It’s Not Easy Buying Green

BY Realty Plus

Companies are ramping up their climate commitments, and with them their ambitions to source materials—such as green steel, recycled aluminium, 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 aluminium 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. 

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. 

Supply shortfalls ought to ease as more production capacity comes online, though it is not clear how long this might take. Until then, companies that haven’t already locked in supplies of low-emissions resources could face rising price premiums. Their dilemma will be whether to pay those premiums—for the sake of meeting climate pledges and satisfying customer demand—or to break their promises.

Now is the time to optimize sourcing for sustainability

It’s still early days in the race to obtain low-emission resources and too soon for first movers’ approaches to be proven successful over the long term. Nevertheless, their actions suggest that a high degree of ingenuity, along with extensive collaboration across value chains, may be required to overcome supply constraints and lock in lower costs. Our experience with these companies has highlighted what they are doing to manage the green-materials squeeze. Their initiatives are typically concentrated in three areas.

Developing market insights to manage uncertainties. Because supply, demand, and pricing will vary as market conditions change, leading companies have worked to model these factors over time. Their modeling tools often include supply cost curves, supply and demand scenarios, and pricing scenarios, along with projections for suppliers’ capacity buildouts, cost positions, and emissions intensity. They also need to be frequently updated to keep up with a dynamic market. Most companies will want to update their models at least every six to 12 months.

Taking a strategic, long-term approach to sourcing decisions. The unsettled outlook for pricing, supply, regulation, and technology, among other considerations, has prompted leading companies to devise long-term strategies for reducing carbon emissions in their supply chains. These strategies generally integrate three components:

• Decarbonize suppliers’ energy use by helping suppliers shift to renewable electricity and fuels (or by switching to suppliers that use these energy sources) and by helping suppliers improve energy efficiency. 
• Adjust the materials mix, which can involve not only switching to lower-emissions materials but also redesigning products to use different or less material than they do now. Developing so-called circular products—those that are designed so that their components and materials can be recovered easily for recycling or reuse—is one such way to lessen demand for material. 
• Partner with suppliers to expand production capacity for green materials or to implement low-emissions processes. The time and effort involved in building or reengineering production facilities means that companies that establish green-sourcing partnerships now can expect them to yield benefits starting in three to seven years.
• Building new capabilities beyond supply chain management. Most companies will need to invest in analytical and strategy-setting capabilities just to institute these practices. Other capabilities may be needed as well, such as design skills to eliminate supply chain emissions by changing products’ material requirements, or engineering capabilities required to develop product-as-a-service business models.

To transform a business in these ways will take time, but companies cannot afford to delay action. The green-materials shortage has begun, and leading businesses are preparing for it. Below, we describe three near-term actions that companies can take to get ready.

Step 1: Develop baseline insights on emissions, supply, demand, and pricing for every material input

Step 2: Chart a sourcing strategy to cut emissions over multiple time frames

Step 3: Implement low-emissions sourcing plans at speed

Tags : Anna-Christina Fredershausen Eric Hannon Stefan Helmcke Tomas Nauclér McKinsey sustainability supply chain emissions green steel recycled aluminium recycled plastic