Engaging the Value Chain for Decarbonization: Building Incentives

This blog is the third in our series on Value Chain Engagement for Decarbonization. Missed the previous installments? Catch up on Building Capacity and Building Alliances.

You may have already set an ambitious Scope 3 reduction goal and mapped the reductions needed from your upstream and downstream partners to make the goal a reality. Next, you’ll need to take one more step: ensure your mitigation target is considered a priority across your value chain.

With every company operating under its own constraints and competing priorities, substantial behavior change that supports your particular decarbonization goals will require a clear incentive to ensure your partners treat it as a business essential.

Below are common hurdles to achieving meaningful reduction initiatives from value chain partners – and tactics that can be used to incentivize them to align with your priorities.

Climate & Nature

Scope 3 GHG Emissions Inventory

Explore Now

Common Hurdle #1: “Our value chain partners aren’t interested in decarbonization. They’re non-responsive to our sustainability data requests, let alone proactive reduction initiatives.”

The Solution: When the main hurdle to engaging these partners is their disinterest in sustainability initiatives, contractual requirements for behavior change will be necessary to kickstart actionable improvements. By integrating both mandates and incentives into contracts, you can build formal stepping stones needed for these partners to begin meeting your Scope 3 emissions reduction targets.

For example, awarding “preferred status” or shorter payment terms for partners who meet near-term emissions reductions, or integrating penalties for partners that miss such milestones, may catalyze Scope 3 reductions across the value chain.

Common Hurdle #2: “My company needs to procure low-carbon materials to meet our sustainability goals, but our suppliers aren’t seeing enough demand to warrant their investment in low-carbon inputs. How can we bridge this supply gap?”

The Solution: Without an aggregated demand signal–such as those offered through industry coalitions as described in the previous blog in this series–suppliers may be unable to invest in low-carbon solutions that require new processes and materials.

To overcome this hurdle, upfront purchase commitments from the procuring organization can provide partners with the demand certainty necessary to mitigate the risks of new investment. Specifically, long offtake agreements, in which the customer commits to recurring purchases over a period of months, years, or even decades, can provide demand certainty, lessening the risk to suppliers.

Common Hurdle #3: “Partners in our value chain will need to make investments to meet certain sustainability and decarbonization requirements, which they are unable to make on their own.”

The Solution: Financing the investments necessary for decarbonization is a significant roadblock for many companies, limiting their ability to develop low-carbon solutions. Short-term or supply chain financing can help to provide suppliers with working capital in advance of a typical credit period. These programs leverage the credit ratings of the customer and enlist the help of a third-party financier through a receivables financing agreement that allows suppliers to receive payment early. This may be used to fund investments in costlier processes and set the foundation for future improvements.

Common Hurdle #4: “The grid isn’t becoming cleaner at the pace we expected—especially in regions where our suppliers are located—which is slowing the rate at which we see progress toward our Scope 3 emission reduction goals.”

The Solution: Decarbonization is a global goal, in theory. In reality, it can be very difficult to remove all fossil fuel contributions to a company’s value chain, especially where forces larger than any single company are at play. To expedite system-level decarbonization, companies should consider incentivizing their value chain partners around the world to promote a decarbonized operating environment. Encouraging the introduction of additional renewable energy supply, as well as government policies and programs supporting low-carbon practices, may collectively enable behavior change and signal demand, driving the market closer toward decarbonization.

Related

Strategic Approaches to Scope 3 Emissions Reduction

How G&A Can Help

G&A is excited to connect with your organization to better understand how we may support your value chain engagement journey for Scope 3 decarbonization. Book a 20-minute call to discuss designing an incentive program tailored to your value chain and sustainability goals.

 

Neil Bradley

Neil Bradley is a Sustainability Analyst at Governance & Accountability Institute. His role is primarily focused on sustainability report development, ESG news research and analysis, and supporting a variety of additional client projects ranging from nature-related risk assessment to ESG datapoint gap analyses.