Climate change. Why bother?

Amsterdam, 15 December 2020 - By Bonne Goedhart, Business Development Manager, Smart Freight Centre. Why multinational companies should care about their outsourced logistics supply chain emissions.

Even today, some multinational companies ask us why they should care about climate change. The answer is that, if for no other reason, because it’s about to transform how supply chains work. And if you don’t act, your company will be left behind.

How is climate change going to affect international supply chains?

First things first, let’s be clear about climate change: It’s real. It’s us. It’s bad. But there’s hope. Now we’ve got that out of the way, let’s look at the impact on global supply chains.

Supply chain disruptions: Today, extreme weather is becoming more of a hot topic (no pun intended). An analysis of 239 research papers on extreme weather events, found that 86% were caused or partially caused by climate change.

Extreme weather causes major supply chain disruptions. Stores run empty and consumers go without essentials. Insurance becomes more expensive. Routes must be changed. Shipments and orders get cancelled. And just-in-time logistics becomes hopefully-in-time logistics.

The dependency of today’s business models on fast and free deliveries only increases demand for freight transportation. To ease the impact of disruptions, companies need to build resilient supply chains that ensure reliable delivery and environmental sustainability.

Changing energy sources: Global supply chains depend on the consumption of hydrocarbons. Within the logistics sector, assets such as trucks and vessels are long-term investments. Due to their high initial cost, trucks and vessels need to be on the road, in the air or at sea for several years to make a return or break-even.

This makes it difficult for companies to make their complete logistics fleet greener. However, new assets that are purchased are often far more efficient and thus environmentally friendlier than their precursors.

Another challenge is with the global nature of supply chains. This means that goods are sourced and transported all over the world, which poses infrastructure problems when going from country to country.

For example, let’s say I discover that there are no fuel-stops for hydrogen trucks on one of my important routes. Then it doesn’t make sense to buy these new vehicles, simply because the infrastructure is not there.

However, infrastructure investments to support alternative energy sources are ramping up big time. And initiatives like the Goodshipping program provide a way for companies to team up and replace bunker fuels with biofuels.

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Carbon pricing: Carbon pricing will become increasingly important in the coming years. As we speak, there are 64 carbon-pricing measures in place or in the process of being implemented.

Measures include the emission trading scheme, carbon tax or a credit mechanism. These measures cover at least 46 different countries and account for 23% of global GHG emissions. It is likely that carbon pricing will gain momentum and popularity in the coming years as a policy tool to ease carbon emissions from industry with initiatives from the World Bank and The Carbon Pricing Leadership Coalition (CPLC).

We are also aware of many companies that use internal carbon shadow pricing for investment decisions or managing current emission levels. Nestlé, Microsoft and Unilever, for example, have been doing this since September 2014.

Paying a price for carbon will put immense pressure on companies and sectors who depend heavily on logistics services for example fashion, chemicals, electronics and steel (read more about specific sectors here).

They will need to decrease the demand for freight services or pay more to get their goods from A to B. FM Logistic, a family owned French LSP, includes the social cost of carbon (SCC) in their direct and indirect impact reporting, which is a great way to express the financial consequences of environmental pollution.

So how companies can take action?

What can multinational companies do about it?

Imagine a company that does not have any climate mitigation plans and continues with business as usual. In our Sustainable Logistics Roadmap training we discuss four different negative stakeholder impacts this kind of company will face:
1. Customers and consumers demand sustainable production and products: We know that end-consumers of products value climate sustainability. According to Unilever, 70% of its turnover growth is from sustainable products. A company which turns its back on sustainability loses out to competitors. It’s buying into a failing model that will damage its brand leading to a vicious circle, spiraling down to decline.

2. Government legislation will soon include climate change as a key driver: France was one of the first countries to legislate for businesses to take climate change seriously. Since July 2010, French companies with more than 500 employees must report their GHG emissions.

Now the rest of Europe is following France’s lead. The EU Green Deal sets a net zero emission target by 2050 for the entire EU. Companies which do not set a zero-emission target for 2050 are already behind the curve.

3. Access to finance and insurance will get difficult: Investors are putting more pressure on companies to act on climate change. For example, Institutional Investors Group on Climate Change (IIGCC) is a group of asset management companies with €33tn in assets under management that are committed to reducing emissions.

Other important investors collaborations on climate change are CDP (SFC partners with CDP to increase logistics emissions disclosure), Partnership for Carbon Accounting Financials (PCAF), Task Force on Climate related Disclosure (TCFD) and the activist shareholder organization Follow this.

Not only are more organizations than ever advocating for climate change to be included as an investment indicator, but we also know that access to finance and insurance will get more and more difficult for companies operating in risky geographical regions or markets.

For example, if you are in the Californian bush fire region, insurance for retail properties is more expensive than in mid-west Ohio. And for house buyers in Amsterdam, it’s more difficult to get a mortgage on an old property than on a new energy-efficient apartment. In the long term, climate risk will play a larger part in financing business investments.

4. Attracting staff will become difficult for climate-sceptic companies: In many companies, employees are demanding action on climate change. An example that received a lot of news coverage in 2019 is the Amazon employees, who walked out to demand bolder climate action. In response Amazon strengthened its climate pledge.

Climate change is important for all workers, not just staff of big corporates. A 2020 study by Peakon, found an 85% increase in employee comments about how environmental challenges are important to them. The bottom line is that companies which don’t prioritize sustainability may soon find it difficult to recruit and retain the best staff.

Climate mitigation is smart for business

So where do you start with a corporate Sustainable Logistics Roadmap? Based on the Smart Freight Leadership approach we developed with our Advisory Council, we designed 4 steps for companies to develop their own roadmap:

  1. Report credible emissions with the GLEC Framework: the global method for calculating and reporting logistics emissions.
  2. Set targets that are science based: setting Science-Based Targets (SBTi) means that a company is in line with the Paris Agreement of staying within a 2 degrees and ideally 1.5 degrees scenario.
  3. Reduce emissions by implementing solutions as a buyer or supplier.
  4. Collaborate and advocate with others, because you can’t do it on your own!

The next step would be to develop a roadmap to get to net zero emissions that makes sense. As we demonstrated with our leadership stories, reductions in logistics GHG emissions leads to cost reductions. It is often the companies that include sustainability in their business model that survive!

My call to action? Start bothering about climate change, including for your outsourced freight transportation by developing a Sustainable Logistics Roadmap.

Photo credits: banner NASA EO Images
Other images sourced from Unsplash