Carbon Emerges as a Competitive Dimension

October 19, 2023 EcoVadis EN

To focus on a 1.5°C pathway, every part of the global economy needs to transition. Many major global companies have pledged to achieve net zero by 2050 or sooner. To get there, they’re increasingly evaluating and selecting suppliers based on their carbon intensity, as decarbonization, more than any transformation, requires companies to look beyond their walls. That said, suppliers in select geographies might be gaining a competitive advantage through climate-related differentiation, as two years’ worth of our carbon data suggests.

Two years on from the Carbon Action Module launch, roughly 40,000 partners in our network received a carbon maturity rating, giving over 200 buyers comprehensive benchmarking of their suppliers’ management practices. For the second year running, we’ve shared insights on the carbon maturity of this growing network of companies spanning a range of regions, industries, and sizes. And while performance remains relatively low, with a year-on-year view, we’re seeing that a diverse group of suppliers is improving their carbon management systems – from those calculating their emissions for the first time to leaders using our PCF solution.

Many companies are still early in the journey of building the right change muscles for this long and important ride. Within a five-point scale ranging from Insufficient all the way up to Leader, 37% of all rated companies are currently at the lowest carbon maturity level, and 40% are at the Beginner stage. About 1% attained the highest status. We found, however, that level distribution varies considerably across geographies – not surprisingly, fewer European companies are rated Insufficient (29% of the region’s scorecards) compared to Asia-Pacific (48%) or anywhere else in the world. 

Europe has a good portion of companies with core elements of a carbon management system present – about 22% of European companies are now rated Intermediate, compared to 16% in Northern America. A couple of interrelated forces are coming together to compel action among European businesses as investors, policymakers, and consumers urge decarbonization. A fair share is playing offense by taking proactive steps to develop a comprehensive GHG management system, yet doing so is more intricate in some geographies than others, given that not all countries share the same endowments of natural, physical, technological, and human capital.

Given their long-term focus and countries’ resources, the Nordics are well-positioned to capitalize on the growing push for decarbonization, and some companies in the area have established themselves as Leaders in the effort. Denmark, Finland, Norway, and Sweden are home to one-ninth of Europe’s Leaders. In aggregate, 2% of Nordic companies were rated as such (double the percentage of Europe as a whole), and about one-fifth was assessed as Insufficient. By contrast, in Southern European countries like Italy, Spain, or Greece, the percentage in this category shifts closer to a third of a country’s total. In the Czech Republic and Romania, almost half of the local networks are represented by companies rated as Insufficient, and only a handful are in the top maturity categories.

Moving up the maturity ladder depends on companies demonstrating progress in everything from reporting on all three emissions scopes to deploying incentives to bringing partners along and meaningful investments in renewables and green energy. Yet turning ambition into reality is undeniably challenging: Consider that almost nine-tenths of Northern American and European companies (in regions with a fair level of maturity) don’t have Scope 1 and Scope 2 reduction targets, even though these emissions are most controllable and addressable, compared to Scope 3 categories. Outside these outliers, even far fewer companies target their Scope 1 and Scope 2 inventories – for example, only 4% of the Latin American & Caribbean network have set related targets. The bulk of Scope 3 is universally viewed with trepidation. The point is that even target-setting is in nascent stages, so setting achievable emissions-reduction targets is a measure of progress.

Setting targets provides a framework for action, helps bolster internal efforts, and sends important signals to stakeholders. In B2B situations, buyers are increasingly assertive about reduction expectations. Pragmatic suppliers will know how to cement their commitment and show that decarbonization is happening. We see a growing number of companies that have set at least one GHG emissions target, now 20% of all with a carbon maturity rating. However, we also see a divergence in how many companies from different countries have at least one commitment. 45% of Norwegian and Irish companies reported having set at least one target – the highest percentage globally, and double the share of countries like France and Germany.

Moving well-thought-out targets from ambition to action means very little if companies lack an informed workforce or if they don’t engage the wider ecosystem of suppliers and peers to achieve the speed and scale needed – a successful transition requires investments in people, processes, and capabilities. To stay on track, companies must set up governance and performance strategies with clear data systems that provide ready and transparent access to all critical metrics.

Already, 22% of EcoVadis-assessed companies have GHG monitoring systems, and around 18% publicly disclose their emissions. 12% of companies have their GHG reports verified by a third party. That of course depends on where a company sits. If you operate in a heavily regulated location with carbon-pricing mechanisms, you’re probably already there. If you’re present in countries where carbon-related instruments are only starting to emerge, you may feel like you may have more time to plan and engage your organization.

Even in locations with low exposure to carbon-related regulations, implementing decarbonization measures can create an advantage relative to competitors: Companies that act early – before the moves become mandatory – can boost their odds of success by building capacity for the long term. Your wider ecosystem – customers, suppliers, and peers – might be already managing the difficult task of carbon transition and building greener businesses. They might be expecting the engagement of their trading partners to reduce their overall value chain carbon footprint. If alignment is lacking up front, it will be difficult to move swiftly when a critical opportunity arises.

As typical for any major transformation, different forces bring the system to a tipping point at which change rapidly accelerates. Emboldened regulators are already making moves to encourage decarbonization either by requiring greater emissions disclosure or by pricing carbon. The EU plans to introduce a Carbon Border Adjustment Mechanism that will tax carbon-intensive products imported into the bloc’s countries. Meanwhile, the US Securities and Exchange Commission and the European Commission, via its proposed Corporate Sustainability Reporting Directive (CSRD), are working on mandatory reporting standards for carbon footprints and material climate risks. CSRD will require companies operating in the EU with more than 500 employees – and certain financial criteria – to report on emissions across all scopes (including their supply chain emissions) for fiscal year 2024. This law will impact over 10,000 companies worldwide with subsidiaries in the EU and, indirectly, many international suppliers of EU-based companies that will be expected to provide emissions data. A growing number of businesses need to build the caliber of GHG reporting system that these regulations and others will require.

If you’re a buyer, you’re likely to develop a sensing system to ensure timely intelligence on key triggers, so that you can make smart, careful bets that advance your carbon goals instead of derailing them. You’re sure to investigate how your value chain ecosystem affects your carbon commitments or strategy and set principles on where to direct partnership efforts. That said, could suppliers in certain geographies be setting themselves up to be more competitive when it comes to climate? We argue “yes,” based on the calculus that companies in some countries have achieved above-average values on some carbon-related metrics. (See illustration below).

Of course, some of this is driven by increasing regulatory and reporting requirements and incentive schemes to deploy decarbonization at scale. However, some locations are already competitive even without government backing or a price on carbon emissions. Companies there understand that going green is about more than compliance – it’s about value-creation and carving out an advantage: Energy efficiency and upskilling the workforce – those pay back in almost any environment. Tracking the carbon footprint of your offerings, ideally down to the individual product level, allows you to commercialize low-carbon solutions.

Given the value to be gained or lost, decarbonization is going beyond a license to operate to a strategic business lever. The acceleration of pressure on companies to give more weight to climate considerations determines it. Assume we get to net zero by 2050. What role did your business play in getting there? Were you instrumental in bringing about the required carbon emissions reduction? Only clear and visible moves will put a company on the decarbonization map in the eyes of stakeholders.

About the Author

EcoVadis EN

EcoVadis is a purpose-driven company whose mission is to provide the world's most trusted business sustainability ratings. Businesses of all sizes rely on EcoVadis’ expert intelligence and evidence-based ratings to manage risk and compliance, drive decarbonization, and improve the sustainability performance of their business and value chain. Its AI-powered risk mapping, actionable scorecards, benchmarks, carbon action tools, and insights guide a resilience and improvement journey for environmental, social and ethical practices across 200 industry categories and 175 countries.

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