When Wal-Mart Stores Inc. took a magnifying glass to its business operations, the multinational retail corporation found numerous ways to save energy, cut costs and reduce its carbon footprint. But even as the largest private electricity consumer in the United States, it found that 90 percent of its emissions came from its chain of suppliers.
Wal-Mart partnered with the Carbon Disclosure Project (CDP) in 2005 to measure its greenhouse gas emissions. Two years later, the company started urging its network of now more than 100,000 suppliers to disclose their sustainability performance, too.
"That was the start of the supply chain program," said Dexter Galvin, head of CDP's supply chain initiative. "They started the trend."
In 2010, Wal-Mart committed to cutting 20 million metric tons of greenhouse gas emissions -- equal to taking 3.8 million cars off the road for a year -- from its global supply chain by 2015. Curbing pollution from suppliers "contributes directly to Wal-Mart's business model and future-proofs our supply chain -- like crime scene investigators, we follow [greenhouse gas] hot spots and clues to deliver cost efficiencies and sales growth," Rob Kaplan, senior manager of sustainability, explained in an interview earlier this year.
Today, CDP has 65 member companies working with their suppliers on reducing carbon emissions and mitigating climate change. These multinational corporations collectively represent more than $1 trillion in spending power and span all sectors, including retail, information technology, consumer goods and automotive.
Some big-name companies have been working with CDP for years, including PepsiCo Inc., Dell Inc. and L'Oreal SA. Fifteen new companies have signed on since the beginning of this year, including General Motors Co., Pfizer Inc. and Cisco Systems Inc. Having analyzed their suppliers' sustainability performance, some companies are now factoring that information into their procurement process, Galvin said.
"Traditionally, a lot of our members would make a 100 percent of decision on whether to work with a supplier based on price and quality," he said. "What we're seeing now is companies like Vodafone and Dell are actually reducing the amount [of consideration] they give to price and quality, and basing, say, 20 percent of the supplier's score on sustainability issues."
Extreme weather raises sense of vulnerability
With little coordinated action in effect to address climate change at the national and international level, greening the supply chain has become a significant way to reduce global greenhouse gas emissions, said Ryan Schuchard, manager of climate and energy at the international nonprofit group Business for Social Responsibility (BSR).
"Global agreements started to implode after Copenhagen and with the defeat on Capitol Hill of cap and trade," he said of the 2009 climate negotiations and the Waxman-Markey climate bill that failed the same year. "Since then, there's been a greater consciousness raised about the need and the opportunity for the private sector to play a greater role in greenhouse gas reduction."
More companies are starting to acknowledge this opportunity as vital to their long-term survival. A recent CDP survey of 2,415 companies found that 51 percent see drought or extreme rain already having an impact on their operations, or expect it to within five years.
However, when it comes to climate change mitigation, there's a performance gap between suppliers and their clients. The CDP survey found that 92 percent of purchasing companies have set emissions reductions targets, compared with only 38 percent of suppliers.
A key issue is that the process of calculating emissions in the supply chain is currently riddled with complexity, which could take momentum out of the entire initiative.
"Definitely here in the room today you hear that this is tiring," said Schuchard, speaking last week at a workshop on supply chain emissions co-hosted by BSR and the World Resources Institute.
Tracking emissions is 'a mess'
Tackling climate change through the supply chain often starts when a purchasing company like Wal-Mart decides to measure its Scope 3 emissions. Scope 3 emissions are all of a company's indirect emissions excluding electricity consumption -- things like the extraction and production of materials, waste disposal, and fuel consumption from vehicles not controlled by the reporting company.
To quantify these indirect emissions, a purchasing company will typically ask its top suppliers to measure all their emissions, both direct and indirect.
The problem is that it can take a company a lot of time to manage suppliers that have varying levels of interest and experience in emissions audits. It can also take suppliers a tremendous amount of time and capital to evaluate their carbon footprint. And there are logistics issues. For instance, many suppliers do not have any employees dedicated to sustainability.
"It's a mess," said Jennifer Woofter, president of Sustainability Consulting, whose clients are mostly tier-one suppliers to big companies.
Suppliers are suffering from survey fatigue, she said. One of the biggest challenges is that these companies have to develop a way to gather emissions data, not just with respect to their own operations but to their suppliers', too. They have to aggregate the data and present it in a meaningful way. Then they are expected to act on it.
"The first place we always think about sustainability is within our own operations, and I think for companies that's challenging enough," Woofter said. "When you add on that, you also need to be looking at your suppliers and their suppliers and their suppliers, going all the way back to the beginning; that is really overwhelming."
It also saves big money
The issue is made worse by the fact that big multinational corporations often aren't clear about why they want a Scope 3 emissions assessment in the first place and how they're going to engage in the cleanup effort, she said. If companies overwhelm their suppliers with survey requests without setting a larger goal and playing a part in helping them reduce emissions, the entire process could yield little besides more work.
"I think all companies before they start a supply chain initiative need to think carefully about the cost and benefits," she said. "How is this going to build a better product? How will it improve the entire value chain?"
The benefits of a sustainability audit vary greatly between companies and their suppliers. CDP reports that of 52 multinational corporations it works with, 63 percent are seeing year-over-year emissions reductions. Of 2,363 suppliers surveyed by CDP, only 29 percent are experiencing emissions savings year over year. Similarly, 73 percent of CDP member companies are achieving monetary savings through avenues like energy savings and reduced waste, while only 29 percent of suppliers are enjoying such returns.
The returns are significant, however. The 29 percent of suppliers that reduced their emissions saw about $13.7 billion in savings as a result.
"There's a huge opportunity here if all main suppliers were to reduce emissions," Galvin said.
These suppliers may just have to dig to the depths of their business operations to find it.