The trend towards net zero and energy transition is accelerating. Large corporates are leading the charge in the UK, but the pain is being passed down the supply chain to smaller companies. Failure to adapt could leave businesses lagging behind, says Stuart Preston.

The UNFCCC Race to Zero campaign is a UN-backed global push towards net zero carbon dioxide emissions. At the time of writing, a total of 4,466 companies have committed to the Race to Zero, effectively promising to halve carbon emissions by 2030. Over half of these (2,329) are based in the UK, including c.50% of the FTSE 100.

The Race to Zero signatories are essentially committing to reducing their own carbon emissions, and those of their supply chain, to zero within the next 10-20 years. This trend is reflected in large corporates globally and, with the United Nations Climate Change Conference (COP26) imminent and an increasing focus on energy transition, the number of net zero commitments is accelerating by the week.

The simple fact is, businesses that fail to embrace energy transition now are likely to fall behind their competitors and be faced with an uphill struggle in years to come.

Furthermore, a significant proportion of the supply chain of these larger corporates sits within the SME market. Owners and directors of these SMEs will be forced to consider net zero commitments of their own.

Passing the pain down the supply chain

Energy transition will have a varying impact across the supply chain in any given sector. Companies that are forward-thinking and open to reworking their business plans will have an opportunity to thrive while contributing to the push towards net zero. Those that are less agile may face challenges that could become insurmountable.

While collaboration from top to bottom of any supply chain is seen by many as the key to achieving net zero, the reality is that only some will be willing or able to work together in this way.

With disparity across the supply chain, challenges start to creep in. There may be extra pressure for supply chain operators who are fighting off other live and pressing concerns, or for whom management capacity to address net zero matters will be less than ideal.

Supply chains with the most emissions

The World Economic Forum notes in its report: 'Net-Zero Challenge: The supply chain opportunity' that eight supply chains make up more than 50% of global carbon emissions. These are food, construction, fashion, FMCG, electronics, automotive, professional services and freight. So, it is no surprise that the vast majority of supply chain emissions are embedded in industrial and machinery inputs.

The two largest contributors are food and construction – with supply chains that run deep across their sector and into other related areas such as manufacturing.

Food

For many within the food supply chain, Brexit and COVID-19 have caused varying degrees of damage. Now they face another longer-term challenge. As food retailers strive for net zero, there is an expectation that suppliers will do the same. But this is no mean feat when you consider the nature of the inputs, such as fertiliser, fuel emissions and livestock.

The National Farmers' Union (NFU) may have set a 2040 net zero target, but there are many within the sector that may not have the means, or the appetite, to do so.

Construction

Barratt Homes has committed to net zero by 2040 – the first major housebuilder to do so. Cruden Homes recently announced a deal with ScottishPower for the supply of 100% clean energy, and is also working with it to develop a number of other zero-carbon initiatives.

The sector is moving in the right direction but, inevitably, not all are moving at the same pace.

And what will the impact be on suppliers of concrete, steel and other raw materials? Or the suppliers of heavy plant machinery? These businesses will likely require significant capital expenditure to decarbonise their products or refresh their fleet.

Net zero push adds pressure on manufacturers

There are knock-on implications also for manufacturers of the machinery that serves the agriculture and construction sectors, and other high emission sectors. They and their suppliers will need to replace existing high-carbon machines with low-carbon alternatives.

Will these be powered by clean energy sources or by electric power sources? Either way, these businesses will need to source alternative raw materials, amend manufacturing processes, restock spare parts and reconsider after-sales services.

This is illustrative of just some of the challenges that could be in wait. Change is, inevitably, coming across all sectors in the push to reduce emissions and meet targets. Making an early move towards net zero is important to maintain a competitive edge. But that can only happen with a robust plan in place. Businesses will need to identify and address the financial needs and consequences of adopting an early mover position.

They will also need to ensure that the ability to trade competitively in the short term, with sufficient cash reserves, is not lost in the process. And they need to be aware of the pressures likely to be coming their way from the rest of their supply chain.

For more guidance on these issues, get in touch with Stuart Preston.

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