Accelerating Supply Chain Decarbonization

Moving beyond transparency to concrete emissions reduction ensures that emissions insights lead to meaningful climate action. Engaging suppliers is a necessary step for many companies working to decarbonize their supply chains. In this sector, we offer a streamlined four-step approach to effective supplier engagement, enabling collaboration with right suppliers for impactful reduction outcomes.

Existing solutions for segmenting suppliers have already provided a strong guardrail for companies to start this exercise, such as Deloitte’s Navigating to Net-Zero and WBCSD’s supplier engagement program design. Building on this known knowledge, we help take companies a step closer to implementation by adding sector specificity to these frameworks.

These frameworks typically include fundamental criteria for evaluating a supplier’s capacity to measure emissions and set targets, as well as additional criteria to assess their readiness to disclose impacts and participate in climate initiatives. In practice, companies may need sector-specific indicators for accurate assessment of key material sectors beyond these general criteria. However, without sufficient sector-specific expertise, adding extra indicators may lead to reporting fatigue while failing to drive real emissions reductions. Prioritizing relevant, high-impact sector-specific metrics is essential for effective and efficient supplier engagement.

Exhibit 7 provides example indicators tailored to the steel, aluminum and chemical sectors, incorporating both fundamental criteria and sector-specific aspects. The maturity signposts, ranging from beginner to advanced levels, help your company identify where their suppliers might fall on the maturity spectrum and align engagement strategies accordingly. For example, a beginner aluminum supplier may lack access to specific data, be unfamiliar with their scrap type, and have no PCF reporting capacity. In contrast, an advanced aluminum supplier may be actively sourcing data from its suppliers, and consistently tracking and calculating recycled content, and has the capacity to separate emissions from virgin materials and recycled content for PCF calculation.

With the help of sector-specific metrics, companies can confidently segment suppliers from a key material group into four categories representing different levels of climate maturity and impact, each requiring distinct engagement priorities and strategies:

• Innovation (high maturity, high impact): they are already aligned to climate targets and present an opportunity for collaborative innovation. They are ideal candidates for pilot projects, case studies, and other initiatives to achieve actual reduction goals.
• Intervention (low maturity, high impact): they contribute heavily to a company’s Scope 3 emissions but lack the capacity to measure, report, or reduce their impact effectively. Providing them with capacity-building support can drive meaningful improvements.
• Compliance (high maturity, low impact): they may meet climate targets easily, but have relatively small emissions impact. While less critical for engagement, they can be easily motivated to meet compliance requirements and may support broader sustainability efforts.
• De-prioritization (low maturity, low impact): they have limited emissions impact and lack climate maturity. While they may require resources to improve their reporting capabilities, they have minimal influence on overall emissions and can be deprioritized for active engagement.

The unique characteristic of each supplier group entails distinct strategies needed for effective engagement. By applying an established framework, this guide categorizes strategies along two dimensions: the form of engagement (collaborative efforts or delegation to third parties) and the type of engagement tools (offering incentives or enforcing climate requirements). Matching with the identified supplier groups, this strategy quadrant (Exhibit 8) presents typical profiles of steel and aluminum suppliers and offers actionable insights to help companies optimize their engagement strategy for improved effectiveness.

The innovation group, which likely has very few suppliers, should be prioritized as key collaborators, with financial incentives used to strengthen the strategic relationships critical to the company’s growth and reduction outcome.

The intervention group, often the largest, is essential for operational and financial stability, so incentives should take precedence over enforcement to encourage incremental climate progress. However, as building maturity in this group is resource-intensive, companies may delegate capacity-building efforts to third-party professionals for greater efficiency.

The compliance group is easy to motivate to comply with climate requirements due to their high maturity, thus collaborating with and enforcing requirements on these suppliers are often low-hanging fruits for progress.

Finally, the de-prioritization group requires minimal attention but still warrants basic requirements to mitigate reputational risks.

When implementing with steel, aluminum, or chemical suppliers, the innovators are often leading entities in regions with a supportive policy environment like the EU or Japan. In steel and aluminum, these suppliers often have integrated operations, from mining to scrap recycling, that give them the flexibility for innovative deep decarbonization projects. In the chemical sector, similar innovators are advancing solutions such as bio-based feedstocks and carbon capture. While these suppliers are typically ambitious and capable, they require strong signals and commitments from buyers to move forward confidently. Collaborating with them offers companies the best opportunity to stay ahead of the reduction curve. Whereas the intervention suppliers are often in either less climate-focused regions with limited climate regulation and/or major production regions. Because they have lower levels of climate maturity compared to the innovators, they are more likely to focus on incremental reductions, such as efficiency improvements. These suppliers require more practical tools and resources for capacity building to move them toward emissions reduction while considering varying levels of climate maturity.

Before matching the right levers with different supplier groups, it is important for companies to sort out the abatement levers they can pull to hold suppliers accountable. Resources like Net-Zero Value Chain Support Hub or Incentives for Scope 3 supply chain decarbonization have provided comprehensive mapping of potential levers, spanning from financial support and contracting process to routine supplier management. These levers are further categorized by whether they provide rewards or penalties and whether they involve financial or non-financial mechanisms.

Many companies already apply some of these levers in supplier engagement. For example, they may set carbon performance targets or reduction clauses in contracts while also offering training and resources to help suppliers lower emissions. Some companies go further by fostering strategic relationships with climate-advanced suppliers, offering beneficial payment terms or paying premiums to support ambitious reduction efforts.

Aligning those levers with the right suppliers for effective reduction outcomes (Exhibit 9) involves the following:

• The largest reduction opportunity lies in the innovation group. Buyers should prioritize financial rewards with this group for maximizing reduction potential and ensuring tangible outcomes. These actions could include providing green premiums for low-emissions products that achieve quantifiable reductions, establishing long-term contracts to support suppliers’ emissions-cutting initiatives, or even investing in net-zero technology initiatives.
• The intervention group requires substantial capacity-building efforts, thus the key for engagement is to reinforce learning. A combination of non-financial rewards and light penalties is best suited to drive progress. Companies might offer low-cost financial incentives, such as rewards for meeting specific thresholds, or provide high-profile non-financial recognition to motivate top-performing suppliers to advance into the innovation group for more impactful reductions.
• For the compliance group, companies may consider incorporating non-financial penalties into contracts to ensure adherence to climate requirements, as they should be able to meet requirements easily. Minimal effort and resources should be allocated to the de-prioritization group beyond enforcing basic due diligence and performance requirements to mitigate risks.

Tracking climate maturity across supplier groups creates a feedback loop to refine supplier engagement strategies, tailor support, benchmark progress, inform procurement decisions, and strengthen supplier collaboration.

However, tracking progress can be challenging if metrics are not tailored to varying levels of suppliers because not all suppliers can meet the same expectation. For instance, innovation suppliers may have already used advanced, comprehensive metrics, while intervention suppliers might start with beginner or intermediate indicators to provide primary data for key emissions sources and evolve as they mature.

Exhibit 10 lists sector-specific climate metrics, using steel, aluminum, and chemicals as examples, to help companies identify the most relevant questions for each supplier maturity level. In addition to the metrics, it’s useful to confirm the accounting methods used to ensure consistency and credibility. Companies can share the full set as a north star for all suppliers or focus only on the most pertinent indicators for each group.

These metrics can support companies to improve both supplier engagement and the procurement process. Companies can incorporate these tailored and sector-specific metrics into annual questionnaires to keep track of suppliers’ climate progress and inform maturity assessments. Collecting primary data, even if limited to key emissions sources, also enhances more accurate emissions modeling to guide improvements in Scope 3 strategies. In procurement, these metrics can help define a clear climate performance expectation in request-for-information (RFI) and request-for-proposal (RFP) stages and inform effective, industry-specific climate clauses in contracts.