What is supply chain sustainability and how can it be achieved? Globally, organisations have turned their focus to combating the climate crisis and having a positive impact on a raft of other sustainability issues. A major chunk of an organisation’s impact sits within its supply chain and is a key variable to deliver effective change. Sustainability within the supply chain – or bundled as scope 3 emissions in reference to an organisation’s carbon footprint impact – are typically the most challenging to measure, monitor and have a major influence upon. This is largely due to the complexity of many organisations’ supply chains and the many actors at play within it, this is also the reason why supply chain emissions outweighs direct emissions for an organisation – on average 11.4 times that of direct emissions or operational emissions. Therefore, companies taking action to improve the impact of their supply chain can achieve great strides on their sustainability ambitions.
A lot of major organisations are considering their sustainability and supply chain processes and have taken the lead and begun the necessary transformation to deliver real change within their supply chain through voluntary disclosure systems like Carbon Disclosure Project (CDP). CDP offer a supply chain disclosure platform requiring all suppliers of a reporting organisation to fill out a CDP questionnaire. Others, perhaps organisations who are more hesitant to change, are beginning to be pushed into action through a new swathe of regulations. Within the EU, the new Corporate Sustainability Reporting Directive has been adopted amending its predecessor, extending the scope to apply to more European and Non-European companies listed who are operating in the EU regulated markets to report on the way they operate and manage social and environmental challenges, including their supply chain sustainability. In the US, the Securities and Exchange Commission (SEC) have proposed new rules to enhance and standardise climate related disclosures for investors, requiring them to report on their scope 1,2, and 3 emissions. These regulations will put a new reporting burden on organisations globally. Therefore, companies need to get their house in order and begin to think holistically about their impact, beyond their own internal operations.
What does Sustainability and Supply Chain mean for SMEs
Although these changes in regulation do not put any immediate reporting requirements on small to medium sized businesses (SMEs), they will result in many SMEs facing growing requests for sustainability information from the large companies that they supply, who will have to meet these new regulations. SMEs represent 90% of businesses globally and within the UK alone, 77% are part of supply chains. Therefore, SMEs can have a significant impact in improving environmental and social supply chain impacts of larger organisations, helping them achieve their sustainability goals. However, in noting the importance of SMEs in the transition to sustainable supply chains and meeting large organisations regulatory requirements, it is important to note the challenges and implications this will pose for SMEs operating within these supply chains.
Expertise and resources
SMEs often lack the expertise and resources to measure, monitor and report upon their sustainability performance. Unlike large corporations, they can not afford to outsource this problem to external consultants. SMEs need to get up to speed on sustainability and how to integrate sustainable practices into their business to meet the current non-regulatory requirements from their large buyers and the soon to be regulatory requirements from governments targeted at SMEs. In line with the new CSRD enacted by the EU commission, they have also proposed the development of separate, proportionate standards for SMEs on a voluntarily basis for non-listed SMEs.
Competitor Inaction
Operating within a large organisations supply chain, a suppliers sustainability impact will need to be reported up to the buyer to enable them to meet their regulatory requirements. Inaction can lead to a competitive disadvantage and can be the factor in ensuring your working relationship with your buyers is continued. For example, if your organisation is unable to supply sustainability data you may fall out of favour to another supplier who is more advanced on their sustainability journey and able to supply the required information. This supplier changeover is already beginning with one in five British retailers dropping suppliers over issues with their environmental and social impacts.
Cost of inaction
Sustainability is an opportunity and not a cost, SMEs can introduce cost savings throughout their operations such as efficiency measures or adapting their current business model. The cost to business comes with inaction or lagging in taking action on sustainability. This cost can be heightened by large organisations using the “stick” to enforce action amongst its suppliers, leading to a potential extra cost to SME suppliers. For example, Salesforce has initiated a “climate remediation fee” to meet their supplier sustainability requirements. Salesforce asked its suppliers to set science-based targets and help Salesforce meet its sustainability targets or risk paying a fine.
What can SMEs do about their sustainability and supply chains?
It is clear that taking action, or not, on sustainability and supply chain for SMEs will become one of the most defining factors in whether an SME can continue to work with a large corporation/buyer. Ultimately, regulation is coming and the trickle down effect has well and truly begun, SMEs need to take action on sustainability to reduce their risks but more importantly take advantage of the opportunities a sustainable transformation offers.
In order to do this, organisations need to align their sustainability agenda to industry best practices, regulation demands and most importantly not only deliver on these sustainability metrics but to be comfortable speaking about their sustainability values and purpose. SMEs must invest in understanding the problem as much as investing in reporting upon the problem, doing so will help embed sustainability within your organisation giving you the opportunity to create a real difference and remove sustainability as another to-do list item among many, becoming part of your organisation’s mission and reason for operating.
It is vital that management teams of SMEs become educated in sustainability, the challenges and opportunities, and how to integrate sustainability into existing strategy or reimagine their strategy to overcome challenges and take full advantage of the opportunities. Putting structure on your sustainable journey will help capture all the positive work that you are currently doing and places a pathway to achieve future sustainable goals, enabling you to shape your sustainability narrative and engagement with key stakeholders. Companies that do so will have a significant advantage over those that choose not to act, winning out in the competitive landscape of the transforming supply chain of big buyers.
Are you looking to learn more?
Whether you are an SME owner, sustainability senior leader, or simply are interested in business sustainability, learn more about what it takes to be a sustainable business and the initial steps needed to create a sustainable plan for your organisation with the Institute of Sustainability Studies’ Diploma in Business Sustainability.
