Corporate purchasing – an unexpected way to fight climate change
Published in Environment.
Originally written for CIO.com.
Large businesses are at a disadvantage when it comes to making real change to tackling climate change. Unless there is a clear cost benefit (such as by switching to cheaper, renewably generated power) implementing changes which cannot be justified by a simple internal cost-benefit analysis are difficult to build a business case for.
Energy usage is the easiest to measure. You can look at the itemised bill and calculate exactly how much could be saved by switching to a green utility provider. It becomes more difficult when you have to consider direct and indirect emissions, complex multi-national supply chains and how the environmental footprint of third party vendor operations affect your own impact.
But it is increasingly important. Consumers are noticing, and making buying decisions based on sustainability criteria:
Nearly half (48%) of U.S. consumers say they would definitely or probably change their consumption habits to reduce their impact on the environment. And these consumers are putting their dollars where their values are, spending $128.5 billion on sustainable fast-moving consumer goods (FMCG) products this year*. Since 2014, these influential shoppers have grown sustainable product sales by nearly 20%, with a compound average growth rate (CAGR) that’s four times larger than conventional products (3.5% vs -1.0%** comparatively). By 2021, we expect these sustainably minded shoppers to spend up to $150 billion on sustainable FMCG goods an increase of $14 billion – $22 billionWas 2018 the year of the influential sustainable customer?
So where should corporates start? Are there any quick wins that can have an impact today?
First step: reporting
Standards for reporting on sustainability have existed for some time. The GRI Sustainability Reporting Standards (GRI Standards) were created in 1997 and have now been adopted by 93% of the world’s largest corporations. And in the US, the Greenhouse Gas (GHG) reporting standards are used by 9 out of 10 Fortune 500 companies.
Reporting tends to be voluntary, and the format of existing reports is usually determined by the company itself. But the introduction of global standards is quickly being followed by legal requirements to report this information. In the UK, reporting on greenhouse gas emissions has been required by all quoted companies since 2013, and reporting of global energy use since 2019.
You can’t improve what you don’t measure. The GHG Standards created the concept of scoping to help determine precisely where emissions are being generated. This is important to decide where to focus initial efforts.
- Scope 1 emissions are those most under your control e.g. emissions from boiler combustion or chemical processes, but are therefore likely to be the most difficult to change.
- Scope 2 emissions include electricity purchased by the company, where it might be easier to change supplier.
- Scope 3 emissions are those not directly controlled, such as use of purchased materials or emissions from services contracts. It is often assumed that these are the most difficult to mitigate, but this is actually the area where corporates can have the most immediate impact.
Corporate supply and demand
Startups have an advantage when it comes to agility. The fact that they are small means they can adopt new policies and implement changes quickly. They also have the advantage of being able to start from scratch.
Startups are the future growth companies. If the company starts with a sustainability mindset, it’s much easier to continue with that approach as the new status quo, rather than try and change it in the future. There are plenty of ways that startups can help combat climate change. But due to their size, their immediate impact is tiny. The opposite is true for corporates.
The market mechanism is the best way to make lasting change. Incentives matter and competition encourages changes in products and services to meet the needs of the consumer. Corporate buyers are consumers like any other, but their large size means they can have a big impact on what is offered in the market.
This is basic economics. Demand encourages supply. Suppliers compete to be the best.
Anyone who has ever sold into the enterprise or been part of a vendor evaluation process knows how buying and selling to corporates works. RFPs. Checklists of features. Security reviews. All of these processes have built up over time to evaluate vendors on objective criteria.
If large corporate buyers require a minimum set of product features, those features become the baseline that all suppliers must meet in order to be competitive. This is where corporate buyers can have an immediate impact on climate change.
Green procurement policies
Corporate buyers should introduce environmental requirements into their purchasing.
There are already long lists of requirements around security, certifications, features and functionality. If the big enterprise buyers start asking for a minimum set of sustainability requirements for all of their new vendors, the market will quickly adapt to ensure the vendors meet those requests.
Not only would this impact the Scope 3 emissions reporting for corporates themselves, the changes will have a ripple effect for all the other customers supplied by that vendor. This is particularly true for modern software as a service. Once the vendor decides to become carbon neutral and apply their own approach to sustainability, it applies to all of their customers with no additional effort.
Government is leading the way in this respect – almost all OECD countries have an approach to green public procurement.
The EU required all member states to implement the Energy Efficiency Directive 2012/27/EU on 3 June 2014 (and also has a voluntary Green Public Procurement instrument). The US implemented its first “green” procurement policy in 1976 which introduced a preference for recycled products and there are now over 300 product categories with specific environmental purchasing criteria.
The size of govenment forces change. Initiatives such as the UK’s “Cloud First” procurement policy adopted in 2013 have a real impact on what the market offers. Corporates have a similar effect, and many are bigger than some countries. Corporate procurement polices are an untapped area for having a major impact on climate change.
Change is inevitable
The major advantage of introducing a new requirement for selecting sustainability as part of the procurement process is that it requires no changes to existing practices yet still has a major positive impact as vendors are forced to adapt.
Corporates are ultimately going to have to adopt green practices to their entire business or face challenges either from competitors, consumer demand, or both. Adopting a green procurement policy is an easy change that can have an immediate impact whilst the more difficult, long term policy changes are figured out.