Environmental supply chain risks to cost companies $120bn | Apparel Industry News

Corporate buyers could be impacted by this looming cost increase

Companies face up to US$120bn in costs from environmental risks in their supply chains by 2026, according to new research by CDP, which says laggards that fail to take responsibility for supply chain impacts will fall behind, while leaders who manage and reduce risk through collaboration will not only be more competitive today but will be more resilient for the economic shifts of tomorrow.

In its latest report, ‘Transparency to Transformation: A Chain Reaction’, environmental non-profit CDP (formerly known as the Carbon Disclosure Project), analyses data from more than 8,000 supplier companies disclosing to their corporate customers via CDP in 2020.

It notes environmental risks are material for business and says addressing these through supply chain engagement is vital for companies to be competitive and resilient in the changing market and to build back better from Covid-19.

“Leading companies that address these risks will benefit from lower costs and better reputations,” says Sonya Bhonsle, global head of value chains at CDP. “This gives them a more competitive edge today and helps them become more resilient for the economy of tomorrow. Meanwhile, laggard companies risk being left behind. As the climate and ecological crisis worsens and the economy shifts, it’s essential for both business and society that we have a green recovery from Covid-19 and build back better. Smart business procurement is key to that transition.”

The environmental risks causing cost increases stem from climate change, deforestation and water-related impacts. These cover physical impacts, for example, increased severity and frequency of cyclones and floods, increased cost of raw materials; and regulatory and market changes as the world addresses environmental crises, such as carbon pricing and increased spending on product innovation due to changing customer demands.

Corporate buyers could be impacted by this looming cost increase, CDP says, adding in addition to the increased costs of $120bn, some $1.26 trillion of revenue is likely to be at risk over the same period due to climate change, deforestation and water insecurity.

And that is only a current snapshot. “Environmental risks are set to increase as the planet, society and economy changes,” the report states. “Intensifying climate change and environmental degradation will increase the physical risks. Society will adapt in response, raising awareness, spurring action and increasing reputational and regulatory risks. So companies that fail to manage the environmental risks in their supply chain will also face greater reputational and regulatory risks.

“Managing the direct environmental impact of your operations is no longer enough. Businesses must put the spotlight on – and engage – their supply chains.”

To address this risk, increasingly buyers are demanding transparency and action from their suppliers to tackle environmental impacts in their supply chains. These include 150-plus major buyers with over $4.3 trillion in purchasing spend, such as Google, L’Oréal, Walmart, Braskem and Toyota. As CDP supply chain members, they request thousands of their key suppliers to disclose their environmental data through CDP each year and use this data in their procurement decisions and supplier engagement.

CDP says the demand from big corporate buyers for their suppliers to be transparent on environmental impacts and take action to address them is growing, despite the pressures from Covid-19. In 2020, the number of buyers requesting disclosure through CDP’s system grew by 24% and they collectively requested data from more than 15,600 suppliers, a 19% increase on the last year. In part, this increase in market demand has been driven by the large companies increasingly setting science-based targets, which usually require them to cut their supply chain (Scope 3) emissions. Achieving their targets depends on engaging their suppliers.

Within its report, the non-profit outlines a series of steps to help companies engage with their suppliers.

For companies beginning their journey on supplier engagement, it advises:

• Ask questions: Start asking your suppliers to assess and report their environmental data to you through CDP’s disclosure system. You cannot manage what you haven’t measured. If your suppliers are regularly disclosing, you can pinpoint risks, identify opportunities and start collaborating to build resiliency.
• Collaborate with others: Supplier companies are more likely to act when requested to do so by multiple customers. For example, 57% of suppliers disclosed on forests if requested by one member and 75% disclosed when asked by multiple members. Therefore, seek out opportunities to collaborate with peers, investors and other stakeholders that influence your suppliers’ behaviours.

While for those companies who are already engaging with their suppliers on environmental issues:

• Set public targets for the supply chain: Setting targets publicly gives buyers and suppliers clarity on their climate, deforestation and water security goals, and a clear shared pathway towards achieving them.
• A chain reaction: Ask your suppliers to engage with their own suppliers. Risks and opportunities don’t stop at tier one. By driving disclosure requests, targetsetting and collaboration across your suppliers’ values, you are futureproofing your own business.

Meanwhile, CDP has also published its Supplier Engagement Leaderboard within the report. Each year CDP evaluates how corporate respondents are encouraging sustainability throughout their value chain resulting in their Supplier Engagement Rating. This analyses data from all companies that disclose through CDP on climate change, relating to supplier engagement, governance, Scope 3 emissions accounting, targets, and overall CDP climate change score. Inclusion on this list demonstrates that a company is proactively working with its suppliers to ensure that sustainability is present in every part of their value chain.

Among those mentioned are Kering, VF Corporation, Fast Retailing Co, Hugo Boss, Inditex, JD Sports Fashion, Lululemon Athletica, Lululemon Athletica, Zalando, Asics Corporation, Burberry, Asics Corporation, and Puma.

Click here to read the report in full.