To achieve global decarbonization, the decarbonization of supply chains must accelerate, and it is urgent.

According to relevant data,about 75% of greenhouse gas emissionsfall under Scope 3 emissions, covering the upstream supply chain and the end-use of a company's products and services.

Reducing these emissions to avoid catastrophic climate change requires technology, infrastructure, operational changes—and capital investment.

According to McKinsey's 2022 estimate, the total cost of the global transition to a net-zero emissions economy could increase annual capital expenditure by an additional$3.5 trillion, roughly equivalent to about half of global corporate profits.

As more companies seek to reduce the carbon footprint of their supply chains, the question of who will pay for the necessary changes—buyers or suppliers—will become increasingly pressing. Even the world's wealthiest brands are gradually recognizing the true cost of decarbonizing their supply chains.

"Organizations vary widely in their internal investment in decarbonization activities," said Simon Geale, executive vice president of procurement at consulting firm Proxima. "It's not just suppliers struggling with 'How do I pay for this?' Organizations themselves face the same question."

While some large brands are investing to help suppliers reduce emissions, others may simply be passing the problem and its costs on to suppliers to solve on their own.

In industries such as fashion, these suppliers already face thin operating margins. "Without cash flow, how can they invest? Cash flow is the problem," said Chana Rosenthal, principal of reDesign Consulting. "This makes investing in green technology difficult."

The 'biggest hurdle' in climate action

In many companies, cost control—rather than carbon reduction—remains thetop priority。

In a study by Efficio this year, only one-third of surveyed executives and managers said they were "very confident" in achieving carbon reduction targets. The study showed that cost control remains the primary responsibility of procurement leaders, taking precedence over other matters including sustainability.

According to GEP's survey of executives this year, even in environmental reduction investments, cost reduction is the primary driver.

"Privately, many chief financial officers (CFOs) will say: 'I know I have to act sooner or later, but when do I have to?'" Geale said regarding supply chain emissions action. "Because there is an immediate cost, not an immediate return."

Unfortunately, for humanity and other life on Earth, the climate is indifferent to budget plans and profit targets. According to the United Nations Intergovernmental Panel on Climate Change (IPCC), the world needs tocut greenhouse gas emissions by 43% by 2030to avoid some of the most extreme consequences of climate change.

"Privately, many CFOs will say: 'I know I have to act sooner or later, but when do I have to?' Because there is an immediate cost, not an immediate return."

—Simon Geale, Executive Vice President of Procurement at Proxima

Scope 3 emissions, particularly those related to the supply chain, pose a particularly severe challenge and cost burden. Simply understanding the scope of the carbon footprint requires time, data, and often technology. All of this requires funding. Because these emissions occur outside a company's direct control, they are the most costly to track and are also typically the largest portion of most carbon footprints.

"The biggest hurdle is Scope 3," Jackie Sturm, vice president of global supply chain operations at Intel, told sister publication Supply Chain Dive earlier this summer. "For Scope 1 and Scope 2, we had already switched to renewable energy—long before it became trendy." In 2022, Intel's operations in the United States and Europe were already 100% powered by renewable energy, and the company aims to achieve 100% renewable energy globally by 2030, according to its corporateresponsibility report.

"But bringing that back to our supply chain is challenging because, as a semiconductor company, we use almost every element on the periodic table."

For Intel, the scale of its climate footprint is closely tied to the mining of various minerals, each with its own associated emissions. Mitigating this footprint requires a vast toolkit, including data collection, choosing more sustainable materials, and working with suppliers to understand how much of their carbon footprint is inherent in their production processes and what mitigation measures they are taking.

Sturm said some carbon reduction efforts may pay for themselves over time through operational changes that improve efficiency or lower energy costs. "How do I reduce consumption? How do I switch to greener chemicals? How do I source more regionally rather than shipping across oceans?"

For suppliers that can afford it, they may have their own incentives to invest in emissions reduction, especially in consumer goods sectors where more consumers want to buy sustainable products.

"We generally find that, at least in our industry, suppliers are viewing climate as a competitive advantage and are truly investing in their own value chains," said Nancy Mahon, chief sustainability officer at The Estée Lauder Companies, during a panel discussion at The Economist Impact conference in Washington, D.C. earlier this year.

But many suppliers may lack the resources to invest without help.

How to get CFOs interested in cutting Scope 3

Finance departments may be able to help bridge some of the gap between global environmental requirements and corporate financial goals, as well as the divide between buyers and suppliers in emissions reduction.

For CFOs, "one of the things that really makes their ears perk up is that they can get more favorable financing rates by performing better on green initiatives, and I think that's very interesting," Geale said.

In recent years,the green capital market has expanded rapidly. Investors can channel funds into climate transition projects through so-called green bonds and other lending instruments.

These instruments can help finance environmental projects. For example, Apple announced last year the issuance of$4.7 billion in green bondsto "kickstart the development of low-carbon manufacturing and recycling technologies," including carbon-free aluminum for its products, as the tech giant works toward acarbon-neutral supply chain by 2030。

Walmart, the world's largest retailer, announced in 2021 the issuance of its "first-ever"$2 billion green bond, with part of the proceeds going to waste reduction and sustainable transportation projects in its supply chain. To date,projects includeworking with tire supplier Apache Mills to turn recycled tire material into heavy-duty commercial entry mats sold at its Sam's Club stores.

Walmart is also trying to help its suppliers decarbonize through asupply chain finance programlinked to environmental goals. Launched in late 2021 and described as an "industry first," the program is provided by HSBC and offers more favorable financing terms if suppliers achieve science-based carbon reduction targets related to theretail giant's 'Project Gigaton'. The project aims to cut 1 billion metric tons of emissions from its supply chain by 2030.

In effect, large retailers like Walmart can leverage their solid credit ratings to secure cheaper financing and faster payments for suppliers, using it as a carrot to incentivize emissions reduction.

"When we present these kinds of programs to CFOs, they say: 'Of course, if we can get more capital, that's great,'" said Eric Fisch, head of retail and apparel at HSBC's U.S. commercial banking arm. "Then we present it to their chief sustainability officers, and they say: 'This is fantastic, I want to do this.'"

These programs can also include funding for some supplier projects to help them implement environmental and carbon reduction initiatives.

The selection of supplier projects is still being fine-tuned, and Fisch noted that such programs can fund a limited number of projects. "If you do this for every supplier, you'll spend a lot of money very quickly," he said.

Outsourcing sustainability to suppliers

Whatever the usefulness and limitations of such financing programs, they are far from universal.

For many suppliers, especially those in low-margin industries like apparel, buyers' Scope 3 targets are just anotherdemanding requirementand cost imposed by powerful brands as buyers.

"You increasingly put all the pressure on suppliers," said Rosenthal, noting the history of outsourcing manufacturing and other functions to suppliers outside large consumer brands. In this model, sustainability can also be outsourced.

"You increasingly put all the pressure on suppliers."

—Chana Rosenthal, Principal of reDesign Consulting

Some apparel manufacturers report this is happening. In a study co-authored by Rosenthal and Natasja Sheriff Wells for New York University's Stern Center for Business and Human Rights, some manufacturers in Bangladesh reported that "expensive new environmental requirements to reduce water and carbon emissions" exacerbated their economic pressures. The report noted that brands often refuse to incentivize these requirements through financial concessions.

However, suppliers may indeed have an interest in reducing their carbon footprint. "We've discussed renewable energy with many suppliers, and they're all interested—at least those we've engaged with—but it's not easy," Rosenthal said. "It takes time and money."

Complicating matters is that buyers' environmental requirements are constantly changing and often vary from buyer to buyer. "Some suppliers face the difficulty that they invest in something, and then new requirements emerge, and they have to reinvest," Rosenthal said.

Across industries, there are various approaches, some more conducive than others to working with cash-strapped suppliers.

"I've seen companies say to their suppliers: 'This is my target, comply or get out. If you can't reduce emissions according to my targets, I'll kick you out,'" said Geale of Proxima. "That's a particularly harsh and inefficient way to execute a decarbonization program."

Geale went on to note: "I've also seen organizations say: 'Let's take a more structured approach to supplier engagement. Let's understand where you are, how we can help you, whether we can unlock financing solutions for you, and be more collaborative.'" HSBC's Fisch said he expects the cost of the carbon transition will ultimately be shared in some way among suppliers, buyers, and consumers. He cited the recent period of supply chain disruptions in 2021 that triggered historic inflation, accompanied by a "collective sharing of cost inflation."

"Part of the cost was absorbed by factories, then part by wholesalers and retailers, and finally prices rose to some extent," Fisch said of inflation. "Ultimately it became a collective burden. That's how I envision any transition related to climate initiatives."

According to Rosenthal, a simple way to help suppliers finance the transition could be through good procurement practices, such as timely payments and committed purchasing.

"If you really want to decarbonize, you have to start there, giving them the ability to fix their business," Rosenthal said. "Communicate with them, understand their needs."