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IKEA Has a Plan to Help All of Its Suppliers More Easily Switch to Clean Energy

So far, the company is facilitating access to renewables for suppliers in 13 countries through PPAs and a finance mechanism for suppliers keen to invest in onsite projects.

Investment in clean energy is finally picking up. According to BloombergNEF, last year saw record levels of money being channelled into renewable power projects. Roughly half a trillion dollars was spent on low-carbon energy generation in 2022, with solar investment jumping 36 percent year-on-year to $308 billion. The second-largest sector, wind, benefitted from £175 billion.

In the five years that followed the signing of the global Paris Agreement to reduce greenhouse gas emissions (GHGs) sufficiently, the annual growth rate in clean energy investment stood at just 2 percent. That has since increased to around 12 percent; but experts predict much more will be needed if the Paris deal is to be upheld.

Yes, governments will need to step up. While the US’ climate response has been deemed “insufficient” by Climate Action Tracker, President Biden’s recently signed Inflation Reduction Act promises to inject $369 billion to deploy clean-energy technologies.

But companies must also play their part — and luckily, many of them already are. In fact, some have been reinvesting their profits into clean-energy schemes that will lower their overall footprint for decades. Take Amazon, for example: In January, the online retailer set a new record for the most clean energy purchased by a single company. It now has a renewable energy portfolio of more than most countries — its 20GW capacity is enough to power over 15 million homes a year.

For many companies, cutting the GHGs associated with their power use is one of the most important immediate steps they can take on climate change — and contributing financially to developing new clean-energy generation is seen as the most transparent and effective approach. Corporate power purchase agreements (PPAs) are increasingly seen as a sure-fire way for firms to not only trace their energy provision back to a specific wind or solar farm, but also to lock in their energy prices for the long term and gain protection from power price fluctuations. In Europe, 161 renewable-energy PPAs were signed last year — with corporate buyers accounting for 83 percent of the total 8.4GW of capacity that came on stream in 2022.

Of course, developing your own renewable-energy assets, whether onsite (e.g. solar panels on factory roofs, for example) or offsite (e.g. by having an equity share in a new local project) can be even more straightforward. The continuing fall in the cost of solar technology and installation is helping to fuel this trend.

However, making the switch to clean energy is not always an easy thing to achieve — especially for smaller businesses. Cost pressures often make investment hard to square in the face of day-to-day operational costs. And misconceptions remain about the price, value and implications of transitioning to renewable energy.

It is a challenge that homewares giant IKEA has been trying to solve these past couple of years. In 2021, the firm launched a dedicated program to support its suppliers in China, India and Poland in accessing more clean energy. The scheme created bundled framework agreements and PPAs making it easier for suppliers to buy renewable power from the grid. It also set up a mechanism to provide finance for suppliers keen to invest in onsite projects.

Recognising that many of IKEA’s suppliers struggle to purchase 100 percent renewable electricity — and that only a portion can be generated onsite — the firm says it has “shown that it’s possible to make renewable electricity both accessible and more affordable.” The initiative has already contributed to reducing IKEA’s climate footprint by a further 5 percent and doubled the share of renewable electricity being used in China from 32 percent in 2021, to 64 percent in 2022. According to the company, offers for affordable renewable electricity contracts in India and Poland have been “successfully finalised and will come into effect during 2023.” In Poland, PPAs from wind and solar have been secured — giving suppliers at least 50 percent cheaper electricity compared to current market prices.

Now, IKEA has announced plans to expand the scheme further this year, with suppliers in 10 more countries — including Germany, Italy, Lithuania, Sweden, Turkey and Vietnam — set to take advantage. The combined electricity consumption for production in the 10 nations accounts for around 13 percent of the climate footprint associated with IKEA’s production; so, success is crucial if IKEA is to meet its goal to be people- and planet-positive by 2030.

“We’re aiming for 100 percent renewable energy throughout our value chain, taking into account both Scope 2 and 3 emissions,” Peder Weibull Hartman, the company’s Project Manager for Renewable Electricity for Supply Partners, told Sustainable Brands®, adding that the program is “instrumental”

in enabling suppliers to help IKEA meet its value chain commitments. Electricity makes up 40-50 percent of total energy consumption in production. “This program is critical in two ways: First, it facilitates the transition to renewable electricity for the existing electricity consumption; secondly, it lays the foundations as we strive for electrification for the majority of the remaining 50-60 percent of energy consumption,” Hartman says.

On top of offering the two finance solutions, IKEA is also working hard to increase awareness and improve the understanding and competence among suppliers on the subject of clean energy. The business has run a number of training sessions which Hartman says have been “highly appreciated.” Ultimately, IKEA wants every single one of its suppliers to use 100 percent renewable electricity through whatever approach works best for them. So, the program has been designed so that suppliers can take advantage of financial mechanisms on offer, or find their own clean-power solutions.

So far, solutions with framework agreements have been the most popular setup, Hartman says — noting that the most common options vary widely across geographies. “In many markets, there are regulatory barriers that prevent the acceleration of the transition to renewable electricity,” he says. “In those markets, we’re continuously assessing opportunities for advocacy and working with industry stakeholders and policymakers.”

IKEA’s approach to engaging suppliers — and successfully helping them to adopt carbon-cutting technology — will appease some agitators who have long called for brands to get better at ‘supplier marketing.’

“In an era of digitalisation and data collection, supplier marketing is the next logical step for procurement,” says Anthony Payne, Chief Marketing Officer at supplier management software company HICX. “[This is] the process by which companies engage suppliers, build strong supplier relationships and create supplier value in order to capture value from suppliers in return.”

Supply chain business expert and Chair of Scope 3 Peer Group, Oliver Hurrey, agrees. He urges brands to “listen to and empathise with suppliers, in the same way you do customers — especially when it comes to sustainability.”

So, what’s the secret to IKEA’s success in fostering climate action among its supply base? Hartman says the company’s overarching sustainability strategy, which includes climate sub-goals for specific parts of the IKEA value chain, provides the perfect foundation.

“Internal buy-in within IKEA has set the foundation to run the program with adequate resources,” he says. Periodic review by management ensures that the project stays on track; and dedicated project managers have been assigned to take suppliers through a step-by-step approach and handle questions or concerns. Project managers work closely with country project teams to provide in-depth local knowledge, delivering the most effective solutions.

But building trusted, long-term relationships is everything in turning the dial on sustainability performance, Hartman says. “The average length of IKEA collaboration with home-furnishing suppliers is 11 years. IKEA is often a large share of a supplier’s annual turnover; so, developing long-term relationships helps build trust and improve knowledge sharing. Establishing strategic partnerships that are based on shared goals leads to mutually beneficial relationships.”