## 3.4 Engage and Support your Suppliers 3.4.1 Create your Supplier Incentives and Support Program3.4.2 Continuously Support Suppliers and Monitor Progress ## 3.4.1 Create your Supplier Incentives and Support Program After launching your Supplier Ask, you need to engage and support your suppliers along their net-zero journey. Engagement and support will ultimately drive progress towards your climate goals.Key support levers and what to considerCompanies have a broad set of incentives at their disposal. There are five key dimensions for supplier support levers:Supplier contracting Public recognition Financial incentives/support Capabilities building Access to technical resourcesCompanies should apply a combination of support levers depending on what their suppliers need most. A recent survey of 90 members of the WEF’s Alliance of CEO Climate Leaders found that support levers that are collaborative (i.e., in the form of joint projects or collaborations) and provide financial support are considered most effective.Suppliers oftentimes struggle to decarbonize not because of a lack of willingness or awareness, but because: They have either limited know-how and don’t know how to do it, or they lack the capacity to ramp up on this highly complex topic by themselves. Taking the decarbonization journey together is therefore the most effective way of kick-starting a supplier’s net-zero journey. Suppliers may also lack the financial means and/or liquidity to decarbonize. For example, in 2022, an Original Equipment Manufacturer (OEM) in the automotive value chain had an average margin of 8.3%, while a supplier had a margin of only 4.7%. Suppliers with lower profit margins may not have the financial means to fund large-scale decarbonization out of their own pocket. It is therefore not enough to only provide suppliers with the right resources and tools; financial support levers can play an important role in enabling large-scale decarbonization. Lastly, many companies are confronted with a high demand uncertainty for low-carbon products. This uncertainty can increase investment risks, make payback periods longer or returns on investments less attractive. Levers that enhance predictability and revenue streams – e.g., in the form of long-term purchase (i.e., offtake) agreements – can be a powerful way to overcome this challenge. In this section, we will introduce the different support lever dimensions and provide concrete examples of levers you can apply. ## 1. Supplier Contracting These levers focus on embedding decarbonization expectations and commitments into procurement processes. Two types of supplier-contracting incentives exist: (1) Change of supplier status, and (2) Long-term purchase (i.e., offtake) agreements.1.A) Change of supplier status:Preferred status Non-preferred status Loss of supplier statusIn a survey of 90 members of the Alliance of CEO Climate Leaders, providing obtained supplier status to suppliers that act environmentally friendly was the third most often applied supplier incentive. The effective implementation of the change in supplier status lever relies on access to timely and accurate supplier data. You can include decarbonization criteria in performance management and assess suppliers. Suppliers that meet or exceed the expectations can obtain or maintain a preferred status. Failure to meet the criteria could result in engagement to improve performance or risk of losing the preferred supplier status.1.B) Long-term purchase agreements (i.e., Offtake agreements):Offtake agreements can benefit the procurement team by providing access to new technologies, securing a competitive price, and anticipating future demand. The agreement can also benefit the supplier by providing stable and predictable revenues, significantly improving the bankability of low-carbon projects. Long-term purchase agreements builds trust with preferred suppliers and facilitates ongoing collaboration. Startups working together with established players could accomplish change faster by combining innovation with appropriate support and funding. ## 2. Public Recognition Larger organizations can take advantage of their reputation to offer recognition as a reward for suppliers that meet emissions reduction targets. Strategies like public recognition and co-branding can benefit both suppliers and procurement teams.2.A) Positive public recognitionPositive public recognition through non-financial awards, ratings, and public relations press releases are all ways to reward suppliers. Assessing supplier performance, through the methods in the “Select and Segment Suppliers” chapter will establish peer benchmarking to identify the highest-performing suppliers. Publicly recognizing the highest-performing suppliers can foster competition and encourage lower-performing suppliers to raise their ambition.2.B) Co-brandingCo-branding is marketing under two or more brand names as part of a strategic Alliance. It is typically done when collaborating on an existing product or launching a new product or service. Co-branding can be considered with suppliers who share similar brand values as it allows each brand to leverage its qualities while benefiting from positive spill-over effects from the image and recognition of the other brand.For more information on how to use public recognition and co-branding to enhance supplier decarbonization, please refer to the WBCSD paper here.The section below includes featured case studies related to this area. ## 3. Financial incentives and support Suppliers report that lack of financial resources and project funding, due to uncertainty about payback periods and rate of returns, are key challenges to decarbonizing. A recent survey of 90 members of the CEO Climate Leaders Alliance found that financial support levers such as better payment terms and conditions, paying a green premium for lower carbon goods, and pay for performance, are considered highly effective if adopted. However, relatively few companies seem to offer financial support levers to suppliers. Offering suppliers preferential payment terms or financing rates based on carbon reduction progress encourages suppliers to accelerate decarbonization efforts to benefit from the incentives. In turn, by improving cash flow, suppliers can overcome financing as mitigation barriers.For more information on financial incentives and support, refer to the WBCSD paper on payment terms (here), financial incentives (here), and WBCSD's Climate Drive action library (here). 3.A) Change in payment terms Preferential payment terms based on progress can encourage suppliers to accelerate rates of decarbonization while creating a culture of continuous improvement. Although beneficial payment terms are often used in procurement to secure price discounts, there is currently a lower prevalence of using them for decarbonization. Beneficial terms can also be challenging to implement alone, as it requires verifying suppliers’ decarbonization actions.3.B) Access to financing/ funding supportLonger-term investments can have a great impact on decarbonization of Scope 3 emissions hotspots. Benefits of improving access to financing include supporting net-zero and SBTi commitments, rewarding suppliers for decarbonization efforts, and signaling a commitment to the supplier relationship. Find investments that are relevant to suppliers, depending on factors including emission hotspots and supplier maturity.3.C) Financial incentives for mitigation (green premium)Financial compensation for green products and services benefits suppliers since it provides cash flow for decarbonization initiatives. At the same time, transition risks are reduced since suppliers are managing their decarbonization journeys more proactively. Financial compensation is especially beneficial for industries dependent on cash flow, or for suppliers that have accumulated debt. Often, this lever goes together with the access to financing lever and co-creation lever.3.D) Pay for performancePaying suppliers earlier or paying more can be linked to environmental performance and progress on decarbonization. This lever also requires verification of performance, so it may be harder to implement. The better the performance, the quicker the payment or the lower the supplier’s debt interest rate burden.The section below includes featured case studies related to this area. ## 4. Capabilities building SME suppliers report that one of the most common challenges to decarbonization is the skills and knowledge gap, as they often lack the know-how on how to address climate change in their business. This challenge does not exist for SME suppliers only, but also for other supplier types. Explore more here. A recent survey of 90 members of the Alliance of CEO Climate Leaders indicated that most members currently focus on capability building of their suppliers, as the most applied supplier support lever. Investment in educational initiatives to upskill supplier capabilities could include training modules or focused workshops.4.A) Supplier training/educationSupporting supplier upskilling is critical to bridge the knowledge gap, currently in the way of supply chain decarbonization. Supplier training can be conducted through multiple channels:Dedicated and tailored training sessions, workshops or webinars, following a clear curriculum, to onboard suppliers to the key concepts they need to know to decarbonize successfully.Access to online tools to support suppliers’ self-learning journey. There are multiple tools and guidebooks out there that are free of charge:WBCSD’s Climate Drive provides a step-by-step guide on how to get started and advance on a company’s net-zero journey. For more information, refer to the Net-Zero Guidebook here.The SME Climate Hub, on the other hand, provides a free online training course – co-developed by the University of Cambridge and BSR – to help SMEs reduce their carbon emissions. For more information, please refer to the SME ClimateFit Education here. The Exponential Roadmap initiative has developed a 1.5°C Business Playbook, targeting companies that want to tackle their net-zero emissions. For more information, please refer to their website here.4.B) Co-creation projectsCo-creation projects are joint projects between companies and their suppliers. Secondments could be useful additions in co-creation projects, for example, through joint research on developing lower-carbon materials. Companies can reduce emissions by collaborating on existing products or launching new products or services together. Joint projects can then also be leveraged to obtain positive, public recognition – e.g., through co-branding.The section below includes featured case studies related to this area. *Featured content group* ## Access to technical resources A variety of digital tools can help suppliers tackle emissions across the entire net-zero journey. In a recent survey of the SME Climate Hub, a high share of surveyed SMEs indicated tools for measuring and monitoring emissions as a top necessity to decarbonize. ### Carbon accounting tools: measure and track an organization’s emissions. For some businesses, carbon accounting is becoming an industry-standard requirement as part of mandatory reporting and tender requirements in contracts. Quantification of carbon emissions is the foundational first step in the supplier journey towards net zero. ### Data exchange tools improve emissions transparency by enabling companies to access primary product-level data from suppliers. As mandatory climate reporting becomes more stringent, technical specifications also continue to enable standardized GHG data across technology solutions. ### Tools that support identification of emissions hotspots and decarbonization initiatives: sustainability management software solutions help manage sustainability initiatives. Solutions include tools that help with mapping and identifying emissions hotspots and monitoring and auditing performance. For more information on tools, please reference the “Unlock the Tools and Systems” chapter. ## Create your supplier incentives and support program The type of support and engagement companies need, will depend on where they are on their net-zero journey. After segmenting suppliers by maturity and developing a timeline for where you expect suppliers to be by when, you can map the relevant support levers to accompany the supplier asks. Several support levers should be combined for each step.How much you engage a supplier will also depend on the priority level of the supplier and their maturity level. For example, a preferred supplier at the advanced level could be engaged bi-annually, while lower-importance suppliers could be assessed on a more ad-hoc basis. From there, the engagement period to provide high-level support will take suppliers through their net-zero journey. ## Training, education, and carbon accounting tools Training, education, and tools remain relevant at all stages of the supplier journey. However, the exact support materials will vary depending on the stage. For example, a low-maturity supplier might need a primer on sustainability, data collection methodology, and target-setting introductions, while a higher-maturity supplier might need more technical information on product carbon footprint calculations and data sharing systems. Sharing learnings and experience is an ongoing process, and you should iterate based on supplier input to provide what is most relevant for them. ## Complementary incentives depending on supplier maturity At the advanced, leading, and North Star levels, companies can incentivize and support their suppliers through:Positive recognition such as awards or press releases, positively highlights companies’ efforts towards a net-zero future. Co-creation and other joint projects also become more relevant, as suppliers reach a maturity that equips them with the necessary skills and know-how to design lower-carbon products, which will ultimately reduce the emissions in their value chain. Co-branding purposes, e.g., highlighting a jointly achieved positive climate impact through joint press releases. Financial support to enable decarbonization initiatives in the supply chain. However, mostly relevant in the more advanced maturity levels, as systematic reduction initiatives are of high relevance. Providing financial support can and should also be leveraged for co-branding purposes, as it strengthens the brand value for both the supplier and customer. Long-term purchase (i.e., offtake) agreements which likely are most relevant with suppliers in the Leading or North Star Stage, as these suppliers usually have a meaningful portfolio of low-carbon products. Lastly, whether suppliers do or do not adhere to the North Star Ask can ultimately impact their supplier status. I.e., companies that are in line with the ask, could obtain or keep their preferred supplier status, while those that do not meet the North Star Ask may lose their preferred supplier status. *Featured content group* ## References to key resources and tools ### The SBTi has a report “Engaging Supply Chains on the Decarbonization Journey” that details guidance for supplier engagement. ### The WBCSD SOS 1.5 Incentivizing Supply Chain Decarbonization has a report detailing incentives for supply chain decarbonization. ### In other papers on financial incentives and support, the WBCSD has outlined payment terms and longer-term investments. ### The SME Climate Hub annual survey creates a report on barriers and bridges to SME climate action, which is helpful to understand where small business currently stands. ### The SME Climate Hub provides a free online training course – co-developed by the University of Cambridge and BSR – to help SMEs reduce their carbon emissions. ### Schneider Electric’s EcoStruxure™ Resource Advisor is a platform enabling companies to collect, analyze, and automate information that matters for their sustainability goals. ## 3.4.2 Continuously Support Suppliers and Monitor Progress You will continuously work with and engage your suppliers throughout their net-zero journey. Regularly re-evaluate whether the engagement and support you are providing are adequate and enable your supplier to decarbonize.Maintaining open communication channels with your suppliers can help to understand their true pain points and obstacles in the way of decarbonization. You can then tailor your supplier and incentives program accordingly.In addition, supplier progress should be monitored on a regular basis. Two meeting cycles are possible:Leverage the meeting cycle (e.g., business review meetings, quality review meetings, regular supplier check-ins) you already have with the supplier to incorporate discussions on decarbonization progress. Schedule a dedicated meeting cycle on sustainability that meets at least every quarter. This approach may be beneficial if the supplier has a dedicated sustainability team that’s different from the participants in the ‘leveraging meeting cycle’ group. ## Case study: Schneider Electric Continuosly support suppliers and monitor progressSchneider Electric recognized that onboarding suppliers in the decarbonization journey not only required technical support and access to tools but constant meaningful engagement to ensure suppliers remain focused on and prioritize decarbonization.Regional sustainable procurement experts play a critical role. Located across major regions, they provide local context, as well as cultural and linguistic relevance. Several introductory sessions on GHG footprinting were held in English and Mandarin. Schneider found that while recorded training sessions, email communications, and tools for documentation were all useful, less mature suppliers particularly benefited from real-time meetings to build relationships. The Sustainable Procurement team conducts a weekly analysis and evaluation of supplier performance with the designated single point of contacts (SPoCs) to identify areas of improvement and forward action. These are cascaded to the suppliers via the SPoCs and the buyers through a series of weekly scheduled meetings.In addition, several weekly, monthly, quarterly, and annual performance reviews are conducted to identify issues and ensure resolution in a timely manner.The program is meeting Schneider Electric’s ambition: as of Q3 2023, 1015 suppliers are engaged in The Zero Carbon Project, 99% of which have computed their carbon footprint. Since the launch of the program in 2021, Schneider has reported suppliers have reduced their carbon emissions on average by 24%.