Supply chains must evolve to keep pace with drive to Net Zero

As international trade continues to expand, robust supply chains are essential to facilitate efficient access to goods. They also play an important role in achieving Net Zero as they typically account for about 90 percent of a company’s emissions.

Supply chains can increase greenhouse gas outputs through inefficient shipping and logistics practices, wasteful production and assembly operations, and shortcomings in energy use, reuse and recycling of products.

But while their contribution to emissions must be examined, supply chains can also be leveraged to provide key green technologies that are needed to reach Net Zero.

So how can these emissions be tackled? In the short term, fuel efficiency standards should be tightened across supply chains.

Estimates suggest the shipping industry could reduce its emissions by up to 55 percent through measures to cut fuel consumption, for example by lowering speeds and using technology to optimize routes. The shipping industry is also innovating to cut its carbon output, which you can read about in more detail here.

Perhaps most importantly, companies and finance parties can enhance environmental responsibility in supply chains by engaging with suppliers cooperatively on design, manufacturing and services technologies and processes that are more energy- and resource-efficient and produce less emissions and waste.

Given the large portion of emissions that are generated by supply chains, companies that have pledged to reduce emissions must favor sustainable suppliers or provide their suppliers with the resources needed to reduce their emissions in order to reach overall sustainability goals.

In recognition of this issue, some companies are working with suppliers to set sustainability standards and facilitating the provision of favorable finance terms to those lacking the initial means to invest in technology and processes to improve their sustainability performance.

EU imposes non-disclosure obligations in bid to mitigate adverse environmental impacts

In Europe, supply chain considerations are a key aspects of many pieces of legislation adopted as part of the Green Deal, the EU’s landmark policy to reach climate neutrality by 2050, which was announced in 2019.

EU non-financial disclosure obligations dating back to 2014 identified the need for entities in scope (of whom there were approximately 5,000) to identify and disclose supply chain risks.

The upcoming Corporate Sustainability Reporting Directive (CSRD) which is applicable from 2024 and covers around 50,000 companies will take non-financial disclosure obligations to a new level with hundreds of data points to be reported, many of which will cover the supply chain.

As a complement to disclosure, the EU’s vision of a sustainable corporate governance has led proposals for a new due diligence directive (CSDD).

This creates an obligation whereby large companies will need to identify and mitigate their adverse ESG impacts, with some obligations extending to “business partners” in the value chain.

Beyond this general framework, sectoral obligations were created several years ago at EU level (eg conflict minerals, timber) and more are being discussed, for instance in the fields of batteries and deforestation.

They have in common the need for in-scope entities to consider their supply chains, with increasingly stringent due diligence obligations.

A common feature of the EU approach and a novelty compared to earlier sets of EU law is the recognition that EU law will effectively have consequences beyond EU borders, in the situation where value chains are global.

Tariffs and human rights challenges limit climate progress

When trade barriers interrupt supply chains, potential for change is curtailed. Tariffs on environmental goods may prove an obstacle to the spread of green technology.

The US Commerce Department’s 2012 tariffs on solar cells and panels from China, for example, slowed the growth of solar projects.

Domestic supply failed to fill the gap, and in 2022, the Department began to investigate Southeast Asian manufacturers alleged to have circumvented the tariffs (who had filled much of the demand resulting from the 2012 measures) once again slowing solar project growth.

Likewise, sanctions and import controls also disrupt supply chains. The ban on US imports of solar panel materials sourced from Xinjiang impacted solar project development, given that about half of the world’s solar-grade polysilicon is produced in the region.

The renewable energy sector in particular is often characterized by increasingly complex global supply chains. In addition to the risks posed by tariffs and sanctions, this complexity can create risk arising from other human rights issues.

In many cases, manufacturers may not be aware of, or have access to meaningful information on, various upstream suppliers. 

Cobalt, for example, is a key input for batteries that will need to be manufactured at scale as part of the renewable energy transition and is mined in large quantities in the Democratic Republic of the Congo, often in unsafe and/or coerced conditions in or near conflict zones. This in turn creates both legal and reputational risks for manufacturers.

Although legislation has attempted to improve transparency about conflict minerals and forced labor in supply chains, these initiatives also highlighted the challenges facing companies attempting to gather and interpret data from suppliers.

Geopolitical tensions may also hamper access to rare earths or other key mineral inputs for the renewable energy transition, preventing renewables firms from pursuing projects, or making such projects prohibitively expensive. 

The importance of responsible supply chain management

Global supply chains bring many advantages and are firmly rooted, but come with a range of legal and other risks.

Many companies in the renewables sector, and their consumers, are rightly eager to avoid developing the renewable energy transition on the back of forced labor or other human rights abuses, to say nothing of legal and geopolitical risks arising from sanctions, tariffs, and other issues. 

These pitfalls will need to be addressed by civil society and/or governments to ensure that the transition to renewable energy is not hindered by restricted access to key inputs for solar, batteries, and other renewables.

Among the key benefits of responsible supply chain management for all sectors are increasing supply chain flexibility, which reduces vulnerability to disruptions and creates new market opportunities.