Supply Chain Traceability as a Climate Imperative

16 min read December 13, 2022
Domain Insights

This article is part of BCV’s ongoing work in climate tech, led by Aaref Hilaly and Sarah Hinkfuss. More on our climate tech efforts and priorities here.

Supply chain functionality is mission-critical to business operations and is the source of $1.85 trillion dollars of annual spend in the US alone.1  At BCV, we have long been excited about tools that enable companies to measure, manage, and optimize their supply chain.  Given the centrality of supply chain to business success, we believe there is a clear, outsized value proposition for supply chain solutions – since 2004, we have invested in a range of supply chain innovators, including Kiva Systems, OneraFourKitesShipBobVentionLightSourceCofactr, and TruckSmarter

In recent years, rapid adoption of cloud software has created new opportunities to leverage technology between supply chain partners, while labor shortages have given rise to increased urgency around automation.  Geopolitical and COVID-related disruptions have also heightened our collective awareness of the importance of a resilient, well-functioning supply chain. 

In addition to these already-compelling tailwinds, our growing recognition of supply chain’s centrality to climate efforts has supercharged our conviction around the space.  We see supply chain traceability becoming a climate imperative, as a combination of consumer pressure, regulatory requirements, corporate sustainability commitments, and increased natural disaster risk necessarily merge climate and supply chain technology considerations.

We view supply chain traceability as immediately critical to climate efforts, and are excited about the innovative solutions that are emerging to enable businesses to incorporate sustainability into their efforts to drive supply chain efficiency.

Level-setting: What are supply chain transparency and traceability tools?

Supply chain transparency and traceability tools are software solutions that provide real-time insight into the components and players at each step of a company’s supply chain.  Tracking these steps enables a company to understand factors that vary across the supply chain, including pricing, vendor quality, compliance, cybersecurity, extreme weather, geopolitical risk, and climate impact.

While both supply chain transparency and traceability tools equip companies with a stronger understanding of their supply chain, there are nuances between the two categories of solutions.  Transparency is a broader term, and refers to high-level mapping of the overall supply chain, with visibility into basic data at each stage.  Transparency solutions help companies identify all components and suppliers in their network, and provide key information, such as facility locations, at the level of detail required for internal and external communications.  Traceability is the process of tracking products and materials throughout their entire supply chain journey; it is more granular than transparency, and enables component-level understanding of each supply chain input, from origin to disposal.

Both categories of tools are valuable as they empower companies to identify and evaluate their supply chain counterparties, enabling more strategic decision-making and risk management.  Given the opacity and complexity of modern supply chains, however, we are most excited about traceability solutions.  We believe that deeper, more granular data is hugely beneficial, allowing companies to better uncover and address vulnerabilities and inefficiencies.  Here, we’ll focus on the subset of traceability solutions that enable companies to manage climate impact as part of their supply chain strategy.

What is the relevance of supply chain traceability to climate impact measurement?

Greenhouse gas emissions are classified into three scopes:

  • Scope 1 emissions are direct emissions from sources that a company owns or controls
  • Scope 2 emissions are indirect emissions from the generation of purchased energy
  • Scope 3 emissions encompass all indirect emissions that occur in a company’s supply chain. 

Scope 3 accounts for 80-90% of greenhouse gas emissions associated with most products,2 and across industries comprises on average 75% of companies’ total emissions.3 Measurement of corporate climate impact therefore requires measurement of supply chain emissions, since they comprise the bulk of overall impact.  In this context, traceability tools are critical.  To comprehensively measure and manage supply chain emissions, companies need the minute, end-to-end, component-level detail that traceability tools provide. 

Why is supply chain traceability an immediate imperative?

The potential value proposition for supply chain traceability solutions – to help teams manage costs and avoid a variety of potential business disruptions – is not new, but climate considerations have created urgency in the demand for these tools.  From our perspective, four key tailwinds make supply chain traceability critical today:

  1. Consumer pressure: Consumers are increasingly incorporating – or, at least, seeking to incorporate – social impact into their purchasing decisions.  In scale surveys, 80% of US consumers say they are more likely to buy from a company that stands up for environmental causes,4 while over 90% of retail consumers indicate that retailers continuing their efforts toward sustainable operations is important to them.5  In tandem, consumers are demanding higher levels of disclosure from brands around sustainability: 80% of global consumers believe brands must be transparent about their environmental impact.6 Business buyers are similarly scrupulous, with 74% ranking sustainability as at least 8/10 on a scale of importance when making technology buying decisions.7 

    Companies who fail to meet customer expectations with regards to supply chain increasingly experience strong blowback, as evidenced by protests and criticism against ESG impact and workforce conditions at companies including Nike, Amazon, Ikea, Apple, and Unilever.  In communicating climate impact to consumers, businesses must ground their efforts in facts to avoid criticism of greenwashing – H&M, for instance, is currently facing multiple lawsuits for allegedly making misleading claims around sustainability.

    In sum, companies must not only work towards sustainability, but also measure and communicate this progress to consumers in order to meet consumers’ growing appetite to buy from more conscientious sources.

  2. Regulatory demands: A global tide of regulation around supply chain transparency and disclosure is another force driving demand for supply chain traceability. 

    Recent and upcoming legislation in Europe makes material demands of companies with regards to supply chain traceability.  In 2017, France’s Corporate Duty of Vigilance Law required all large French companies to publish an annual “vigilance plan” in which they identify and create a plan to mitigate any human rights or environmental impacts arising from their own activities and activities throughout their value chain.  More recently, France’s Climate and Resilience Law, passed in 2021 and expected to go into effect in 2023, includes an article requiring environmental labelling for many categories of products.  Elsewhere in Europe, Germany’s Supply Chain Due Diligence Act, which goes into effect January 2023, will require companies to identify and evaluate possible human rights and environmental risk in their supply chain. 

    In February 2022, the European Commission adopted a proposal for a Corporate Sustainability Due Diligence Directive (CSDD), which would extend similar requirements throughout the EU.  A second proposal, the EU Corporate Sustainability Reporting Directive (CSRD), adopted by the European Parliament in November 2022, would require large companies to make regular, public disclosures around ESG impact.  Additional legislation – both current and planned – creates specific traceability requirements for products such as batteries, construction products, packaging, textiles, minerals, and vehicles in the EU.

    The EU has also sought to influence both businesses and investors through standardized guidelines.  ISO20400, an international guideline for sustainable procurement published in 2017, has brought attention and rigor to evaluation of procurement practices.  The EU Sustainable Finance Taxonomy, first published in 2021, provides standardized criteria that a business activity must fulfill to qualify as sustainable.  In practice, the taxonomy acts both as framework for investors to assess the environmental impact of business activities, and for external audiences to assess the environmental impact of investors’ portfolios.

    Although the US has been slower to regulate supply chain transparency, the SEC’s March 2022 proposal for a rule that would mandate and standardize climate disclosures in investor reports is an early signs of regulatory momentum.  The SEC’s rule would require disclosure of Scope 1 and 2 emissions, as well as Scope 3 emissions if they are material or part of a company’s stated emissions target.  It would also mandate reporting around prospective climate impacts and risks to a company’s operations, and of related governance and risk-management processes.  In addition, the rule would require companies to provide detail on efforts to meet publicly stated environmental goals, such as net zero commitments. 

    If enacted, the SEC climate disclosure rule would be a major milestone in US environmental policy and a major accelerant for traceability solutions. In the meantime, adjacent US legislation such as the Uyghur Forced Labor Prevention Act, which requires importers to review their supply chain to ensure they are not funding forced labor, has begun to put some pressure on supply chain traceability in the US.

    In a growing number of countries, companies will need to have a clear and deep understanding of their supply chain and its environmental and social impact merely to comply with the rule of law.

  3. Corporate commitments to net zero: Net zero commitments will further accelerate demand for solutions enabling supply chain traceability.  A growing number of companies are publicly committing to carbon neutrality: today ~33% of Forbes 2000 companies (a list comprising the world’s largest publicly traded companies) have set net zero targets, compared to ~20% at the end of 2020.  Despite this proliferation of commitments, very few companies have an actual roadmap towards net zero.  Today, only 35% of companies with net zero commitments meet the basic criteria for robust net zero target setting – a specific pledge, published plan, immediate action, and regular, published progress updates.8

    Anecdotally, this gap between publicly stated intentions and organized action rings true.  Multiple supply chain software founders that I have spoken with have recounted variations on a common story heard from customers:

    A CEO of a large company goes to Davos and publicly commits to net zero by 2040, then returns home and lets his COO know about the commitment, telling the COO, “Don’t worry, we have 20 years.”  The COO, who knows that the organization’s emissions are neither readily tracked nor easily managed, is worried (and seeks solutions to help).

    As net zero commitments multiply and 2035, 2040, and 2050 approach, companies will need tools that empower them to map, measure, and action on their sustainability commitments.

  4. Challenges to supply chain resilience: External disclosure and communication pressures aside, companies are increasingly recognizing the importance of supply chain traceability to protect their day-to-day operations.  More and more businesses are impacted by the increasing incidence of natural disasters.  To quantify this, for the past 8 years the US has annually experienced at least 10 distinct extreme weather events in which damages exceed $1 billion; from 1980-2014, for comparison, there were only five years total in which the US experienced 10 or more such billion-dollar events.  In the first nine months of 2022 alone, there were 15 distinct billion-dollar weather and climate disasters in the US.9 This pattern resounds globally, and can be even more pronounced in other geographies.

    In the face of these risks, supply chain reliability is not a given.  In 2017, after Hurricanes Irma and Maria disrupted production in Puerto Rico, the US experienced shortages of saline and medications produced on the island.  More recently, a drought in Southwestern China has caused reduced production of items like electronics and car parts, whose producers rely on factories in the region.  Globally, there is a countless and growing list of similar climate-driven disruptions.

    To understand vulnerability and manage around natural disaster risk, companies must have a granular understanding of where their products come from and how components get from one point to another, all the way back to their origins.  For instance, if a hurricane were again to strike Puerto Rico, a company that recognizes that, say, 10% of its final goods are produced in vulnerable areas of the island, can react and adjust its procurement and production far more readily than a company that had not mapped its components back to their source.

    As extreme weather conditions grow increasingly prevalent due to climate change, understanding the potential impact of a given natural disaster on supply chain components and processes will become yet more important.

How can technology best meet this need?

Founders have recognized the fundamental, immediate need for technology to enable understanding, measuring, tracking, and optimizing the supply chain.  We’re excited by the innovative solutions in the space, and think that the strongest tools:

  • Take a bottoms-up approach to emissions measurement: The baseline capability that most climate-oriented traceability solutions provide is, in itself, immensely exciting.  Scope 3 data is valuable where it is actionable, and it is actionable when companies can understand their emissions hotspots and reduction opportunities at a supplier, component, and stage level. 

    Bottoms-up approaches to emissions measurement, which calculate emissions based on the supply chain and operations behind a business’s products and processes, provide this actionable, granular view; they enable companies to split out climate impact by supplier, process, product, spend category, region, and more.  While top-down emissions approaches, generally based on a company’s overall spend categories, can provide a high-level estimate of carbon emissions, they are less effective in helping companies understand their supply chains and strategically manage and reduce emissions. 

  • Prioritize accuracy & rigor in measurement: Informational accuracy is top of mind for corporate supply chain, operations, and ESG leaders when they select supply chain traceability solutions.  Large corporations will even pilot multiple traceability systems at once, and hire consultants to test disconnects in data between piloted systems to identify the most accurate performer.  Inaccurate measurement risks making efforts towards emissions management meaningless, and exposes companies to accusations of greenwashing if they make false claims based on incorrect information.  

    Strong solutions pull data from a broad range of reputable datasets and meticulously validate their classification algorithms and AI models to guarantee high quality information. Examples include Makersite, which uses its scale and automated life cycle analysis (LCA) tool to enable data accuracy, CarbonChain, which pairs activity-based and source-level data in its calculations, and subjects their validity to third-party verification, and Planet FWD, which has amassed an extensive database of agricultural LCAs across 20+ agricultural factors to accurately calculate related emissions.

  • Go deep, rather than broad:  Across industries, there are vast differences in both the nature of supply chains, and in the size, scale, and sophistication of supply chain and procurement teams. 

    To the first point, supply chain counterparties and processes vary greatly between industries, but are often similar within an industry, as similar companies use overlapping suppliers, transportation methods, and production processes.  By focusing on a vertical, supply chain traceability solutions can achieve economies of scale in their datasets and can more minutely refine their algorithms, thus achieving stronger informational accuracy more efficiently.  We’re excited about Scope 3 calculation solutions like Vaayu for retail, Foodsteps for restaurants and foodservice brands, and Pledge, which focuses on the transportation component of supply chains, that harness depth to achieve excellence. 

    To the second point, teams responsible for supply chain look significantly different and have different priorities across industry categories.  In heavy industries like industrials or manufacturing, supply chain teams are large and sophisticated, so prioritize comprehensive systems with best-in-class data, and can invest in set up and integration between best-of-breed point solutions.  In industries like retail, supply chain teams are likely somewhat smaller, and might value traceability tools that are more user-friendly and provide a communications element, such as a QR code, due to their customer-facing nature.  Other industries have highly specific priorities, such as the food industry, where traceability solutions often provide food quality tracing features. 

    Not only can vertical focus enable supply chain traceability providers to achieve high data accuracy more quickly, it allows them to better tailor features and user experience to the preferences of their customer base.

  • Facilitate collaboration between counterparties:  Companies generally act upon Scope 3 data by working with existing supply chain partners to reduce emissions, rather than by actually switching suppliers.  A corporate supply chain leader I spoke with likened the pain of swapping out a vendor to “giving birth to an elephant,” given the cost and operational repercussions.  As a result, effective solutions facilitate collaboration across the supply chain. 

    At a baseline, supply chain traceability solutions can enable cooperative efforts by offering easy, open integrations, so that suppliers’ own emissions measurement or traceability solutions can communicate with those of their buyer.  We’re yet more excited by solutions that take this a step further, actively partnering with suppliers to support purchaser goals.  Contingent, for instance, onboards suppliers onto a purchaser’s own platform and offers them training materials and guidance for emissions reduction to meet the purchaser’s goals.  Likewise, Sourcemap generates network effects in its data by encouraging buyers to invite suppliers onto their platform; these suppliers enrich the platform with data and, in turn, invite their own suppliers onto Sourcemap, creating a virtuous cycle.

  • Enable an integrated perspective on supply chain optimization:  Supply chain decision makers cannot realistically make decisions around Scope 3 in isolation.  Anecdotally, sustainability generally ranks within the top five to ten considerations in supply chain decisions, but is rarely afforded the luxury of being the top criteria, at a minimum falling behind cost and resilience.

    As a result, we are excited about tools that function as platforms, providing a wholistic perspective on the supply chain that treats sustainability as a vector in an effective management plan, rather than solutions which are effectively features, positioning ESG as a separate- or novelty- consideration. Prewave’s 360-degree approach to supply chain intelligence and supplier scoring is an exciting tool to enable comprehensive supply chain analysis, while Eivee’s dual strategic and sustainable procurement offerings are an interesting out-of-the-box example of enabling integrated decision making.

Acceleration in this space is just beginning, and we’re excited to see how the list above will grow and evolve over the coming months and years.  If you have opinions on the space, or if you’re a founder taking a novel approach to Scope 3, we would love to connect.

Abby Meyers is an Associate focused on growth-stage application software and fintech companies.


Sources:

  1. Council of Supply Chain Management Professionals, 33rd Annual State of Logistics Report
  2. McKinsey & Company, Buying into a More Sustainable Value Chain
  3. Carbon Disclosure Project (CDP), CDP Technical Note: Relevance of Scope 3 Categories by Sector
  4. PWC, Beyond Compliance: Consumers and Employees want Business to do more on ESG (2021, n=5,005)
  5. Sensormatic Solutions, The Era of Sustainable Retail (n=1,000)
  6. EY, The CEO Imperative: Make Sustainability Accessible to the Consumer (n=14,047)
  7. IDC, Global Environmental, Social, and Governance (ESG) Business Services Buyer Value Survey (n=1,015)
  8. Net Zero Tracker, Net Zero Stocktake 2022
  9. NOAA, Billion-Dollar Weather and Climate Disasters

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