Four decades after scientists quietly began warning corporate decision-makers that carbon emissions produced by human activity, if left unchecked, would inevitably alter the global climate, their predictions have proven accurate, sometimes startlingly so. And because of that, businesses now find themselves confronting another inevitability: that the health of their bottom and top lines depends on how adeptly they manage the costs associated with the overall environmental impact of their products, services and actions.

Because of this carbon emissions-climate change connection, a company’s competitive standing has become inseparable from its ability to monitor and manage carbon emissions and resource consumption, not just within its own organizational boundaries, but across the entire supply chain. The pressure for companies to better manage their carbon footprint comes from multiple directions. On the regulatory and policy front, there’s the European Commission’s new CBAM policy for taxing imports of materials such as steel and aluminum based on the greenhouse gases emitted to manufacture them, along with actions resulting from the recent COP26 proceedings in Glasgow, and new requirements in Japan that large companies report greenhouse gas emissions beginning in April, 2022. Companies also are being held increasingly accountable for their actions by investors, shareholders, customers and supply chain partners, with environmental, social and governance (ESG) factors carrying greater weight in the choices these stakeholders make. This new type of performance evaluation will inevitably grow more sophisticated and meaningful through this decade and beyond.

While the logical starting point for managing ESG considerations such as carbon footprint is within a company’s own organizational boundaries, the supply chain is where the carbon-reduction needle really begins to move for many sectors. In an analysis by CDP, an organization that manages a global environmental disclosure platform, suppliers reported upstream emissions that were, on average, 11.4 times greater than those produced through their direct operations (within the manufacturing sector, the multiple was reported at 7.2). What’s more, companies across the industrial landscape face up to $120 billion in new costs from environmental risks in their supply chains by 2026, according to CDP. The bulk of those costs — $64 billion — will be borne by the manufacturing sector.

All of which suggests that individual company carbon-reduction efforts are fundamentally intertwined with, and impacted by, the actions of their suppliers, logistics partners and vendors, and that excelling at managing carbon footprint exposure will give supply chains (and the entities that make them up) a commercial advantage.

The first step toward gaining such an edge is to integrate environmental considerations into every aspect of direct business operations, so the entire enterprise is synced to key performance indicators (KPIs) and strategies around carbon reduction, natural resource efficiency and circular pathways for repurposing, recycling and reusing materials and products at end of life.

From there, the focus expands horizontally, to the flow of carbon across the supply chain. If measuring carbon footprint were akin to stepping on the scale in your bathroom, that scale had better be capable of registering not just one individual’s weight, but that of the collective group and each of its parts. Likewise, companies must be able to evaluate and choose partners and pathways based on auditable carbon-reduction/ESG data. For that to happen, they’ll need to establish tighter, digitally connected business networks or ecosystems, within which multiple tiers of suppliers, business partners, logistics providers, distributors and the like can readily and securely share data and gain visibility and insight into materials sourcing and production upstream, to last-mile logistics and even product usage, returns and recycling processes downstream.

As we’re seeing today, extended networks like these provide other benefits. They can improve the resilience, agility and value of a supply chain. They also can provide the framework within which companies can share risk in collaboratively developing new revenue streams that cater to customers’ growing appetite for performance-based services with a green component. We’re seeing that play out today as well, with lighting, compressed air, PCs and more now offered as a service via usage- and subscription-based business models.

Amid the current global patchwork of net-zero targets, carbon taxation schemes and emission credit trading markets, one thing is certain: Individual companies, and individual countries, cannot achieve their carbon-reduction and ESG goals in a vacuum. As U.S. Climate Envoy John Kerry said this fall in announcing an agreement with China to work together to curb climate change, “On climate, cooperation is the only way to get this job done.” By taking a horizontal, supply chain-focused and network-based approach to managing their environmental impact, individual companies and their partners can begin to leverage carbon as a valuable and in certain respects renewable commodity that they can use in innovative ways to strengthen their top and bottom lines over the long term.

Peter Maier is president of industries and customer advisory at SAP.

Four decades after scientists quietly began warning corporate decision-makers that carbon emissions produced by human activity, if left unchecked, would inevitably alter the global climate, their predictions have proven accurate, sometimes startlingly so. And because of that, businesses now find themselves confronting another inevitability: that the health of their bottom and top lines depends on how adeptly they manage the costs associated with the overall environmental impact of their products, services and actions.

Because of this carbon emissions-climate change connection, a company’s competitive standing has become inseparable from its ability to monitor and manage carbon emissions and resource consumption, not just within its own organizational boundaries, but across the entire supply chain. The pressure for companies to better manage their carbon footprint comes from multiple directions. On the regulatory and policy front, there’s the European Commission’s new CBAM policy for taxing imports of materials such as steel and aluminum based on the greenhouse gases emitted to manufacture them, along with actions resulting from the recent COP26 proceedings in Glasgow, and new requirements in Japan that large companies report greenhouse gas emissions beginning in April, 2022. Companies also are being held increasingly accountable for their actions by investors, shareholders, customers and supply chain partners, with environmental, social and governance (ESG) factors carrying greater weight in the choices these stakeholders make. This new type of performance evaluation will inevitably grow more sophisticated and meaningful through this decade and beyond.

While the logical starting point for managing ESG considerations such as carbon footprint is within a company’s own organizational boundaries, the supply chain is where the carbon-reduction needle really begins to move for many sectors. In an analysis by CDP, an organization that manages a global environmental disclosure platform, suppliers reported upstream emissions that were, on average, 11.4 times greater than those produced through their direct operations (within the manufacturing sector, the multiple was reported at 7.2). What’s more, companies across the industrial landscape face up to $120 billion in new costs from environmental risks in their supply chains by 2026, according to CDP. The bulk of those costs — $64 billion — will be borne by the manufacturing sector.

All of which suggests that individual company carbon-reduction efforts are fundamentally intertwined with, and impacted by, the actions of their suppliers, logistics partners and vendors, and that excelling at managing carbon footprint exposure will give supply chains (and the entities that make them up) a commercial advantage.

The first step toward gaining such an edge is to integrate environmental considerations into every aspect of direct business operations, so the entire enterprise is synced to key performance indicators (KPIs) and strategies around carbon reduction, natural resource efficiency and circular pathways for repurposing, recycling and reusing materials and products at end of life.

From there, the focus expands horizontally, to the flow of carbon across the supply chain. If measuring carbon footprint were akin to stepping on the scale in your bathroom, that scale had better be capable of registering not just one individual’s weight, but that of the collective group and each of its parts. Likewise, companies must be able to evaluate and choose partners and pathways based on auditable carbon-reduction/ESG data. For that to happen, they’ll need to establish tighter, digitally connected business networks or ecosystems, within which multiple tiers of suppliers, business partners, logistics providers, distributors and the like can readily and securely share data and gain visibility and insight into materials sourcing and production upstream, to last-mile logistics and even product usage, returns and recycling processes downstream.

As we’re seeing today, extended networks like these provide other benefits. They can improve the resilience, agility and value of a supply chain. They also can provide the framework within which companies can share risk in collaboratively developing new revenue streams that cater to customers’ growing appetite for performance-based services with a green component. We’re seeing that play out today as well, with lighting, compressed air, PCs and more now offered as a service via usage- and subscription-based business models.

Amid the current global patchwork of net-zero targets, carbon taxation schemes and emission credit trading markets, one thing is certain: Individual companies, and individual countries, cannot achieve their carbon-reduction and ESG goals in a vacuum. As U.S. Climate Envoy John Kerry said this fall in announcing an agreement with China to work together to curb climate change, “On climate, cooperation is the only way to get this job done.” By taking a horizontal, supply chain-focused and network-based approach to managing their environmental impact, individual companies and their partners can begin to leverage carbon as a valuable and in certain respects renewable commodity that they can use in innovative ways to strengthen their top and bottom lines over the long term.

Peter Maier is president of industries and customer advisory at SAP.