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ASCM Insights

Episode 45: Sustainability Gets Real in the Supply Chain

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Bob Trebilcock: Welcome to The Rebound, where we'll explore the issues facing supply chain managers as our industry gets back up and running in a post-COVID world. This podcast is hosted by Abe Eshkenazi, CEO of the Association for Supply Chain Management, and Bob Trebilcock, Editorial Director of Supply Chain Management Review. Remember that Abe and Bob welcome your comments.

Now to today's episode.

Welcome to today's episode of The Rebound, Sustainability Gets Real in the Supply Chain. I'm Bob Trebilcock.

Abe Eshkenazi: I'm Abe Eshkenazi.

Bob: Joining us today is Tom Raftery. Tom's a Global VP, Futurist, and Innovation Evangelist for SAP. That's one of those titles I envy. He's host of two podcasts, the Digital Supply Chain podcast, where he showcases the latest happenings in the world of supply chain technologies, and The Climate 21 podcast, where he highlights successful climate emissions reduction strategies, and stories in order to educate and inspire listeners.

If that wasn't enough, Tom will be one of the presenters at this year's ASCM CONNECT, which will be live in Chicago and available as a virtual event, September 18th through the 20th. I'll be there.

Tom, you're a busy guy, so welcome and thank you for sharing your time with us.

Tom Raftery: Bob, thanks so much for inviting me to come on the podcast. I really appreciate it.

Bob: We're really looking forward to this conversation. Hey, one of the reasons I wanted to hear from Tom is because I've noticed how sustainability seems to have come back to the forefront of supply chain discussions in the last year or so, and I know it's been top of mind at ASCM.

Abe: Absolutely, Bob. I think among the challenges that we have is how to respond, not only as supply chain professionals, but as the industry. I think we've seen quite a bit of focus on sustainability, a lot of rhetoric, maybe not as much action, but there's quite a bit of focus on sustainability. This is a really timely topic for us as an organization.

Bob: I just did the Gartner Top 25 for SCMR (Supply Chain Management Review), and I'm really impressed with the number of initiatives from the top 25 supply chains plus their 5 masters that are related to ESG. What I've been trying to figure out is really what's going on out there? What are leading companies really doing? What's driving it? Looking over the titles of some of Tom's podcasts, I think he's the perfect for this discussion.

Tom, let's start with an easy one. What's really going on out there when it comes to sustainability and supply chains?

Tom: It's a fascinating topic, to be honest. It's one that's near and dear to my heart, and has been for a long, long time. I'm a graduate biologist. Even after I got my degree, I went on to do postgraduate studies in biological control, and I'm a little bit ADD, and so while I was doing that, I got distracted by this technology thing, which was new and shiny, and I chased that down.

I've been banging this sustainability drum for a long, long time, and the changes that I've seen happen in the sustainability space in the last two, three years are unlike anything I've seen in the previous 20. I'm not sure why it is. Some people say it's down to COVID, and I'm sure that's part of it. People have got a chance to do a bit of a reset. Some people put it down to the 2015 Paris Climate Accord, and we hit 2020 and suddenly we had the decade of action coming along. There's been an enormous shift before 2020, let's say, the idea of what was previously referred to as CSR, Corporate Social Responsibility. That functionality in a company typically belonged to the marketing organization in a company. Right there, that tells a story in its own right.

More recently, with the shift away from CSR and now people are starting to refer to it as ESG, we're starting to see, because ESG requires a higher level of rigor in reporting, and it's still very immature that it's going to become even more rigorous and more defined, but because it requires more rigor in the reporting, we're starting to see that function now shift away from the CMOs organization to the CFOs organization. Now, that's going to be the big shift we see in the next few years. That, and the requirement, as I say, for reporting, the SEC came out a few months back with their proposals, and they're talking about the large public listed companies having to produce reports based on climate risk next year, and then all companies having to do it from 2024 onwards.

Not just that, but a year later, for large companies from 2024 onwards, they'll have to start reporting out to their scope three emissions, which has never been required before, and for all companies, from 2025, out to scope three. It means an enormous change.

The other thing they said in their proposals was that those reports would have to be audited. That's an enormous change. You can see the auditor organizations are loving this, but that's another reason why it's going to shift away out of the CMOs organization to the CFOs organization, because that requirement for rigor and reporting.

Abe: Really interesting, and it's not a new topic. Obviously, we've been talking about sustainability for decades here. Obviously, there's quite a bit more energy today around the concept of the ESG beyond just the rhetoric. Give me a sense, from your perspective, what's driving it? Is it the consumer? Is it regulatory? Are we just much more aware of the impact that supply chain is having? Give me a sense of what's really behind us?

Tom: It's all of the above. I'm based in Europe, and if I take a European lens, the EU past legislation in June of last year saying that we were going to have to, as a 27 Nation Block, reduce our emissions 55% by 2030. That's seven and a half years, that's less than seven and a half years from now, and we've got to reduce our emissions, as I said, 55%. Now, that's unprecedented. That's enormous. The scale of the change that that will require is beyond most people's comprehension. It'll be incredibly hard to do.

Now, to give you an idea, to put that in context, first of all, I'll ramp it down a bit because it's against our 1990 baseline, and we've already reduced 24% against that. That leaves 31%, and that 24% has gotten out of the system in the last couple of decades, but that still leaves 31% to get out in the next seven and a half years, or seven and a quarter years, I guess at this point. Again, to put it in context, during 2020 when we had the big lockdown pandemic related, businesses shut down, we reduced our emissions 7%. Then in 2021, as economy started to open up again, it went back up 5%. We had a net reduction, between 2020 and 2021, of 2%, and we have to get another 24% out in the next, as I said, seven and a quarter years. It will require enormous structural change. It's not just the EU, China have very ambitious targets as well. I know the Biden administration has enormous ambitions as well, whether they'll manage to get through some of those. They passed the IRA in the last couple of weeks. Massive, massive changes.

It's not just the regulatory changes. It is, as you rightly said, it's down to things like the consumers being aware of it now, particularly younger consumers, requiring that people they purchase from have a good sustainability story they can tell. It's not just consumers, it's also employees.

On my Climate 21 podcast that you referenced, I talked to a guy called Ken Pucker, and Ken is the former COO of Timberland. He mentioned that when they started on their sustainability initiative, and this was in the early 2000s, they started reporting their emissions, and very few companies were doing it then. He said when they were doing it, because they were doing it, anytime they advertise a vacancy, he said the candidates that they got applying for that vacancy were far above who they would've expected to apply for such a role. It was simply because they had a good sustainability story to tell. He said their recruitment and retention costs fell. They cratered because everyone wanted to work for them, and everyone who was working for them wanted to stay working for them because they felt they were doing something important.

That's even more true today. It's a question of, if you have a good sustainability story to tell, you are, A, in line with the regulations that are either out or coming out, but also, B, you have a very easy time attracting customers, and you have a very easy time attracting and keeping your employees. It's a win, win, win all around.

Bob: Tom, I want to ask you a two-part question, which I'm wont to do. The first part is based on something you just talked about. Actually, the second part, but the first one is that European lens. We are seeing a lot of pushback in the US. I don't know so much that it's coming directly from the business community, but certainly from certain parts of the political community against ESG and all that entails.

Are you seeing that same pushback in Europe? If so, how are they contending with it? Then I'll ask you the second part.

Tom: There's very little pushback in Europe. You do have fossil fuel company interests who are trying their best to delay anything that's happening, but they're fighting a losing battle. There's a great quote from Martin Luther King that is escaping me now, but it's something along the lines of the arc of justice bends to the right, or, again, I've forgotten the exact quote, but you can look at the trend lines, and you can see that things are becoming, over time, more and more and more sustainable. The demand is there for it to happen, so it's going to happen. Anyone who's trying to delay it, they're ultimately fighting a losing battle. It is coming.

I mentioned the 2030 deadline, that will get us to 55% reduction, but we've got to get to net zero by 2050. The 55% we get out by 2030 is the low-hanging fruit. That means that from 2030 to 2050, we've got to work even harder to get that remaining 45% out. This isn't a flash in the pan. This is something that we're going to be working on and working really hard on for decades to come.

Bob: For the second part, which I think flows from the answer just there, every supply chain conference I've gone to this year, this has been at ISM, the procurement conference, it was the keynote, but it's been a major component of every event I've been this year. Certainly, supply chain's going to be asked to play a role. As you see it, why is it falling on supply chain, and what is going to be our role in meeting those goals?

Tom: You look at any studies around emissions and supply chain, and they will tell you that depending on the industry, supply chain is responsible for anything from 50% to 95% of the emissions of an organization. Ken Pucker mentioned it when he talked about Timberland. He said that at the time when they started out, they couldn't quantify their Scope 3 emissions, which is the emissions from their supply chain. They could only report on 5% of their actual emissions because they were getting 95% from their supply chain. In their case, it was 95%. It can be that high. That's why it falls in large part on supply chains, because supply chains are responsible for the majority, often, of an organization's emissions. That's why.

What can we do about it? There are various things. I think at the very least, in our RFPs or FQs, we've got to require our suppliers to report on the emissions that are associated with anything that we purchase from them. That's going to probably be mandatory, depending on NGOs, but that's going to be mandatory, I would suspect in the next few years. All companies will be required to set targets, set science-based targets. There's a thing called the Science Based Targets Initiative who have standards around doing this. It's likely that most organizations will be required to set targets and then report against them. Everyone will be required to report on their emissions. That's just going to be a thing that everybody does. It will get to a point where every business decision that is made would be weighed, not just on its financial implications, but also on its climate implications. It will truly become the climate economy. The global economy will become the climate economy.

The other things, there's a lot of low-hanging fruit, as I referenced earlier. If you are in a region where you have a choice of electricity supplier, just look for one that has a renewable tariff, a green tariff, one that where all your electricity that you're getting is 100% renewably sourced. If you can get that, then, like I said, that's low-hanging fruit, the next step is to then convert everything in your organization to electric. Convert your heating, convert your cooking if you have kitchens, convert your transportation to electric, and suddenly your emissions come way, way, way down.

Work with your suppliers as well, because you can't just straight away mandate that they report their emissions to you with everything. Rather work with them to help them do that, to understand why you want them to do that, and explain to them how you would like it to be done. Then offer them advice on how they can reduce their emissions so that they help you meet your targets.

Those are some easy wins. There are other things like setting an internal carbon price, one that can work very well, but you would find a lot of pushback against is to set KPIs in your organization so that executive remuneration is tied to emissions reduction goals. That one can be very powerful, but, like I say, hard to implement.

Abe: Tom, you're bringing up really a number of great examples to a couple of studies that we've done, not only with the Economist but with Gartner. It did indicate that size does matter, that predominantly larger organizations, more publicly listed organizations are much more likely to not only set the benchmarks, but to report out on them. You talked a little bit about how the larger organizations can help their partners as well. Can you give us a little bit of sense of what these top leaders and these organizations are doing that can be maybe a little bit of a roadmap for other organizations?

Tom: Yes. It's everything you said, Abe. The larger organizations are very often working with the likes of the Science Based Targets Initiative, and the working with other organizations like that to certainly to create an example and to work with agencies as well to make sure that the targets that are out there are achievable by organizations, and that they are cross compatible, because it's one thing for an organization like the Science-Based Target Initiative to come up with targets, but they have to be targets that industry can work with.

These targets that are created are often created in conjunction with larger organizations. The likes of the large technology companies engage with the Science-Based Target Initiative and say, "These are the things that we need to come together with to create the targets for our industry." That happens across industries. That's a big part of it.

Another thing is working with the regulators to say which kind of regulations can actually work, because the kind of regulations that we want to be putting out there are not just the stick beating people over the head. You need to have incentives as well. It needs to be a combined carrot and stick thing.

A phenomenal example of that is the country of Norway. Norway, at the moment, if you look at new private car sales in Norway, the new car sales are typically now in and around 90% to 95% electric vehicles for new car sales, new car registrations. That has happened over a number of years through fantastic incentives that the Norwegian government has put out for private citizens. The new cars in Norway, for decades, had a very high taxation regime. It was always very expensive to buy a new car. Over decades, if you went into Norway or Denmark, similarly, you would find that the car fleet there is typically a little older than in most other countries, but when electric vehicles came out, they decided not to tax them, not to put a tax on new. It leveled the playing field straight away in terms of price because the electric vehicles initially were significantly more expensive, but because they didn't have that tax, they came down to equal. Then as the cost of new EVs started to fall, they were cheaper than internal combustion engine vehicles. Then they had other incentives like free parking, free rides and ferries, free tolls on roads, the ability to use the bus lanes, all these kinds of things. It became a no-brainer to buy EVs. In fact, because you had a heavy tax on non-EVs, that was the stick, everyone switched.

Like I said, now, it's about 90% to 95% new vehicle sales are EVs in Norway. Things like that. Those are the kind of things that need to happen. We need to have those kinds of incentives to incentivize the right behavior, and then a bit of a stick in terms of heavier taxation to try and penalize what we'd call bad behavior.

I mentioned the 55% emissions reduction in the EU. One of the other things the EU is doing, which I forgot to mention, is they're putting in place, or we're putting in place what's called a carbon border tax. What that is, is we're putting a tax on goods coming into Europe from outside based on the carbon emissions of the goods that come in. It's to level the playing field. If something is coming, if maybe steel or concrete is coming into the EU from outside the EU and it comes from a country that has a high carbon rating, then there'll be an extra tax put onto that to make it more expensive versus the lower carbon concrete or steel that has been created in the EU. It's those kinds of things that need to happen. A lot of this needs to happen at the regulatory level because it's all very well, you and I buying an EV or putting solar panels on our roof or whatever it is at an individual level, but that's not going to move the needle. It needs to happen at a country level. It needs to happen at a regulatory level. It needs our politicians to make these things happen.

Bob: Tom, those are two really great examples from a national level or country strategies. I know on one of your podcasts you highlight success stories. Can you think of some examples from the world of supply chain of strategies that companies are employing to bring down their carbon emissions?

Tom: Yes, there's a number of things. I mentioned electric vehicles, for example. In the transportation and logistics space, the shift to electric vehicles, again, it's a no-brainer. That's one that people can do quite easily. It's a multiple win, because electric vehicles, not only are they cheaper to fuel, but they're also cheaper to maintain. The maintenance cost of an electric vehicle is about 50% or less than 50% of the maintenance cost of an internal combustion engine vehicle. If you think of the drive train of an internal combustion engine vehicle, whether it's petrol or diesel, it contains typically in the order of about 2,000 moving parts. Whereas the drive train of an electric vehicle contains about 20. So two orders of magnitude less, so 19,080 fewer moving parts to fail or to maintain.

The electric vehicles typically require far less maintenance, and they cost a half to a third to fuel as well. For any fleet manager, this is manna from heaven. A, they're reducing their fuel costs. B, they're reducing their maintenance costs. C, these vehicles are typically connected vehicles out of the box. D, they're helping their organization massively reduce their emissions, particularly if they've taken the step already of making sure that their electricity is renewably sourced. That's a big one that people do.

The other ones are the likes of the things of, as I mentioned earlier, requiring emissions on the RFPs or FQs. That's always a big one, that makes a huge difference as well. That's not something that you can slap people over the head with, as I mentioned earlier. It's one you need to work with your partners, your suppliers very much. It has to be a joint effort, because particularly if you're sourcing from smaller organizations, they may not have the resources. It's something you really need to work hard with your supply base to roll out.

Abe: Tom, we could go on all day. Obviously, this topic of sustainability, we seem like we're scratching the surface, but yet the depth and the breadth of knowledge that's available here is really extraordinary. Special thanks to our guest, Tom Raftery. Let's give a shot out to the sustainability imperative. Tom's presentation is going to take place on Tuesday, September 20th, at ASCM CONNECT. We hope to see you there, if not virtually.

Finally, a special thanks to all of you for joining us on this episode of The Rebound. We hope you'll be back for the next episode, and we hope to see you at conference.

For The Rebound. I'm Abe Eshkenazi.

Bob: I'm Bob Trebilcock. All the best. Thanks again, Tom.

Tom: Thanks, Abe. Thanks, Bob.

Bob: The Rebound is a joint production of the Association for Supply Chain Management and Supply Chain Management Review. For more information, be sure to visit ascm.org and scmr.com. We hope you'll join us again.

 

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