Navigating the Era of Sustainability Scarcity

In the realm of environmentally friendly materials and services, scarcity is becoming a looming challenge. Players positioned at both ends of the supply chain must adapt to these constraints.

There exists a clear gap between the commitments of end-chain companies to reduce carbon emissions and those supplying the initial links of their supply chains. Likewise, companies in the early stages of the supply chain must ensure the availability of environmentally friendly materials.

Several major trends are rendering the market for eco-friendly goods increasingly attractive. The energy crisis is expediting the shift towards environmentally friendly goods, commencing notably in Europe. Global consumer environmental awareness is on the rise. Companies are setting commitments to reduce emissions originating from the initial stages of their supply chains and are recently starting to implement these promises.

Governments are also taking action to drive the transition towards eco-friendly goods, although not swiftly enough to curb global warming to 1.5°C. These efforts encompass transparency policies such as labeling, incentives for eco-friendly products, carbon pricing, direct investments, restrictions on the use of non-environmentally friendly infrastructure, and prioritizing green products in public procurement.

These trends are creating a significant demand for eco-friendly goods, yet many companies providing these materials have not responded swiftly. Theres a clear disparity between companies committed to reducing emissions from end products and those providing raw materials for these products.

For instance, in the household and personal care industry, companies committed to reducing emissions in their supply chains hold approximately 45% market share. However, in industries like plastics and aluminum, which supply materials for these sectors, companies with only 6% and 11% market share have yet to make similar commitments to emission reduction in their production processes. This commitment gap poses significant risks for the availability of eco-friendly raw materials. If left unaddressed, it could lead to struggles for end-chain companies in obtaining limited supplies of eco-friendly materials, necessary logistics, green fuels, renewable energy, new energy minerals, and other products.

This scarcity will vary across industries, and companies abilities to procure eco-friendly goods will also differ.

Currently, supplies of eco-friendly goods are just becoming available for most product categories. For instance, non-fossil steel is currently only available from one experimental plant in Sweden, and its products have been sold out for several years ahead. Supplies of non-fossil chemicals and plastics remain extremely limited. Environmentally friendly logistics alternatives are just beginning to emerge. Cement manufacturers have just planned carbon capture and storage projects to reduce emissions from their products. And there are many more developments. As a result, companies taking the lead in any of these categories - if done correctly - should be in a strong position to secure a market presence.

In the medium term, the picture is less clear. Presently, we estimate where scarcity of eco-friendly goods will be strongly felt by 2030, considering the announced supply capacities. It is projected that the most significant scarcity by 2030 will occur in eco-friendly plastics and chemicals. In both these industries, demand will be high across various consumer products, but companies supplying raw materials for these products have not planned sufficient production capacities for non-fossil and decarbonized alternatives. However, theres also green steel, currently scarce, but many manufacturers, especially in Europe, are planning to ramp up the production of eco-friendly steel in this decade. Thus, the risk of scarcity of green steel by 2030 should be lower (although it might persist in some regions).

These findings underscore the importance for companies at the beginning and end of supply chains to be early players in the eco-friendly goods market. Companies at the end of supply chains need to demonstrate their intent to reduce scarcity risks, while those at the start of supply chains must view rising demand as an opportunity and invest in reducing this disparity. Displaying commitment to increasing production capacity will also open up more business opportunities and foster partnerships with end-chain companies still hesitant about their emission reduction commitments.

The impending limitations will pose a challenge for all companies at the end of supply chains striving to reduce their carbon footprint. Companies that act swiftly stand a greater chance of securing scarce goods supplies and are more likely to achieve their emission reduction commitments at lower costs. To accomplish this, these companies must change how they procure goods.

In many cases, this will entail marrying short-term cost and performance thinking with long-term commitments and supplier partnerships. Suppliers long accustomed to operating in cost-competitive markets will be reluctant to invest in emission reduction without assurance that such investments will benefit them. Bridging this gap will require efforts to show suppliers that this demand is real so they have confidence to invest in eco-friendly products. Suppliers need clear signals about buyers intentions and willingness to pay more for green products, or even better, engagement in long-term partnerships for procuring environmentally friendly products.

In many cases, companies must choose who to partner with and where to allocate funds for emission reduction. Like in any partnership, companies must consider the quality of the company and their commitments to emission reduction. Additionally, there are three key factors to consider in emission reduction efforts from suppliers:

1.     Their inputs contribution to the overall emission footprint.

2.     The scalability of eco-friendly supply of an input.

3.     The financial impact of using eco-friendly products.

Companies also need to pay attention to government policies and regulations that will help lower the costs of eco-friendly products. These governmental steps might alter where investments will be most effective. In many cases, companies will make investments based on expectations of emerging policies and regulations.

Active efforts to develop eco-friendly suppliers should focus on all inputs contributing significantly to emissions. In this category, solutions that can be developed at the lowest cost will receive the most attention, but companies should also work with suppliers for other solutions to ensure that environmentally friendly alternatives are available in the future. Outside this category, companies should incentivize suppliers that could reduce emissions inexpensively, for instance, through clear and transparent purchasing criteria. For inputs with significant cost impacts but not on emissions, companies might adopt a "wait and see" approach while other sectors ramp up production of eco-friendly goods.