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Lindsey Hall: Hi. I'm Lindsey Hall, Head of thought leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a senior writer on the Sustainable1 thought leadership team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy.

In last week's episode of this podcast, we talked about what to expect during COP27, the big UN climate conference that just kicked off in Egypt. We heard from our guests about themes like the importance of a just and equitable transition and the need for adaptation as well as mitigation. We heard about the rising focus on food systems and food security. We also heard about the related topic of loss and damage. Loss and damage refers to what happens when climate impacts exceed what countries can adapt to.

And this is a focus, especially for developing countries vulnerable to climate change. We heard last week about the rising role of the private sector at COP27, about where countries stand on climate pledges known as nationally determined contributions or NDCs and about how the private and public sectors are working together towards goals related to climate change as well as nature and biodiversity. We'll include a link to that episode in our show notes. Okay. So Esther, what has actually played out in that first week of the conference?

Esther Whieldon: Well, Lindsey, we heard at the beginning of the conference, Mark Carney say that combining clear net zero policy signals from governments, along with private capital's increasing focus on sustainability, creates a very powerful dynamic for the energy transition. By the way, Mark is UN Special Envoy and Climate Action and finance. We also heard that developing countries would need an annual investment of more than $2 trillion by 2030, and that's to cut emissions and protect themselves from the impacts of climate change. That's according to a new report out this week from the independent high-level expert group on climate finance.

The money would be used to reduce emissions, boost resilience, manage the loss and damage caused by climate change and restore nature and land. Current investments totaled about $500 billion, the report said. And Lindsey, that's a lot less than what we heard developing countries say they would need.

Lindsey Hall: So another big topic that's been a focus at COP gatherings is, of course, the Paris Agreement. As a refresher, under the Paris Agreement, more than 190 parties committed to limit the global rise in greenhouse gas emissions to well below 2 degrees Celsius and preferably 1.5 degrees. That's relative to preindustrial levels. This agreement brings together nations from around the world to work toward a common climate goal. For companies, a big part of achieving Paris Agreement goals involves setting decarbonization targets in both their operations and across their supply chains.

Esther Whieldon: In today's episode of the podcast, we'll be examining how companies are addressing supply chain emissions or Scope 3 emissions. Scope 3 emissions occur up and down a company's supply chain as well as when customers use the company's products. Supply chain emissions can be difficult to reduce, and that's because they occur outside of the direct control of the company.

To understand how companies are engaging with suppliers on reducing greenhouse gas emissions, we're speaking with Simon Fischweicher. He's the Head of Corporations and Supply Chain for CDP North America. Our interview started off with a brief overview of what CDP is and its role in tracking supply chain emissions. Okay. Here's Simon.

Simon Fischweicher: CDP is an environmental nonprofit organization that really launched the first systemic link between environmental and financial decision-making information. And today, it runs the world's largest environmental disclosure system, which enables companies, cities, states and regions to measure and manage their environmental impacts and then disclose that information to their investors, to the public and then, of course, for this conversation today, the customers.

CDP launched in the early 2000s with the idea that we could use the power of the capital markets to drive companies to measure and manage climate information. And it first gathered a group of just 35 investors who we sent out on behalf of our very first climate questionnaire to 500 of the world's largest companies. Today, that investor program includes 680 institutional investors requesting thousands of large publicly listed companies to disclose.

However, over 10 years ago, we had a number of our larger disclosers recognizing that in order to provide their investors with the robust, complete climate disclosure they were being requested to provide required having greater insights into their supply chain, into their Scope 3 or indirect emissions from their suppliers. And so they came to CDP and said, "Hey, can we work with you to create something similar that you have done for the capital markets but for our suppliers?"

And so today, we now have nearly 300 organizations representing $5.5 trillion collectively in their procurement power, requesting over 40,000 suppliers globally. And in 2022, we had nearly 20,000 responses across all of CDP's global engagement with the private sector. So the supply chain program has been a major driver of disclosure on climate change, deforestation and water security using, again, that power procurement to cascade climate action down the supply chain across a number of different value chains.

Esther Whieldon: So what kind of questions does the supply chain disclosure program ask? How is it different from sort of the questions that you ask of companies for the investors?

Simon Fischweicher: Well, the beautiful thing is that for the most part, it is the same. And what that means is for companies who are reporting to the investment community or to multiple customers, they don't have to go through the same process of reporting multiple times. They're submitting 1 set of information. That information is being directed to various interested entities.

However, there is a recognition in the supply chain program that a large percentage of these companies are small to medium-sized enterprises and that some of the robust detailed granular discussions of governance or risk management and strategy and transition plans may not be where these companies are coming from at this time. Their customers are hoping that over time, they will continue to progress on that journey towards robust climate change management across many topics.

But what we find with our supply chain members who are requesting their suppliers is that the majority of them are hoping for those early-stage, those companies who are just beginning to take steps into measuring and managing climate impacts to focus on the core quantitative numbers like their emission figures, their energy use, the percentage of the energy use that may come from renewable energy that are critical to the customer in understanding their supply chain impacts and ultimately, calculating those indirect Scope 3 supply chain emissions.

So what is different is the focus, whereas with the larger companies who are getting these requests from the investment community, the expectation is to have that holistic climate management and be achieving really strong disclosures and performance across all categories of engagement, whether that be the Board level oversight of climate change, the targets they're setting, the verification of those emissions, the strategies they have in place to integrate climate change into their long-term and short-term financial planning. Those expectations are different when companies are engaging their suppliers, really focusing again on the emission reporting, maybe some target setting and then using that information to advance them along that trajectory towards more robust climate disclosure over time.

Esther Whieldon: So what are some options that companies have for decarbonizing supply chains? Kind of what's out there?

Simon Fischweicher: It's a great question, and I might actually give a little bit of historical context on calculating Scope 3 supply chain emissions because they think that context provides a lens into what some of the options for decarbonizing supply chains were and what they are today. So if you look at the initial efforts to calculate supply chain emissions, they were based almost completely on estimates based on spend within an industry or a sectoral group and then taking industry emission averages from those particular sectors and using that to come up with estimates for supply chain emissions.

So basically, to simplify that, I spend 20% of my procurement on corn. What is the average emission, sort of industry averages, for corn production? The next step, and this is where CDP supply chain program came in, was to allow for direct collection of data from suppliers on their enterprise-level emissions and then allocating those emissions based on the spend with that particular company.

So you're going from industry averages and allocation based on spend to specific companies. And so the difference here in terms of decarbonization is with just the industry average, all you can do to reduce your emissions are hope that on average, that industry gets better or spend less with a particular industry. When you begin to direct -- collect emissions directly from your suppliers, what we find is there are more options for decarbonization because you have more granular information into your supplier-specific opportunities and risks and emissions and then engage that supplier with the theory that what gets measured gets managed and that setting targets leads to reduction of emissions and then use that supplier engagement to drive emission reductions with that specific supplier over time, or if you're not seeing those improvements, potentially reduce your business with those suppliers and move to suppliers that are performing better on emissions.

So that sort of engaging suppliers and switching suppliers are 2 options when it comes to the direct collection of data from your suppliers. But where we're headed now is in a more granular decision-useful engagement, which is not just allocating a company's total emissions by spend, but getting into more product-level emissions allocations.

Why is this important? When you allocate emissions solely based on your sort of percentage of business with your customer, let's say you do 50% of your business with this corn supplier and that corn supplier also is a soy and rice agricultural producer, not all of their products or services may have the same emissions intensity. And when you allocate based on spend, you may either be getting a lower number, because perhaps the product that you procure from that specific supplier is more intense from an emissions perspective or you may be getting a higher number than it should be because actually, you are engaging with that customer on a product that is actually lower in emissions intensity.

And so where we're headed today is going into more of a product-level emissions allocation and customers and suppliers working together to understand the full value chain emissions of a specific product. And what that allows the end customer to do is not just focus on switching suppliers, but thinking about what are my most intensive products or inputs into the end product that I provide to the market from a supply chain perspective, and how can I shift either to reduce my reliance on that input or really focus my efforts when engaging suppliers in pursuing opportunities for emission reductions on their practices or their manufacturing facilities that drive that specific product that I am heavily reliant on.

And again, I've gone down the corn example a few times, but if you think about a car and maybe a specific component really crucial to the engine of a car, even in an electric vehicle, thinking about how important one input is to the end product and how to work with that supplier to drive down the emissions associated with that specific product in its value chain. And what that also allows is the part that I get most excited about for options for decarbonization and supply chains, which is actually that value chain collaboration.

When you have a single customer voice asking for better climate disclosure or more investment in renewable energy, you're setting emission reduction targets for a specific supplier, that voice might not be loud enough to drive change, to drive behavioral change, to drive emission reduction activities. But when the entire automobile sector is pushing for better practices for the production of particular products that go into their automobiles, that supplier may listen. And so that's a direction that we're seeing in many sectors is this pre-competitive collaboration, industry groups coming together.

And many of the CDP supply chain members who are in the same sector will collaborate and say, we're all requesting our suppliers to disclose through CDP's climate change questionnaire, let's agree on some of the key KPIs that we want suppliers to focus on so that we're not asking 7 different things of the same supplier, and that can make it more manageable. And it also can show a sign of direction within an industry. So that's a really exciting sort of direction that we're seeing as well for reducing and decarbonizing supply chains with the understanding that we really can't go at it alone when it comes to climate change and that collaboration is critical.

Esther Whieldon: So it sounds like it could also potentially, by collaborating at the industry level, it could also reduce the risk of first movers premium, right? Like, the first movers always end up having to pay a little bit more to get the ball rolling.

Simon Fischweicher: Exactly. And this is a big part of it where we're encouraging competition, we’re encouraging the use of capital to drive climate change, and we want to see companies competing to be the best at reducing emissions and have the most ambitious targets and most innovative low-carbon products and services. But when it comes to the entire value chain, we're talking about systemic changes that we need to see in terms of how rare earth minerals are being extracted from our planet and the considerations around the transportation value chain that involve many businesses coming together, not even just in the peer group, but across an entire value chain.

And so how can businesses who share aspirations to reduce emissions in their value chain and position their value chains in their sectors to break down those costs and find those solutions and drive their suppliers to take those initiatives and also demonstrate to their suppliers that this is not going away. This is not a check box exercise, but something that, as a participant in that value chain, is critically important to the business going forward.

Esther Whieldon: Simon said this collaborative approach among companies and increased transparency on supply chain emissions could also boost customer confidence in the accuracy of any low-carbon labels companies put on products. By the way, you'll hear Simon mention a proposed climate disclosure rule by the SEC or the U.S. Securities and Exchange Commission. If you want to learn more about that proposed rule, we'll include a link in our show notes to an episode we did on that topic.

Simon Fischweicher: Yes, I think that this will be a major opportunity, particularly as consumers begin to take notice and we have an increasing level of granular data, but then the ability to communicate that granular data through elements like certifications that can be trusted and verified where you, by collecting supply chain data, by digging into product level emissions and by collaborating on a sector level to drive those changes, you can position, and I think the electric vehicle space is a good example, charging a premium for an environmentally friendly climate sort of positive product or service.

And there is significant skepticism in the market around those labels, but as industries and sectors can demonstrate through data that their supply chain is actually addressing climate change issues, reducing emissions and identifying ways to ensure the inputs into their product and service are environmentally friendly or comparatively environmentally friendly, that will be really critical demonstration to consumers and to investors of the relative benefit of one product versus another.

And there are already businesses that are beginning to help in certain sectors. There's a company I've been engaged with called Planet Forward that is helping companies in the agricultural space label the food they offer to consumers in such a way to demonstrate the emissions of that product or that meal, that's salad from a supply chain perspective, not just the energy use in the store where you're buying the salad. And that, over time, I think, will enable companies who can demonstrate those relative benefits to provide a premium level pricing for that product or service.

Esther Whieldon: That sounds like a podcast episode I need to think about.

Simon Fischweicher: Absolutely. And there's a lot going on. And there's concern -- I think there is still consumer skepticism in concern for greenwashing and impact washing, but there's more data, and there's more ability for -- if you want to dig into, is this actually a more climatefriendly salad, can I dig into the data to check it? There's more data that is allowing companies to be able to make those claims with backup.

Esther Whieldon: So you sort of touched on this by talking about how this program came about. But how has engagement with supply chains involved in recent years? What are companies asking suppliers? And what are financial institutions asking of companies about their supply chains?

Simon Fischweicher: It's a great question. And I've only been at CDP 7 years. Even in that time, the evolution of supplier engagement when it comes to climate change and environmental issues overall has changed in an incredible fashion. In the early days of the CDP supply chain membership to a certain degree, it was a check box exercise.

The supply chain membership preexisted the science-based target initiative, but many of our early members were engaging their suppliers on climate disclosure because they knew it was important, but they weren't necessarily utilizing the data to drive their own reporting at that time or to meeting targets or really using the data to make decisions.

That's no longer the case. There are 4,000-plus companies who've committed to setting science-based targets. The proposed SEC rule on climate disclosure has provisions around Scope 3 data. So customers are not just checking a box to say, hey, I've sent a request out to suppliers, I'm doing supplier engagement on climate change. They're actually using the data and they're reliant on their suppliers to disclose those emissions, disclose their energy data and other key performance indicators. They're looking to take and put into their own reporting to their investors, which brings up the investor expectations, which have also evolved, again, from that binary yes or no, are you disclosing, are you thinking about your supply chain and reporting that you are collecting data from your suppliers, to an expectation that companies are setting targets and disclosing Scope 3 emissions and specifically that they have science-based targets, which 95% of the validated science-based targets out there, and again, these are targets that are being validated in line with a company's contribution towards 1.5 degree Celsius world.

So what a company needs to do to stave off the climate crisis, investors are expecting that from companies now, not just that they are disclosing, not just that they're setting a target, but that, that target meets a certain level of ambition, and that ambition, for the majority of companies, requires looking at some degree of supply chain emission reporting. So the customer has to take the data more seriously as the investor expectation has increased.

And not only is that demonstrated through an increasing number of companies committing to setting science-based targets or the increase in investors requesting CDP data, but we actually launched an engagement campaign a few years ago where, based on investor interest, where investors and actually, customers can sign on to a letter issue to the largest about 1,600 companies who have not yet set science-based targets. And this past year, we had over 200 financial institutions representing over $30 trillion in assets collectively who signed on to that letter saying disclosure is not enough. We want to see science-based targets.

And so that's sending a signal to the corporate sector that we know science-based targets mean Scope 3 emission targets. We've got to start collecting data from our suppliers and just getting them to disclose something is not enough. We need data, and we need reliable data. So those are some -- 2 big trends when it comes to the evolution on the climate data side.

A third trend I would note is the understanding from some of our more sophisticated customers like a Walmart or a Microsoft or L'Oréal that are not just requesting emission data from their suppliers, but thinking about the interlocking systems of our ecological systems and our planetary boundaries, understanding that the climate crisis means addressing nature. And we know that 15% of emissions are associated with deforestation. So if you're a company interested in engaging your supply chain to reduce emissions and you're engaged in the use of soy, palm, cattle, paper in packaging products, deforestation needs to be a part of that. And so we see companies beginning to recognize, hey, I'm not cutting down trees, but trees are getting cut down in my supply chain in order to create the end-use product that I put out into the market. I need to be thinking about traceability in my supply chain when it comes to deforestation.

And similarly, the IPCC report identified that the emission reductions we need to stave off the climate crisis require nature-based solutions. So we're beginning to see more companies think about biodiversity, for instance, in water security, in their supply chains as well, even if those aren't directly connected to emission reductions and the way deforestation may be. There's an understanding that to solve the climate crisis, we need to think of nature as well.

And while most companies that we engage with in the North American market aren't directly impacting biodiversity in their business, the products and services that they sell, have a supply chain that relies on extractive resources or agricultural production that is impacting nature at the moment in a negative manner, and there are ways that they can work with their suppliers as they've done to increase the production of renewable energy in their supply chain to think about biodiversity impacts and deforestation impacts and water security impacts in their supply chains as well.

Esther Whieldon: So as you can hear, Lindsey, the way that companies engage with their suppliers to reduce emissions is evolving from one where they're asking for just emissions figures to now starting to examine how suppliers handle other activities that are related to climate change. Companies are starting to consider how their suppliers, for example, are handling deforestation, water security and biodiversity.

Lindsey Hall: Please stay tuned as we continue covering COP27 developments as well as how companies and investors are addressing their supply chain emissions.

Thanks so much for listening to this episode of ESG Insider and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.

Copyright © 2022 by S&P Global


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