This article first appeared in Forum, The Edge Malaysia Weekly on February 8, 2021 - February 14, 2021
Global supply chains are a major driver of trade, investment and growth in Southeast Asia. Yet, there is a growing recognition of the need to reduce the carbon emissions of supply chains. This race to net-zero offers an opportunity, not a sacrifice, for Malaysia and its regional partners.
The Net-Zero Challenge: The Supply Chain Opportunity report, presented by the World Economic Forum (WEF) and Boston Consulting Group (BCG) in Davos recently, reveals that tackling supply-chain emissions can transform the global fight against climate change. It explores the top eight global supply chains, which together account for more than 50% of global greenhouse gas (GHG) emissions. The report shows that end-to-end decarbonisation of these supply chains would add as little as 1% to 4% to end-consumer costs in the medium term by introducing key levers that can be easily and affordably deployed today.
Driving net-zero transformation in supply chains is a valuable opportunity in Malaysia. There is growing evidence of consumer willingness to pay for sustainable products, with 73% of global consumers expressing a willingness to change consumption habits to reduce environmental impacts. This sentiment is evidenced in market changes, with demand for sustainably marketed products growing seven times faster than contemporary counterparts over the last five years. Embracing a net-zero supply chain promise could unlock lucrative new markets for Malaysian products and services.
A net-zero future
2021 is a year that offers a new chance for change, with the vital 2021 UN Climate Change Conference (COP26) scheduled for November.
Our combined efforts to defeat the Covid-19 pandemic have already revealed how extreme interventions can be delivered to overcome global challenges. As we look towards the potential impact of a 2°C global warming pathway, deeper actions will be needed.
The UK, EU, South Korea and Japan have all pledged to net-zero emissions by 2050. The world’s two largest emitters — China and the US — have committed to net-zero emissions no later than 2060 and 2050 respectively. These net-zero ambitions now cover nations whose aggregated trade impacts exceed half of Asean’s total trade value.
2020 also accelerated existing supply-chain shifts as Covid-19 highlighted the risks of single-supplier business models. Disruptions in major manufacturing markets like China triggered growing interest in expanded manufacturing opportunities in Southeast Asia.
Customer-facing companies have a big part to play in this transition. Tackling company supply chains will reduce emissions by a magnitude far greater than direct operational impacts. Nestle’s supply-chain emissions, for example, are 10 times higher than direct operations. Tackling emissions in supply chains is critical to reduce end-to-end GHG emissions at limited additional cost.
Embracing greener supply chains
Analysis shows that China, the EU and US together account for almost three-quarters of Southeast Asia’s global CO export flows. The evidence reveals mature and maturing markets are increasingly outsourcing their carbon burden to production hubs such as Southeast Asia (see infographic).
The report highlights eight supply chains — food, construction, fast-moving consumer goods (FMCG), electronics, automotive, professional services, fashion and freight — that account for more than half of global GHG emissions.
Malaysia is a notable participant in many of these supply chains. Our consumer electronics sector is worth US$65.5 billion, with 75% of that attributable to components, including semiconductors. Chemicals is another major area, worth US$23.8 billion in exports and contributing to supply chains such as FMCG. Agribusiness exports totalled US$13.36 billion, contributing to a food supply chain that accounts for almost a quarter of global emissions.
Metal exports were worth US$16.08 billion and contribute to supply chains in areas like automotive, electronics and construction. Automotive production in Malaysia is a particular area of global supply chains to address, with the carbon intensity of operations generating 846 tonnes of CO per US$1 million in export value, against a global industry average of 389 tonnes of CO per US$1 million.
More than 80% of global end-product emissions for customer-facing companies in construction, food, automotive and fashion, and 77% in electronics, are attributable to supply-chain emissions, known as Scope 3 emissions. (See graphic)
The WEF-BCG report estimates that 40% of all emissions in these supply chains could be abated with readily available and affordable levers at a cost of just US$10 per tonne of CO equivalent, using mechanisms such as circularity and increased use of recycled materials, material and process efficiency improvements and increased adoption of renewable power and heat. Interventions that reduced supply-chain emissions to zero would result in just 1% to 4% increase in end-consumer costs in the medium term.
Despite this opportunity, the truth is that decarbonising supply chains is challenging. Even the most experienced companies struggle to access and act upon the right data, particularly in fragmented supply-chain landscapes. This can be a major challenge in sectors such as palm oil, with Malaysia home to over 650,000 smallholders.
Companies looking to tackle end-to-end emissions must recognise and adopt the right measures to reduce supply-chain impacts. The report sets out nine major actions CEOs can address:
1. Build a comprehensive emissions baseline, gradually filled with actual supplier data;
2. Set ambitious and holistic reduction targets, and publicly report progress;
3. Revisit product design choices for sustainability;
4. Design a sustainable value chain and geographic sourcing strategy;
5.Set and track ambitious procurement standards;
6. Work jointly with suppliers to address their emissions;
7. Engage in sector-specific initiatives with peers to maximise impact and level the playing field;
8. Leverage scale through “buying groups” to lower the cost of green solutions; and
9. Develop internal governance mechanisms to align the incentives of decision-makers with emission targets.
Malaysian companies have a chance to drive positive change on supply-chain emissions, and potentially unlock lucrative new economic opportunities.
Working with suppliers to address emissions will be a vital part of this regional journey for many companies, ensuring that customer-facing businesses can cushion the cost of interventions for low-margin industries in a region where pricing concerns will be a major factor in the direction of travel.
Decarbonising supply chains could revolutionise corporate climate action while positively boosting market access to both mature and emerging markets. Addressing supply-chain emissions will be fundamental for companies in the journey to realise credible climate change commitments.
Dave Sivaprasad is managing director, partner and SEA leader for climate action at Boston Consulting Group (BCG). Anis Mohd Nor is project leader at BCG.
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