How to reduce the carbon footprint

Heat and burning forests in southern Europe, Siberia and Canada, devastating floods in Germany: climate change has already begun. As a result, decarbonization is a key task for the coming years. Companies with a major influence on global supply chains should play a pioneering role in stopping global warming. Procurement, as the point of contact for a company’s suppliers, can play a leading role in minimising its carbon footprint. We support you in finding your way to a carbon-free future.

PROCUREMENT: LET’S GET REAL!

Our expert Kiren on decarbonisation

What is procurement's role in supporting decarbonization?

We all understand the need to reduce emissions globally to combat global warming. Companies are under increasing pressure to do this, in particular from investors, consumers, regulators and employees. And just to give a bit of background, when you look at emissions, they fall into 3 categories, or scopes – Scopes 1, 2 and 3:

Scope 1 refers to direct emissions from a company’s own production, such as manufacturing or processing of materials
Scope 2 refers to indirect emissions related to the use of purchased energy, so if you get your energy from a coal powered source or a renewable source, that will directly impact your Scope 2 emissions
Scope 3 refers to all other indirect emissions, of which a large part is from goods and services bought from suppliers and that occur throughout the value chain

The ratio of emissions between the 3 scopes will vary based on industry, but Scope 3 can be as much as 70-90% of a company’s total emissions in industries that manufacture end-product goods, industries such as in electronics, automotive, food and FMCG.

So when you combine the fact that Scope 3 covers predominantly goods and services that are bought into a company, plus the fact that Scope 3 is often the biggest emissions areas, then the role of Procurement becomes extremely important. The ability of the Procurement function to engage suppliers and drive down emissions will directly impact whether a company is able to hit its carbon reduction targets.

What key challenges do procurement functions face when trying to reduce emissions?

Because Scope 3 emissions come from suppliers, there’s already fundamental challenge, which is that you have limited control over what your suppliers do. However, when we look more specifically at client challenges we help with, there are three key ones we see most often:

Firstly, and most common with our clients, is the lack of data and transparency. Many companies simply don’t collect data on emissions, so they don’t know the scale of the problem or where to start – even those that do collect some data may be using third-party databases and benchmarks which will be less accurate than getting it directly from suppliers

Secondly, cost: the costs and investment involved with decarbonizing can be very high. This directly conflicts with procurement’s traditional role of trying to reduce costs. I’ve spoken to many procurement teams who ask how they should balance cost against carbon in sourcing decisions for example. Other companies simply don’t have money to invest in sustainability due to recent inflationary challenges

Finally, we see a gap in expertise and knowledge around decarbonization – there’s a lot of new technology and research underway, different business models being developed and companies are trying things that have never been done before. For example: we have clients in the food sector who are trying to understand how they get farmers to switch to regenerative agriculture methods, or how to procure seaweed in bulk to use as fertiliser

And on top of these three reasons, you also have: regulatory uncertainty, a challenging macro-economic environment, technological barriers, the political landscape, limited infrastructure, resistance to change and many more – so there’s definitely a lot to take into account when making decisions and knowing where to prioritise.

How does KGM Strategy help clients reduce scope 3 emissions?

Our main proposition approaches the challenge from 5 key areas:

SOA: Firstly we start with the assessment phase – our Sustainability Opportunity Assessment or SOA. This is the key starting point to help build a baseline, understand your ESG procurement maturity and define key abatement levers to understand where to focus. We often do this alongside a typical cost assessment to find cost savings to fund the carbon journey – helping mitigate the challenge of investment

Then we move into design and implementation where we look at 3 main levers: (i) reducing emissions from suppliers, (ii) reducing emissions from the supply chain, and (iii) reducing emissions from products

Suppliers: When we talk about suppliers, we look at how to actively influence suppliers through incentives and disincentives, plus how you adapt sourcing processes to select new suppliers that have lower emissions. We also recommend looking more across the value chain and at the broader ecosystem – for example how can you work with your supplier’s suppliers more? Or form alliances with competitors to drive industry change?

Supply Chain: Regarding the supply chain, we start off by looking at where you should source from in the world based on emissions – so rather than re-shoring or nearshoring, we look at green-shoring. For a manufacturing client, we looked at the impact of the new CBAM regulations to advise whether they should source steel more from China or Europe. We also look at our clients’ logistics footprint to see how to reduce it, e.g. Switching from air freight to sea freight, or moving from diesel vans to Evs

Product Design: The final lever is around product design, which includes how to build sustainability into your design processes, how to conduct value engineering to redesign products and product lifecycle management

Op Model: The final fifth area we support on is Operating Model: The priority areas for clients are getting data, upskilling their teams and refining procurement processes to factor sustainability more into decision making

Using these 5 elements, we support clients on their end-to-end decarbonization journey to help them reach their carbon goals.

On the topic of decarbonization, it should first be defined which section is meant in terms of the generation of emissions. Divide into three sections:

Scope 1: direct emissions from the company’s own production
Scope 2: indirect emissions related to the purchasing of electricity and air conditioning of the company’s buildings
Scope 3: all other emissions that arise in the company’s value chain, caused by suppliers, services or logistics

While the amount of Scope 1 and Scope 2 emissions is relatively easy to determine and within a company’s direct sphere of influence, Scope 3 emissions lack both transparency and direct access. Procurement, with its direct contacts to suppliers and service providers, plays a key role in mitigating Scope 3 emissions. We recommend a three-tiered approach.

Procurement should take a leading role in the dialogue on decarbonization.

The most important task for the procurement organisation is the dialogue with suppliers. Each category manager has – or at least should have – a precise overview of the suppliers in their category. The category managers evaluate criteria such as quality and delivery reliability as well as compliance with the corporate strategy.

Sustainability criteria, on the other hand, have so far rarely been part of this evaluation. By taking so-called ESG (environmental, social, governance) criteria into account, the supplier landscape can be opened up to providers who can really change your company’s emissions. Decarbonization is a shared responsibility across the value chain and it is therefore essential to work with strategic suppliers on decarbonization. Even though your current suppliers may not yet be able to meet the new requirements in the short term, cooperation can create new, CO²-reducing or even CO²-neutral solutions.

Procurement should include decarbonization in supplier assessments

When evaluating products and services, procurement considers several dimensions such as price, quality or payment terms. ESG criteria can be easily integrated here. In addition, procurement can ensure that clauses on sustainability and alignment of Scope 3 targets between partners are included in contracts.

Your procurement should derive the targets from the overall corporate strategy. Sustainability targets should also be included in incentives: If decarbonization is part of the KPIs for employees, credibility and engagement will increase.

Procurement sets the decarbonization roadmap

Since procurement is company-wide, it is the natural point of contact to develop a decarbonization roadmap. The purchasing department analyses and decides in which order categories and suppliers face the issue of decarbonization. In addition, procurement can learn through dialogue with suppliers: it is possible that some of your suppliers are already a step ahead of you on the road to carbon neutrality or are pursuing approaches that are also helpful for your company.

How to get started

Decarbonization is a process that will take several years. For good reason, the European Union has set a relatively large timeframe for achieving full carbon neutrality. However, we are convinced that it is necessary to start early, even if all solutions are not yet obvious.

Talk to your suppliers, set targets and start! It is important to be willing to learn and open to new solutions – both your own and those of customers, suppliers and competitors.

We recommend a practical approach to ensure a smooth start:

Evaluate the maturity of sustainability in your procurement
Define a decarbonization roadmap together with procurement and determine which categories and suppliers to target and when
Define targets together with top management and the CPO
Introduce tools, processes and policies to align supplier management with sustainability
Introduce a calculation method for emissions
Integrate ESG criteria with a focus on decarbonization into the procurement process, including the necessary tools and guidelines
Make sure that all procurement officers have appropriate KPIs

Our decarbonization experts

Marianne Kaas Fürst

Principal

marianne.furst@kgmstrategy.com Contatto

Kiren Pandya

Principal

office@kgmstrategy.com Contatto