Building Sustainable Supply Chains

Supply Chains: The Nexus of Sustainability Risks and Opportunities

For most companies, supply chains account for most of their environmental and social impact:

• Scope 3 Emissions: According to CDP, the global emissions survey platform, companies reported that their Scope 3 supply chain emissions were, 26 times greater on average than their emissions from their direct operations.
• Workplace Risks: The International Labor Organization (ILO) reports that every year 2.78 million people die around the world, because of workplace safety hazards. That’s over five people dying every minute.
• Resource and Biodiversity Impact: The UN Environmental Program (UNEP) calculates that the extraction and processing of biomass (e.g., agricultural crops and forestry) accounts for 90 per cent of land-related biodiversity loss and water stress.

In China, where supply chains are concentrated and regulations are rapidly evolving, these risks are magnified. Yet, China also presents a unique opportunity to innovate and lead in supply chain sustainability.

What is a sustainable supply chain?

Simply stated, it means making sure that the products and services companies buy are as sustainable as possible, with the lowest environmental impact and most positive social results.

Unlocking Value Through Supply Chain Transformation

A sustainable supply chain is not only a regulatory necessity, but can also be a driver of competitive advantage:

• Cost-Effective Impact: Decarbonizing the supply chain can yield the highest emissions reductions per dollar spent.
• Operational Efficiency: Initiatives such as using recycled materials or improving resource efficiency can lead to cost savings.
• Improve Resilience: Transparent, sustainable supply chains are better positioned to withstand disruption.
• Compliance Risk Mitigation: Regulators around the world are deploying new tools with real teeth to integrate sustainability into supply chains.

Lessons from Successful Collaborations

Leading companies across industries are already demonstrating how collaborative efforts in supply chain sustainability can deliver transformative results. Here are some examples:

1. Investing in Renewable Energy

Suppliers are installing renewable energy systems, not only rooftop solar at their production sites, but some are also joining their customers to invest in more ambitious power generation projects to cut their Scope 3 emissions significantly. In this way, businesses not only reduce emissions but also lower long-term energy costs.

2. Integrating Clean Energy in Procurement

Companies are embedding clean energy requirements into their procurement processes. Suppliers are being incentivized to transition to renewable energy or implement energy efficiency upgrades as part of their contracts. These mandates encourage suppliers to improve their manufacturing processes in a way that aligns with the buyer’s sustainability goals.

3. Providing Training and Tools

Recognizing the capability gap among their suppliers, more businesses are providing training programs, toolkits, and digital platforms to help suppliers track emissions and adopt sustainable practices. One initiative in China involved training small and medium-sized suppliers on renewable energy procurement and offering data platforms, which simplify their emissions calculation and reporting needs.

4. Piloting New Technologies

Technology pilots are becoming a cornerstone of supply chain transformation. For example, companies are collaborating with suppliers to test low-carbon materials, implement circular manufacturing systems, and deploy advanced AI solutions for emissions tracking. In one case, a company co-invested with their logistics services provider, and leveraged local incentives, to pilot green hydrogen delivery trucks. If successful, this program will be scaled across their transport network.

5. Circular Economy Partnerships

Circularity is rapidly gaining momentum. Increasingly, companies are working alongside suppliers to establish take-back programs for end-of-life items and incorporate recycled materials into new products. Cross-sector partnerships are also emerging, with businesses in China collaborating on shared recycling facilities to reduce costs and environmental impact. It’s also an area where positive social impact can be generated, with one company collecting and recycling its used products to be re-purposed into sports surfaces.

Call to Action

To build a sustainable supply chain that delivers ambition, resilience, and regulatory compliance, businesses should:

Assess and Prioritize: Conduct thorough risk assessments to identify hotspots for improvement, focusing on both environmental and social factors. In China, this includes mapping supply chain tiers and understanding local policies and the regulatory environment.

Engage Suppliers Collaboratively: Move beyond transactional relationships by collaborating with suppliers to achieve shared goals. This can involve co-developing sustainability initiatives or offering incentives for meeting sustainability targets. Cooperating with other local stakeholders can also result in a broader industry impact, as they are often very supportive of actions that result in new performance benchmarks for others to follow.

Leverage Technology: End-to-end transparency is the key to meeting new compliance requirements and achieving ambitious goals. Utilizing data and digital tools like AI improve visibility, goal setting, and monitoring. These technologies are particularly valuable when looking beyond tier one suppliers.
Commit to Net Zero: Align supply chain emissions reductions with science-based targets and support suppliers to use renewable energy and pilot innovative solutions.

Build Circularity: Embed circular economy principles into procurement and manufacturing. For example, prioritize suppliers that use recycled materials and establish systems for product take-back and recycling. Actively engage with forums that are designing industry standards. By sharing experience and expertise emerging risks and opportunities can be more clearly understood.

Why China Holds the Key

As the center of global manufacturing, China represents both the greatest challenge and the most promising opportunity for supply chain sustainability. With its policies promoting circularity and advancements in renewable energy, businesses that act now can secure cost-effective solutions and competitive advantages.

The Future of Sustainability Lies in the Supply Chain

Effective action, resilience, and compliance depend on what happens within the supply chain. Companies that prioritize sustainability in China can achieve meaningful emissions reductions, enhance resilience, and unlock long-term value. Moreover, by contributing to China’s sustainable development agenda, companies can find new ways to enhance their reputation and brand with Chinese stakeholders.

By collaborating with suppliers, leveraging new technologies, and embracing innovative practices, businesses can turn supply chain sustainability from a challenge into a strategic advantage.

The road ahead requires commitment and collaboration, but the rewards—both environmental and economic—are worth the effort.

This article draws upon Deloitte China’s recent report: Building Sustainable Supply Chains – Managing sweeping new regulations whilst achieving Net Zero goals, with a contribution from Aaron Finley, a Deloitte Consultant. Contact Robert Hansor (rhansor@deloittecn.com.cn) for more information.