As Amazon and other big businesses ramp up efforts to reduce their carbon footprint, they’re putting pressure on their suppliers to do the same, and those who don’t may pay a big price.
Starting in 2024, Amazon will require suppliers to share their emissions data, set emissions goals, and report on their progress, the e-commerce giant said in its recently released sustainability report. With that move, it joins Microsoft, Walmart, Apple, and others in saying that suppliers must step up decarbonization efforts.
“The pressure is coming at companies, who are then putting pressure on suppliers,” said Bob Willard, a corporate consultant and author of six books on sustainability.
And in a cascade, those suppliers are leaning on their suppliers.
Businesses typically track three levels of emissions. Scope 1 come directly from operations. Scope 2 are from purchased energy such as electricity. And scope 3 relate to a company’s activities but come from indirect sources such as supplier emissions and emissions from customers using their products. An analysis of major industries by the non-profit CDP found that, on average, scope 3 accounts for 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 instance, while a consumer goods company can’t force a detergent buyer to wash in cold water, it can be selective in working with eco-conscious suppliers.
“The supply chain is where there’s going to be continued rising pressure and transparency because companies have a direct impact over that,” Winston said.
Decarbonization mandates are getting tougher
Salesforce now requires suppliers to disclose scope 1, 2, and 3 emissions, deliver products and services on a carbon-neutral basis, and fill out a supply scorecard each year. AstraZeneca suppliers are expected to annually report emissions data to the CDP and set science-based goals.
While Amazon doesn’t include suppliers in its scope 3 accounting, it’s effectively dealing with this in the way many other firms have started doing, by forcing suppliers to report emissions to them and set goals which emissions levels can then be tracked against. “We know that to further drive down emissions, we must ensure those in our supply chain make the operational changes necessary to decarbonize their businesses,” Amazon said in the sustainability report.
Third-party sellers and suppliers — especially smaller ones — face a paradox as the climate mandates arise and become increasingly tougher. Even if they’re eco-conscious, many say they don’t have the resources to meet the tracking and reporting demands.
Eight in ten small and medium-sized business owners say reducing emissions is a high priority, yet 63% also say they don’t have the right skills, and 43% say they lack the funds, according to a survey from the non-profit SME Climate Hub. In a survey from Intuit QuickBooks, two-thirds of small business owners said they were taking steps to reduce their environmental impact, such as recycling and using renewable materials. Businesses that weren’t acting cited a lack of money, time, and resources.
“Tracking emissions data is no easy feat,” says Karen Kerrigan, president and CEO of the Small Business & Entrepreneurship Council.
She says compliance costs can vary, but upfront expenses can be considerable, which is challenging for the many firms with a tight cash flow.
The information is out there to start getting a handle on the task. Yet, one of the first things that business owners will learn is that it is going to be time consuming, says small-business owner Chaitali Patel, who founded the sustainability advisory firm Evergood. She points to a 152-page document on scope 3 supply chain accounting and reporting from the Greenhouse Gas Protocol, which provides standards for measuring and managing emissions.
“If you look at the process of data collection and recordkeeping alone to comply with these requirements, it will take up significant resources,” Patel said.
Small businesses already under economic stress
Amid ongoing fears of recession, higher interest rates cutting into sources of capital, signs of weaker consumer demand, and labor market challenges, small businesses have focused more on employees and their bottom line than sustainability. When asked what issues matter most to them, nearly 40% said jobs and the economy, while 10% said the environment, according to the CNBC|SurveyMonkey Small Business Survey for the third quarter.
Yet ready or not, suppliers big and small will have to step up soon. “This is coming,” he said. “The procurement arm of the business community is reaching into their supply chains and is starting to ask more pointed questions.”
In addition to the pressure from investors and politicians, another reason big companies will be looking farther down the supply chain is because they are currently coming up short in their emissions reduction goals. Amid the boom in consumer demand and global growth post-pandemic, many of the world’s largest corporations are producing more carbon emissions than they can reduce.
A recent review by the New York Times of climate documents for 20 major food and restaurant companies found that over half have made no progress in reducing emissions or are increasing emissions. The report found, as previous climate accounting has typically shown, that the majority of emissions come from suppliers.
A recent Just Capital report found that more companies than ever before are making carbon reduction commitments, but the results aren’t there yet in the disclosures. Of companies with existing science-based targets, only 26 out of 123 in the Russell 1000 disclosed emissions reductions. Meanwhile, among companies without specific targets — just general net zero targets — emissions have gone up.
Companies that want to retain high-quality suppliers are apt to help partners meet any sustainability requirements, says Mark Baxa, the present and CEO of the Council of Supply Chain Management Professionals.
Corporate giants are offering assistance that ranges from direct funding and better terms to training and access to clean tech.
For its part, Amazon said in its sustainability report that it will use its “scale, investment, and innovation to date to provide our suppliers with products and tools that will help them reach their goals — whether that’s transitioning to renewable energy or having more access to sustainable materials.”
But the retail giant also made clear that there may be consequences for partners that don’t measure up. “We will continue to look for suppliers that help us achieve our decarbonization vision as we select partners for business opportunities,” Amazon said in its report.
Amazon spokespeople declined to comment beyond its publicly available materials.
In the end, it comes down to suppliers choosing what works for their business.
“The suppliers themselves and the suppliers of suppliers have to come to their own independent decision on how they’re going to approach this,” Baxa said.
At the same time, companies have to address scope 3 emissions. “Often, they’ll go with a supplier who can comply,” he said. And for those that don’t, “Eventually, the hard conversation will take place.”