Workers load packages into Amazon Rivian Electric trucks at an Amazon facility in Poway, California, on November 16, 2022.
Sandy Huffaker | Portal
As Amazon and other major companies step up their efforts to reduce their carbon footprint, they are putting pressure on their suppliers to do the same, and those that don’t may pay a heavy price.
Starting in 2024, Amazon will require its suppliers to share their emissions data, set emissions targets and report on their progress, the e-commerce giant said in its recently released sustainability report. With this move, it joins Microsoft, Walmart, Apple and others in calling for suppliers to step up their decarbonization efforts.
The requirements come at a time when large companies are being asked more than ever to adopt environmentally friendly practices. Consumers, investors, regulators and governments are pushing companies to be more progressive and transparent.
“The pressure comes on companies, which then put pressure on suppliers,” said Bob Willard, a management consultant and author of six books on sustainability.
And in a cascade, these suppliers rely on their suppliers.
Companies typically pursue three levels of emissions. Scope 1 comes directly from operational business. Scope 2 comes from purchased energy such as electricity. And Scope 3 refers to a company’s activities, but comes from indirect sources such as supplier emissions and emissions from customers using their products. An analysis of key industries by the nonprofit CDP found that Scope 3 accounts for, on average, about 75% of all emissions.
Companies have much more control over their suppliers than many other areas of indirect emissions, says Andrew Winston, author of several sustainability-related business strategy books.
For example, while a consumer goods company cannot force a detergent buyer to wash in cold water, it can be selective in working with environmentally conscious suppliers.
“The pressure and transparency in the supply chain will continue to increase as companies have a direct influence on it,” Winston said.
Decarbonization regulations are becoming increasingly strict
Salesforce now requires suppliers to disclose Scope 1, 2, and 3 emissions, deliver products and services on a carbon-neutral basis, and complete a supply scorecard each year. AstraZeneca’s suppliers are expected to report emissions data to the CDP annually and set science-based targets.
Although Amazon does not include suppliers in its Scope 3 accounting, the company is effectively doing so as many other companies have begun by forcing suppliers to report emissions to them and setting targets against which emissions levels can then be tracked . “We know that to further reduce emissions, we must ensure that those in our supply chain make the necessary operational changes to decarbonize their businesses,” Amazon said in the sustainability report.
Third-party providers and suppliers – especially smaller ones – face a paradox as climate regulations become more stringent. Even if they are environmentally conscious, many say they do not have the resources to meet tracking and reporting requirements.
According to a survey by the nonprofit, eight in 10 small and medium-sized business owners say reducing emissions is a high priority, but 63% also say they don’t have the right skills and 43% say they lack the resources SME Climate Hub. In a survey by Intuit QuickBooks, two-thirds of small business owners said they would take steps to reduce their impact on the environment, such as recycling and using renewable materials. Companies that failed to act cited a lack of money, time and resources.
“Tracking emissions data is no easy task,” says Karen Kerrigan, president and CEO of the Small Business & Entrepreneurship Council.
She says compliance costs can vary, but upfront costs can be significant, which is challenging for many companies with tight cash flow.
The information is available to get the task under control. One of the first things business owners will learn, however, is that it will be time-consuming, says small business owner Chaitali Patel, who founded sustainability consulting firm Evergood. She points to a 152-page Greenhouse Gas Protocol Scope 3 supply chain accounting and reporting document, which provides standards for measuring and managing emissions.
“If you just look at the process of data collection and recording to meet these requirements, it will take significant resources,” Patel said.
Small businesses are already under economic strain
With ongoing recession fears, higher interest rates sapping capital sources, signs of weakening consumer demand and labor market challenges, small businesses have become more focused on their employees and bottom lines than sustainability. When asked what issues were most important to them, nearly 40% said jobs and the economy, while 10% said the environment, according to the third-quarter CNBC|SurveyMonkey Small Business Survey.
But whether ready or not, suppliers large and small must take action soon. “It’s coming,” he said. “The procurement department of the economy is intervening in their supply chains and starting to ask more targeted questions.”
In addition to pressure from investors and politicians, another reason large companies are looking further down the supply chain is that they are currently not meeting their emissions reduction targets. With consumer demand booming and global growth post-pandemic, many of the world’s largest companies are producing more carbon emissions than they can reduce.
A recent New York Times review of climate documents from 20 major food and restaurant companies found that over half have made no progress in reducing emissions or are increasing emissions. The report concludes that the majority of emissions, as previous carbon accounting has typically shown, come from suppliers.
A recent report from Just Capital found that more companies than ever are committing to carbon reductions, but the results are not yet reflected in disclosures. Of companies with existing science-based targets, only 26 of 123 in the Russell 1000 announced emissions reductions. Meanwhile, emissions have risen among companies without specific targets – just general net zero targets.
Companies looking to retain high-quality suppliers are inclined to help their partners meet all sustainability requirements, says Mark Baxa, executive director and CEO of the Council of Supply Chain Management Professionals.
Corporate giants offer support ranging from direct financing and better terms to training and access to clean technology.
Amazon, for its part, said in its sustainability report that it will “leverage its scale, investments and past innovations to provide our suppliers with products and tools that help them achieve their goals – whether that is transitioning to renewable energy or improving access to sustainable materials.”
But the retail giant also made it clear that there can be consequences for partners who cannot keep up. “We will continue to seek suppliers to help us achieve our decarbonization vision as we select partners for business opportunities,” Amazon said in its report.
Amazon spokespeople declined to comment beyond the publicly available materials.
In the end, it all comes down to suppliers deciding what works best for their business.
“Suppliers themselves and suppliers of suppliers need to make their own, independent decisions about how to deal with this,” Baxa said.
At the same time, companies must address Scope 3 emissions. “Often they choose a supplier that can meet the requirements,” he said. And for those who don’t: “At some point the difficult conversation will happen.”