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Research reveals climate change threat to global supply chain

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Research reveals climate change threat to global supply chain

January 16
10:25 2013

Seventy percent of companies believe that climate change has the potential to affect their revenue significantly, a risk which is intensified by a chasm between the sustainable business practices of multinational corporations and their suppliers, according to research published by the Carbon Disclosure Project (CDP) and Accenture.

“Reducing risk and driving business value” is based on information from 2,415 companies, including 2,363 suppliers and 52 major purchasing organisations who are CDP Supply Chain programme members. These members include Dell, L’Oreal and Walmart, and represent a combined spending power of around US$1 trillion. The research marks CDP’s most comprehensive annual update on the impact of climate change on corporate supply chains.

Climate change presents near-term risks to businesses, according to the report. Fifty-one percent of the risks that disclosing companies associate with drought or extreme rain are already having an adverse effect on company operations, or are expected to within five years, say those businesses. Additionally, the destructive nature of extreme weather is likely a catalyst for company action on climate change, with physical climate risk identified in the report as a greater driver of investment than climate policy. Of the 678 companies investing in emissions reduction initiatives, three-quarters (73%) say they feel that climate change presents a physical risk to their operations; just 13% identify regulation as a sole driver.

Most of the positive actions responding companies say they have taken in response to climate change are attributable to organisations that have been using CDP’s unique global system for at least two years, demonstrating that customer pressure is driving change. However, the report identifies a performance gap between companies and their suppliers and claims that this is intensifying climate risk in the global supply chain models.

Suppliers are significantly less prepared than their clients in responding to climate change, potentially threatening customer relationships and heightening supply chain vulnerability. Suppliers demonstrate a lower level of ambition to mitigate climate change risk, with just 38% setting emission reductions targets in comparison to 92% of purchasing companies. Similarly, at 27%, the percentage of suppliers investing in activities to reduce emissions is less than half that of CDP member companies (69%).

Unsurprisingly, CDP members are more likely to yield results from their environmentally sustainable business practices than suppliers, according to the survey. They are more than twice as likely to accomplish year-on-year emissions reductions (63% vs 29%) and are better positioned to capitalise on the financial benefits of carbon management. While 73% of members are achieving monetary savings, such as reduced energy costs from emission reductions activities, only 29% of suppliers are enjoying such returns.

Paul Simpson, CDP’s chief executive officer, says: “This research illuminates fragility in the global supply chain model. The marked difference in the sustainable actions of companies and their suppliers highlights a missed opportunity for suppliers to reduce energy costs and risks. The 61% of suppliers that failed to provide information through CDP are an even greater concern since they and their clients are unable to make a full assessment of the substantial climate risks or opportunities they face.”

The analysis of the information, processed through CDP’s unique global system for natural capital disclosure – now the largest and most comprehensive in the world – demonstrates the attractive returns that leading companies are enjoying from addressing supply chain sustainability. The 29% of suppliers that have reduced their emissions have saved some $13.7bn as a result. This implies aggregate potential savings of all 2,363 suppliers could reach three times that figure if the remaining proportion of suppliers were to achieve reductions at that rate.

“This report provides clear evidence that those who are most transparent about their climate change risks are more likely to achieve the greatest emissions reductions”, says Gary Hanifan, global sustainability lead for supply chain, Accenture. “And they are also more likely to enjoy monetary savings as a result of their responses to climate change risks. But the return on investment by the most proactive companies will not reach its full potential unless those companies can encourage their suppliers to follow their lead.”

The report is freely available from the CDP and Accenture websites (and can be dowloaded by clicking on the link below). It provides advice on how companies can use data, process and governance to create a more sustainable supply chain and capitalise on the correlations between climate risk, performance and accountability to realise financial benefit. The report also includes supplier scoring data provided by the CDP Supply Chain scoring partner FirstCarbon Solutions. Scores are available by region and sector and show that European and Asian companies are still outperforming companies in North America.

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