2018 has seen Europe make important progress. On sustainable finance; through the European Commission's new Action Plan, laying the foundations for a fit-for-purpose system where “all finance will be fully sustainable”.
And on upgrading EU disclosure rules; by starting to integrate the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
The continent’s next major challenge: to make supply chains – of both private and public purchasers – a priority.
This will be the key step for Europe to build not only a sustainable financial system, but a sustainable economy.
Transforming purchasing power into climate action
Emissions in the average company’s supply chains are four times as high as those from its direct operations. Not to mention the huge water footprint of manufacturing and extractive industries or impact on forests by agriculture.
The insights large corporates get from seeing the risks their supply chains face from climate change, water insecurity and deforestation are key to spurring action towards achieving a sustainable economy.
With their influence on suppliers’ engagement with environmental management, large corporations are a serious lever for speeding up our economy’s sustainable transition.
Last year, more than 1,200 European companies disclosed data at the request of their purchasers. Through CDP’s supply chain questionnaire purchasing companies are able to engage their suppliers to identify risks and find opportunities to lower costs.
Not only this, but by working with suppliers, companies are able cascade environmental action through their whole value chain and exponentially increase progress towards tackling climate change, deforestation and water security.
And we can see that this dislosure is already leading to greater action.
French and German suppliers alone report saving 50 million tonnes of CO2e and over $1 billion from initiatives implemented in 2017.
So far, 23 of Europe’s biggest purchasing companies request information through CDP. That shows the potential for change across the continent’s value chains. Think of what can be done if even more companies ask their suppliers to engage.
With the global economy set to triple by 2050, supply chains are more important than ever to meet decarbonization targets. To get there, two major groups must act together – private and public purchasers.
Private purchasers make progress
Private purchasers are striding ahead with supply chain management. European companies now make up 25% of CDP’s Supplier Engagement leader board – which assesses how well buyers engage their suppliers on climate. This leader board has doubled in size on last year.
French companies lead the way. Their suppliers are most likely to integrate climate change into their business, and more than three quarters report that their boards hold responsibility for climate targets.
Meanwhile, across the globe more companies than ever – 15% more than in a year ago – are considering water risks in their supply chains and major corporations, like McDonald's and L'Oréal, are taking the necessary initiative by requesting supply chain disclosure on deforestation, which accounts for up to 15% of global emissions.
But there's more to do among Europe’s biggest corporates, whose supply chains span the globe.
While more suppliers are taking action in their own operations, just one in four of these organizations engage with their own suppliers on climate.
There is a way to go before the full impact of European supply chains is understood – resulting in foregone business opportunities, overlooked carbon reductions, and unrealized financial savings.
Public purchasers – a missing link?
Public procurement accounts for 14% of European GDP. To drive environmental action, government agencies should leverage their purchasing power to encourage – and eventually mandate – their suppliers to manage climate change, deforestation and water-related risks. On this, they are behind the private sector.
Cities, states, regions and governmental institutions can use supply chain disclosure to align their procurement decisions with the Paris Agreement and the Sustainable Development Goals (SDGs). At the same time, they will improve transparency in their value chain, and can actively pursue circular economy objectives.
Green public procurement can have a significant impact on emissions intense sectors such as public transport, as well as cement and steel used in public buildings. Making these impacts visible through disclosure will help public purchasers identify more sustainable options, and help drive change in these sectors
For public purchasers, company-level assessments are vital to understand how companies in the region are integrating climate-related risks into their strategies.
Better understanding local companies’ environmental performance can drive action by helping public buyers identify opportunities for greater resource efficiency and collaborative solutions.
Like major corporates, more governments should use internal rules to hasten change. For example, Norway set a zero-deforestation public procurement law in 2016, beoming the first country to do so.
Meanwhile, in the Netherlands, tenderers complying with environmental, social and governance criteria are given financial support, making goods and services that are sustainable in the long-term more competitive today.
EU rules help, but a more holistic approach needed
Supply chain engagement is already present in many EU and member state policies.
The French "Duty of Care of Parent companies and ordering companies" law is a leading example. Likewise, regulations like those on Palm Oil (the FLEGT) are widening supply chain engagement beyond emissions.
The European Commission has also developed voluntary common green public procurement criteria. The Circular Economy Package, adopted in December 2015, includes actions to enhance wider use and inclusion of green public procurement. Likewise, directives like those relating to energy efficiency and clean vehicles have made resource considerations more present.
But reaching a tipping point, where sustainability is at the heart of all supply chains, will require a more holistic approach. The EU’s Non-financial Reporting Directive, which sets out mandatory disclosure rules for EU companies, is unspecific on supply chains. It requires information on business relationships where ‘relevant and proportionate’, leaving it to companies to decide to disclose.
The EU needs more than the sum of these parts. Current progress, resulting in diverse policies and regulations on disclosure, due diligence, procurement critera and labels, must lead to a holistic and coherent EU policy framework that ensures positive action towards the Paris Agreement and SDGs.
With public purchasers driving a significant part of the European economy, government agencies can leverage the power of their procurement decisions by engaging, strategically, at a company level and encourage their suppliers to set targets in line with a 2 degree trajectory.
The review of the EU Directive on the disclosure of Non-Financial Information (NFI) in 2019 should strengthen disclosure requirements. Undergoing evaluation this year, this review is the best opportunity to clarify and strengthen supply chain disclosure, and ensure transparency in large European companies’ supply chains.
By making these risks transparent to both public and private investors, an upgraded NFI would directly support the European Commission’s objectives to manage the financial risks of resource depletion.
2018 has brought significant progress in supply chain engagement, but European stakeholders – particularly governments - have a way to go.
High-quality, comparable environmental data from the world's major suppliers will help public and private purchasers drive positive climate action.
Supply chains offer enormous potential for both groups to meet their targets and successfully manage the transition to a low-carbon, resource-secure economy.
The focus now must be on collectively acting.