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Procurement's responsibility extends far beyond mere cost control. Compliance with legal requirements such as the Supply Chain Act forces companies to make their supply chains not only cost-efficient but also sustainable. Particularly with regard to reducing Scope 3 emissions that arise in a company's supply chain, procurement plays a key role. In many industries, these indirect emissions account for up to 90% of total CO2 emissions. Effective supplier management and the targeted use of sustainability criteria when selecting suppliers are essential to meeting this challenge. To determine the true carbon footprint of their products and achieve improvements, companies must therefore create comprehensive transparency.
At the same time, increasing regulation, such as the European Supply Chain Act, is creating new hurdles for businesses. This not only requires compliance with human rights, but also consideration of climate protection along the entire supply chain. Companies that fail to adapt to these changes at an early stage risk not only sanctions but also reputational damage. Sustainability in procurement is thus becoming a strategic necessity that helps companies ensure their long-term competitiveness.
From selecting the right suppliers to implementing sustainability criteria and reducing risks in the global supply chain – purchasing is at the centre of the sustainability transformation. This article explains why the PCF must be integrated into the purchasing process as a new criterion.
Procurement, PCF and Procurement Maturity
The growing importance of the product carbon footprint underlines the fact that procurement must continue to develop in order to make more sustainable decisions. This is where procurement maturity comes into play. There are different maturity levels that define progress in procurement. While companies at the lower levels still act in a highly tactical and operational manner, more mature organisations develop into strategic partners that actively integrate CO2 data into their procurement decisions.
Mature businesses pursue a product group strategy that takes into account not only costs but also sustainability. Here, PCF data is actively used to integrate the carbon footprint into the procurement processes. This makes it possible to consider not only the price but also the carbon footprint when selecting suppliers – to ensure that both expenses and emissions are reduced. The most advanced systems can determine and monitor the carbon footprint of the supply chain and make data-based decisions that lead to a long-term reduction in greenhouse gas emissions. At the same time, extremely accurate forecasts deliver maximum sustainability and cost-effectiveness, as storage, pre-production and unsold products are virtually eliminated.
McKinsey (“Sustainability: Don't get left in the dust”) also highlights the increasing integration of digital tools and AI-based data analysis to reduce CO2 emissions along the entire value chain. High-performance teams use data platforms to achieve emissions targets while ensuring security of supply through supplier diversification. By incorporating sustainability targets into purchasing decisions, these companies can significantly improve their carbon footprint and focus on long-term partnerships with low-emission suppliers.
Supplier Management and Green Procurement
As we mentioned at the beginning, supplier management is THE critical aspect of modern procurement in terms of sustainability. Some also say that supplier management is the leading tool in decarbonisation. The guide to sustainable supply chain management published by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMUV) as early as the beginning of 2017 showed that a large proportion of environmental pollution does not occur at the company's own site, but in the complex global supply chains. In other words, Scope 3 emissions. Beyond optimising costs, it is therefore important to ensure that suppliers meet the requirements for environmentally friendly and socially just production.
Companies that have already implemented an environmental management system such as EMAS or ISO 14001 can use these standards to make their supply chains sustainable as well. It starts with selecting suppliers that use low-emission production processes or materials that have been obtained in an environmentally friendly way. The guide also emphasises that small and medium-sized companies in particular should build on their existing processes in order to gradually integrate sustainable supply chain management practices.
PwC adds that procurement is acting as a driver of decarbonisation. Companies are encouraged to apply strict environmental criteria when selecting suppliers and to regularly monitor compliance with these criteria. PwC also emphasises that this applies in particular to Scope 3 emissions – the indirect emissions that arise along the entire value chain. Sustainable supplier management can help to reduce these emissions and improve the carbon footprint of the entire company. Organisations are encouraged to work closely with suppliers to identify potential and to find – and implement – innovative, environmentally friendly solutions. Concrete steps include sharing PCF and CCF data and possible ideas and solutions for how suppliers can reduce these values or generally produce more sustainably.
To do this, risks and opportunities related to sustainability must also be identified and prioritised. The first step is to systematically assess suppliers' sustainability performance and, if necessary, take measures to improve their environmental performance. Companies can use the standards and certifications mentioned above or others (ISO 14064, ISO 14067) to ensure compliance with environmental and social standards in their supply chain. Businesses that integrate their suppliers into their sustainability goals improve their own environmental performance in the long term and strengthen the trust of all stakeholders.
Supply Chain Visibility
What's more, well-structured supplier management not only minimises risks, but also offers opportunities to improve supply chain visibility. By using modern technologies and data-based approaches, companies can monitor their suppliers' performance in real time and ensure that sustainability goals are met. Closely integrating suppliers into the procurement process not only helps to ensure that sustainability measures are implemented more efficiently, but also inevitably increases transparency while reducing risk. Supply chain transparency is a prominent topic when it comes to sustainable supplier evaluation and supply chain risks – we will now look at these areas in more detail.
Sustainable Supplier Evaluation and Supply Chain Visibility
As we now know, sustainability aspects are firmly anchored in supplier evaluation today. A sustainable supplier evaluation includes ecological, social and ethical criteria that enable companies to compare the CO2 footprint of their suppliers and thus promote sustainability throughout the entire supply chain. By using technologies such as AI, in particular to calculate product carbon footprints, and supply chain visibility tools, companies can monitor the sustainability of their suppliers and improve the efficiency of their supply chain as a whole.
Companies are responsible for ensuring that their suppliers comply with minimum legal standards and that they are equally active in taking measures to minimise their environmental impact. In addition to reducing greenhouse gas emissions, this also involves the responsible use of resources and respect for human rights. Concrete measures that can be taken into account in the assessment include the use of renewable energies in production, waste avoidance and ensuring fair working conditions.
Solutions like pacemaker's Carbon Intelligence access industry-specific databases for emission factors and suppliers and can thus provide more accurate data for different industry sectors and product categories instead of general averages. This makes it possible to calculate CO2 emissions and the carbon footprint of individual products precisely.
Another important aspect, also in terms of sustainable supplier evaluation, is supply chain visibility. This refers to the ability to monitor all stages of the supply chain (in real time). Supply chains are designed using modern technologies to make them more efficient and sustainable at the same time. One example is the use of digital platforms for supplier evaluation – companies can use these to identify potential risks at an early stage and react immediately. The pandemic in particular has prepared us for such cases. Thanks to such evaluation systems and supply chain visibility, we are able to react immediately to disruptions in the supply chain and activate alternative suppliers before supply bottlenecks occur. However, there is one prerequisite for the desired end-to-end transparency on the part of the company: strong data management.
Risk Management in a Global Supply Chain
Speaking of risks and disruptions – as we now know, global supply chains pose numerous challenges – risk management is therefore of the utmost importance. Because a large proportion of CO2 emissions occur in the supply chain, it is important to identify and minimise risks at an early stage – especially if organisations want to improve their product carbon footprint.
One of the main factors that helps to reduce risk is the aforementioned supply chain visibility. Alongside artificial intelligence forecasts (demand planning, demand forecasting), technologies such as IoT and GPS tracking also help to identify disruptions, delays or stock shortages at an early stage, enabling proactive action. The dynamics of globalised markets have become too complex to predict without machine learning – the good news, however, is that much less data is needed than is commonly assumed. Even with the small amounts of data from the last two years, the improvement from manual calculation to machine learning algorithms has been significant.
Other advanced technologies, such as digital twins and AI-supported scenario analyses, make it possible to identify risks precisely and take preventive action. Companies can use simulated scenarios to assess various risks and analyse the effects of potential supply chain disruptions before they actually occur. This also makes the supply chain more resilient and sustainable.
Failure to comply with ESG standards poses a further risk. Many companies struggle to monitor their suppliers' ESG standards. With research showing that up to 65% of companies lack sufficient information on compliance with these standards, this can lead to significant legal and reputational risks. To counter these risks, AI tools and data-driven analytics can help to keep ESG risks manageable and to respond to violations in a timely manner.
As we discuss in our paper, ‘AI, Carbon Dioxide and the Trillion-Dollar Promise’, AI can help us in three areas: monitoring, predicting and reducing emissions. By accurately predicting the availability of goods, energy consumption and carbon footprints, emissions can be monitored, ultimately making the supply chain more sustainable. This not only reduces supply chain risks, but also improves the much-vaunted transparency and efficiency of the supply chain.
ESG-compliant Procurement and ESG Finance
Let's stay in the area of ESG. Due to the growing importance of ESG criteria, procurement processes must be sustainable and socially responsible. The rising CO2 price, as analysed by the Cologne Institute for Economic Research (IW Köln), is leading to significant cost increases in industry. Energy-intensive sectors in particular are feeling the strain. One specific example is the cement industry, which has to pay considerably more for CO2 certificates due to high emissions. These additional costs force companies to reduce their emissions in order to remain competitive. But there are even more monetary incentives.
As we now know, ESG-compliant procurement means firmly integrating environmental and social standards into the procurement process. This is because ESG-compliant procurement helps to ensure compliance with legal requirements such as the Supply Chain Act. Companies are obliged to identify and minimise human rights and environmental risks in their supply chain.
Wolters Kluwer also emphasises that companies that comply with ESG criteria have access to better financing conditions. Green financing, such as green bonds or sustainable loans, is increasingly being offered by banks to support environmentally friendly projects. For example, an automotive manufacturer was able to obtain a green loan at more favourable conditions by introducing a sustainable purchasing process, as it was able to demonstrate that it had reduced its CO2 emissions along the supply chain.
The integration of ESG criteria into procurement also leads to greater customer and business partner loyalty. Consumers are increasingly paying attention to the sustainability of products and rewarding companies that act transparently and responsibly. One example is a fashion company that provides its customers with detailed information about the sustainability of its products. By disclosing the CO2 emissions of each garment, the company was able to gain the trust of its customers and strengthen its market position.
ESG finance is another important aspect. Investor groups and financial institutions are increasingly taking ESG factors into account in their decisions. Companies that operate sustainably gain better access to capital. For example, an energy company received a significant investment from a fund that invests exclusively in sustainable projects. The prerequisite was a demonstrably ESG-compliant procurement process and a clear strategy for reducing the carbon footprint.
Conclusion
The introduction of the Product Carbon Footprint in procurement requires a paradigm shift: suppliers must be evaluated not only on the basis of price and quality, but also according to their contribution to CO2 reduction. Digital technologies support this process, by providing insights into the supply chain, making emissions measurable and thus helping to make critical decisions. By introducing the PCF into the procurement process, companies can not only operate more sustainably but also reduce their costs by promoting energy efficiency and resource conservation. Sustainability is thus becoming a key success factor in procurement, with the Product Carbon Footprint being integrated as a new criterion and benchmark.