agenda as of yet, it is bound to make its way there forcibly in the near future.

Whilst it is clear that most executives are concerned about climate change, a gap still exists between sentiments and action. A recent report from Deloitte states that despite most companies having pledged to reduce their carbon emissions, only one third have definite plans in place [4]. This is the gap that must be bridged in order to meet our 1.5⁰c target in accordance with the Paris Agreement. This apparent inactivity is a point of contention for many, however the momentous shift required in conducting our ‘business as usual’ activities must be recognised. The businesses dominating our landscape today have spent years perfecting their strategy of achieving the best quality at the lowest price. In our 2021 research we asked our clients how their organisation defines value and the top response was cost reduction/avoidance. Although the cost factor cannot be ignored, it is the hidden cost to the environment that organisations have neglected and failed to account for. Such a shift in the mentality would likely take generations to come into fruition, but we do not have the virtue of time when dealing with the unforgiving forces of our natural world. This posits the question of how we can promptly address this crisis using more familiar methods.

Lessons from COP26

Establishing a commonality is the first step in instigating change of this magnitude. All invested parties must agree on a strategy that can be worked on collaboratively, ensuring that all voices are heard. The recent COP26 Summit was publicised as our last hope in reaching this agreement. All eyes were on Glasgow as world leaders and delegates pledged their commitments towards a sustainable future. The emerging ‘Glasgow Climate Pact’ has been praised by many, particularly for its strong efforts on ending deforestation and doubling adaption finance [5^]. However, there was a resounding notion of disappointment as leaders failed to make satisfactory provisions for disaster recovery finance and a global transition away from coal [5]. Despite the innate difficulty in being able to truly quantify the effectiveness of the climate pact, what is clear is that there is a gap between policy and science that businesses must bridge. Even after COP26 the international policy process is not moving fast enough in relation to the climate system. A recent study from Deloitte shows a consensus that sustainability efforts need to be stepped up - 81% of executives believe this to be true for businesses, and 72% believe this to be true for governments [2]. This statistic implies that business owners are self-aware of their own shortcomings, and suggests that solid action lags behind policy. If our target of 1.5⁰c is to be met it is not enough to simply ‘wait’ for policy changes – businesses must create their own benchmark.

Undeniably, the most important takeaway from COP26 is that collaboration at different levels is key. Around 100,000 people were said to have marched the streets of Glasgow to demand more action on the climate crisis – making it the largest protest in Glasgow for almost two decades [6]. In reality, COP26 was more than top-level political discussions, the public pressure from protestors around the world had great influence in instigating change. Professor Tim Lenton from Exeter’s Global Systems Institute states “the coalition of civil society, business, finance, NGO’s and others around COP26 is starting to drive real progress” [7]. From a business perspective, harnessing the spirit of collaboration can begin with the supply chain – this business function that can contribute to over 90% of a company’s GHG emissions [8]. The supply chain is therefore arguably the most crucial area to address ESG factors. As leading experts in supplier management, State of Flux can assist organisations in reducing their impact through facilitating innovative collaboration with suppliers.

Supplier Management in Creating Sustainable Value

Just as the most valuable outcomes from COP26 relied on cooperation, optimising value relies on capturing input from all players in the supply chain. State of Flux has been leading research in Supplier Management for more than a decade, and our experience shows that a holistic approach must utilise both clients and suppliers expertise – the same methodology should be used for achieving an organisations strategic ESG targets. With the majority of any company’s environmental and social impact sitting in the supply chain, it is impossible to achieve ESG objectives without supplier engagement. Despite this, our research shows that 47% do very little or no joint work with suppliers to manage sustainability, and only 5% are ‘advanced’ in this area. Expert led joint business plans, workshops and process mapping have seen many of our client’s release additional value for both parties, and with ESG being inextricably linked to the supply chain, developing a ‘best practice’ approach for sustainability must involve collaboration with suppliers.

Whilst we have seen recent advances towards sustainability, cost implications have remained the greatest barrier to embedding ESG effectively into Supplier Management processes. However, as the landscape is constantly evolving, many sustainability initiatives are no longer in competition with cost and can in fact go hand in hand. Reducing emissions and waste can result in substantial cost reductions and efficiency gains. Research by ‘The Carbon Trust’ has shown that carbon footprinting can evaluate whether waste from one value chain would be useful material in another, developing a lower cost and lower environmental impact solution [9]. Identifying such value release opportunities are only possible through honest communication with your suppliers – therefore embedding ESG as a key part of Supplier Management activities is essential to achieving long-term success and strategic objectives.

To conclude, sustainability is not just ‘nice to have’: it is a competitive advantage. Addressing sustainability is key to securing longevity in this ever-changing world, and Supplier Management provides the necessary tools to unlock this value. Achieving any fruitful long-term relationship requires active care and attention – this is especially true for supplier relationships. As the dust settles on COP26 discussions, it is evident that the same issues flagged in our 2018 report are those that still remain today. To put it simply, in a space where the government falls short, businesses are expected to take responsibility for the environmental and social impact of their supply chain. As these issues become increasingly more critical to address, organisations must ensure that complacency does not prevent us from instigating sufficient change. Whilst policy may lack in this area, a sustained pressure is being driven by NGO’s, investors, consumers and media coverage. A study from Unilever shows that one-third of consumers choose to buy brands based on their social and environmental impact [10]. Therefore, businesses must ensure they are not left behind, and those that are not willing to take this necessary step are at risk of losing the trust of their customers.  Not only is inaction an injustice for the planet, but also for the future of any business.