Sector News

It’s not easy buying green: How to win at sustainable sourcing

February 27, 2022
Borderless Future

Companies are ramping up their climate commitments, and with them their ambitions to source materials—such as green steel, recycled aluminum, and recycled plastic—that have lower emissions intensity than their conventional equivalents. Production capacity for many low-emissions materials, however, appears set to fall far short of future demand. For example, our analysis suggests that in 2030 demand for green steel in Europe could be twice as great as the available supply. Projections point to global shortages of recycled aluminum and recycled plastic.

Such market imbalances will squeeze makers of industrial goods and consumer products that have pledged to reduce their supply chain emissions. Companies that fail to secure adequate supplies of scarce green materials may need to pay steep premiums, or else they will fall short of their target commitments, potentially harming their relationships with customers, investors, and other stakeholders. Already, growing demand has pushed the prices of some types of recycled plastic much higher than the prices of virgin resins.

Anticipating these risks, careful players across value chains are now working to build the capabilities and strategies needed to avoid supply disruptions in the near term and beyond. In this article, we identify potential shortages and explain business practices that can help companies cope with them. Three near-term actions—developing baseline insights on emissions and pricing for inputs, defining a sourcing strategy to lower emissions over time, and implementing sourcing plans at speed—could prove valuable as businesses prepare for the green-materials supply crunch.

Shortages of low-emissions resources loom
Savvy companies know that investors, regulators, and other stakeholders increasingly expect them to decarbonize. They also see that rising customer demand for low-emissions offerings could allow them to widen their margins and capture large shares of growing markets. Achieving the necessary decarbonization level means cutting not just the greenhouse-gas emissions from their own operations (Scope 1 and Scope 2) but also the emissions from their value chains (Scope 3). Of the more than 2,100 companies that have joined the Science Based Targets initiative (SBTi), nearly half have made 1.5°C-aligned commitments covering Scope 3 emissions “where relevant.”

Scope 3 emissions account for 80 to 90 percent of the emissions associated with many end products, and large shares of these emissions occur upstream in the supply chain as a result of energy use and industrial processes. In response, companies are demanding ever greater quantities of low-emissions inputs, from raw materials to highly engineered components. Our recent reviews of requests for quotations from automotive OEMs suggest that more and more are specifying renewable-electricity use, recycled-materials content, and even SBTi commitments. However, the output of green materials isn’t keeping up with the increase in demand—and the gap could widen as more companies switch to the low-emissions resources they will need to meet their climate goals.

For example, our analysis suggests that demand for green steel in Europe will rise to 45 million to 50 million metric tons per year by 2030, if it increases at the pace necessary to meet the European Union’s target of a 50 percent emissions reduction. Steelmakers have said that they will have more than a dozen green-steel factories up and running in Europe at the end of the decade, enough to provide about one-third of the continent’s flat-steel production capacity. Even so, there could be a supply shortfall of more than ten million tons in 2030.

Steel is only one low-emissions resource that is headed for supply shortages in Europe. Further analysis points to wide gaps between production and demand for recycled aluminum and recycled plastic, partly because there may be too little aluminum and plastic waste available to meet demand for recycled materials. READ MORE

By Anna-Christina Fredershausen, Eric Hannon, and Tomas Nauclér

Source: mckinsey.com

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