Engaging Suppliers on Carbon Emissions Reduction: 5 Tips to Set You Up For Success

A company’s supply chain is estimated to produce on average more than 11 times the emissions of its direct operations, according to research by the World Business Council for Sustainable Development (WBCSD). Corporate net zero targets cannot be achieved without significant reductions in supply chain or ‘Scope 3’ emissions, but how do organisations effectively drive sustainable reductions in emissions that they do not control?

Where we see clients try and fail, it is because they have tried to approach the Scope 3 reduction challenge ‘contract-first’ – by dropping carbon-related obligations into contracts and standard terms as a first step, often on a ‘one size fits all suppliers’ basis. As we explain in this briefing, there is an important role for contracts in navigating the Scope 3 challenge, but as part of a broader supplier engagement toolkit.

Read on for our 5 practical tips to set your organisation up for success.

Tip 1: One size does not fit all suppliers – start by mapping and segmenting your supply chain and prioritising suppliers for engagement

Before engaging entities in your supply chain, carry out a supply chain mapping exercise across tiers, geographies and sectors – or source an existing and recent mapping exercise done by another team. Once you have a basic picture of your supply chain, you can start to segment it according to carbon intensity (which parts of your supply chain are the highest/lowest emitting?) – sometimes called taking a ‘materiality-based’ approach. You can then further segment based on suppliers’ willingness and likely capability to engage, based on, for example, their size and decarbonisation maturity.

This mapping and segmentation exercise will help you prioritise and allocate time and resources to engaging those suppliers whose emissions reductions will have the biggest impact on your Scope 3 and/or to banking some quick wins with suppliers who are already substantially aligned with your carbon reduction objectives and in a position to make meaningful commitments.

Tip 2: Invest in capacity building and knowledge sharing

It is important to recognise that many of your suppliers – particularly SMEs – will likely be at an early stage in their decarbonisation journey. They may not yet have articulated their business case for emissions measurement and reduction, secured management buy-in or invested in the tools and resources needed to baseline their carbon emissions and capture/report reductions.

Investing in targeted capacity building and knowledge sharing with your suppliers, whether by upskilling key employees, hosting supplier training workshops, regularly sharing insights or forming supplier knowledge sharing forums, will help to plug supplier capacity gaps and lay the foundations on which you will be able to seek meaningful supplier carbon commitments in due course.

Tip 3: Think incentives first, not penalties

When seeking any kind of commitment from suppliers, lawyers tend to think first about penalties for non-compliance. There may be a role for penalties as we’ll see below, but think too about incentives for compliance, particularly as you begin to engage suppliers that are at an earlier stage in their decarbonisation journey.

Incentives can be financial, for example preferential payment terms, bonus payments or financing rates based on carbon reduction targets, disclosures and progress, or paying a premium for alternative products and services that offer lower carbon emissions when compared to competitors or existing offerings. Incentives can also be non-financial – rewarding suppliers that have met emissions reduction targets with positive PR or peer benchmarking for example.

Different suppliers will respond to different incentives, so tailor your offer based on the strength of the relationship, supplier culture, spend category, decarbonisation maturity and anticipated return-on-investment.

Tip 4: Embed tailored carbon requirements into contracts

Having worked through tips 1-3, buyers will be in a much stronger position to agree meaningful carbon commitments with suppliers and embed these into contracts. You should still be very wary of a standard carbon clause or ‘one size fits all suppliers’ approach however, and for best effect, develop tailored contract clauses for particular supplier groups.

Key questions to ask during the contracting stage include:

What should be the scope of your suppliers' carbon-related obligations?

Should suppliers be required to measure and disclose their carbon emissions or measure and disclose them using a recognised framework (e.g. the Carbon Disclosure Project)? Should they be required to take reasonable steps to reduce emissions or perhaps to set a verified net-zero target with specified reductions at required intervals? Might an obligation that rachets up over the life of the contract be more appropriate, perhaps starting with Scope 1 and 2 (direct emissions) measurement and disclosure before introducing Scope 3 and verified reduction targets at a later stage? This is where your supply chain mapping, segmentation and supplier capacity building will pay dividends, allowing you to tailor contractual commitments appropriately.

Are the requirements workable and realistic for the supplier?

Buyers should assess whether their requirements are proportionate, considering the supplier's capacity, resources and expertise. Competing incentives matter too: are the carbon obligations being proposed realistic given the price being paid and other delivery requirements? Suppliers may face parallel demands from multiple clients and may already have their own climate commitments that align with or exceed what the buyer is proposing.

Are the requirements workable and realistic for you, the buyer?

Buyers must also look inward. How large is the supplier pool, and how much leverage do you have? Do you have (or do you need to enhance) capacity to monitor compliance and bear the associated costs? Carbon-related clauses will only be effective where there is genuine buy-in from the buyer’s board, senior management and the wider business.

Are you willing to provide incentives and enforce consequences for non-compliance?

Carbon-related contract clauses carry little weight without meaningful incentives and credible consequences. As explained above, incentives can be financial or non-financial. Consequences might include service deductions where carbon-related obligations are not met. A willingness to terminate for persistent non-compliance may be appropriate for longer-term contracts but must be weighed against the impact on operational and business continuity.

Tip 5: Embed decarbonisation into business as usual

To ensure changes are sustained and not a point-in-time exercise, buyers should embed carbon metrics into the procurement process – integrating scoring on carbon-related issues into their RFP processes, awarding points for verified/science-based targets and published emissions reduction pathways and assigning a significant weighting (for example, twenty per cent) to these criteria.

What is the takeaway?

Supply chain decarbonisation represents both a significant challenge and a strategic opportunity for organisations committed to achieving net zero. Using the five tips above, organisations can establish a robust framework for supplier engagement that supports their broader sustainability objectives while ensuring appropriate contractual and operational safeguards are in place.

For more information or tailored advice, please contact Kerry Stares or your usual Charles Russell Speechlys contact.