Supply Chain

Environmental Risks to Cause $120B ‘Chain Reaction’ for Companies by 2026

The findings are a stark warning of the financial impact of environmental risks for both companies and consumers, as firms rally around the need for better management of environmental risks in product supply chains.

Published 3 years ago | About a 3 minute read

Image: Michael Krämer/Pixabay

According to new research released today by CDP — the global non-profit behind the world’s leading environmental disclosure platform — companies face up to US$120 billion in costs from environmental risks in their supply chains by 2026.

Transparency to Transformation: A Chain Reaction analyzes data from 8,000+ supplier companies disclosing to their corporate customers via CDP in 2020. The sectors that report the most potential cost increase are manufacturing (US$64 billion), food, beverage & agriculture (US$17 billion), and power generation (US$11 billion).

As most supply chains running on tight profit margins, increased costs are expected to be passed up the chain in a domino effect from suppliers to their buyers — and then, onto consumers.

“With US$120 billion at stake, addressing environmental risks through supply chain engagement is vital for companies to be competitive and resilient in the changing market,” says Sonya Bhonsle, Global Head of Value Chains at CDP. “Leading companies that address these risks will benefit from lower costs and better reputations. This gives them a more competitive edge today and helps them become more resilient for the economy of tomorrow. Meanwhile, laggard companies risk being left behind.”

The environmental risks causing cost increases stem from climate change, deforestation and water-related impacts — including physical impacts such as increased severity and frequency of cyclones and floods, and increased cost of raw materials; and regulatory and market changes as the world addresses environmental crises, such as carbon pricing and increased spending on product innovation due to changing customer demands.

Corporate buyers could be impacted by this looming cost increase. To address this risk, buyers are increasingly demanding transparency and action from their suppliers to tackle environmental impacts in their supply chains. These include 150+ major buyers with over US$4.3 trillion in purchasing spend, such as Alphabet, Bank of America, Braskem, Coca-Cola, Colgate Palmolive, Dell, Electrolux, Ford, Google, LEGO, L’Oréal, Mastercard, Stanley Black & Decker, Toyota and Walmart. As CDP supply chain members, they request thousands of their key suppliers to disclose their environmental data through CDP each year and use this data in their procurement decisions and supplier engagement.

The good news is, despite the disruption of the pandemic, the number of supplier companies disclosing data to CDP increased 16 percent — from almost 7,000 to over 8,000 — in 2020; and those suppliers cut emissions by 619 million metric tons of C02e — equivalent to emissions from 159 coal power plants running for a year — in the past year, saving US$33.7 billion in the process.

So, with such obvious financial benefits, why isn’t supply chain decarbonization already being done on a wider scale? As a World Economic Forum report released last month explains, a variety of factors still prevent companies from effectively reducing emissions in their supply chains — including lack of transparency about these emissions — and the mechanisms for establishing greater transparency at the supplier level are still immature; CDP reports only 37 percent of suppliers are engaging their own suppliers to cut emissions.

But the drastic rise in the setting of approved science-based targets by large companies requires require them to become aware of and greatly reduce their supply chain (Scope 3) emissions — making it an imperative to engage and gain that transparency from their suppliers.

Read more findings from the CDP report here.