The Darkside of the Limelight: Sustainable Supply Chains and Reputational Resilience
Firms’ disclosures about supply chain emissions can often be wielded against them, causing reputational harm
Disclosing short-term carbon emissions information contextualized with long-term corporate sustainability efforts can increase reputational resilience
Climate change is a pressing issue for business leaders. Factors such as changing consumer behavior, the rise of sustainability as a strategic differentiator, activist investing, and the 2015 Paris Agreement have created a confluence of pressure to reduce carbon emissions. Coupled with political gridlock that minimizes government action, calls for corporate leadership in the carbon emissions space continue to amplify1.
How are firms responding? Many seek to better understand the main drivers of carbon emissions using formal methodologies like Life Cycle Assessment (LCA). LCA is a tool that can help uncover opportunities to improve environmental performance in the sourcing-production-distribution process. For most firms, the largest source of emissions is their supply chain, with up to 74%2 of a company’s entire carbon footprint being classified as Scope 3. In other words, for most companies, within the supply chain resides the greatest opportunity for emissions reductions.
What firms do to reduce supply chain emissions is important. For instance, strengthening supplier relationships, improving energy efficiency, and implementing transportation best practices can help mitigate emissions. But how firms communicate their emissions reduction efforts may be just as important.
About 90% of US companies now produce annual corporate responsibility reports, up from 20% in 20113. These reports place firms’ sustainability goals, efforts, and results achieved in the reporting year firmly in the spotlight. These documents are scoured by various stakeholders including investors, regulators, and even the media. In fact, given the prevalence of digital and social media in today’s 24/7 news cycle, they can often be a news source in the mass media.
The disclosures companies make on climate issues in these reports can easily be wielded against them. For example, a supply chain executive at a Fortune 50 company with whom I recently spoke opined on how disclosing emissions goals can be a double-edged sword. If a company doesn’t state an emissions reduction goal, such as becoming carbon neutral by 2040, then the firm can be portrayed as being not environmentally responsible. If the company does state a goal but perhaps hasn’t gained the capability to reach the goals yet because either the technology doesn’t exist or is under development, then they can be portrayed as talking the talk, but not walking the walk. In fact, this very outcome recently happened to a major global logistics firm, as an executive from that organization recently informed me. This company has been a sustainability leader in its industry since the early 2000s yet only a tiny portion of its emission reduction efforts were acknowledged by a nonprofit organization in its recent study evaluating the integrity of emissions disclosures, despite it being publicly available information.
These are some of the risks of being transparent about supply chain emissions. The information a company discloses out of a desire to demonstrate responsible corporate citizenship can sometimes be turned back on it, damaging the firm’s reputation. So, how can a firm balance transparency and environmental disclosures with protecting its reputation?
One way is to develop “reputational resilience” by highlighting long-term sustainability performance and efforts alongside short-term disclosures. Just like a good leader helps their teams understand the big picture and how their efforts fit into that big picture, disclosing supply chain emissions information in the context of the historical sustainability picture (as long as it shows a history of good responsibility) can help weather negative short-term news coverage. In other words, adopting a long-term view of supply chain sustainability is key to developing reputational resilience.
A reputational resilience capability will become even more imperative in the future as the SEC will require more carbon emissions disclosures of publicly traded organizations in the US4. Firms would do well to remember that as the spotlight shines on them, the size of the shadow cast can be reduced by having a long-term perspective on sustainability.
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