New Normal: Climate Change and the Supply Chain with Sanjith Gopalakrishnan (Read Transcript)

Season 2 Episode 3 of The ‘New Normal’ hosted by Dave Kaufman: New Normal: Climate Change and the Supply Chain with Sanjith Gopalakrishnan (Read Transcript)
Dave Kaufman – host: Climate change. It’s the largest and most pressing issue our society faces. And for so many of us who want to help, one of the biggest challenges is figuring out where to start. And once you do start, now you’re using energy-efficient light bulbs, composting, even driving an electric vehicle. Is what you’re doing making the slightest bit of difference? And what if there were others, who want to make a difference too?
Dave Kaufman – host: If you tuned into any news program in the fall of 2021, chances are you heard about two major stories. One was climate change. Here’s how COP26, the United Nations Conference on Climate Change, concluded. This is COP president Alok Sharma after the final agreement was watered down when India and China refused to accept phrasing that would phase out coal and instead would only accept that coal be phased down.
Alok Sharma: May I just say to all delegates, I apologize for the way this process has unfolded. I also understand the deep disappointment. But I think as you have noted, it’s also vital that we protect this package.
Dave Kaufman – host: At the same time, flooding and mudslides destroyed property and wiped out essential infrastructure in Canada’s westernmost province, British Columbia. Canadians were now left to wrestle with large questions that many didn’t expect would come up for years. And like lobsters in a pot, have Canadians only realized that the water is boiling now that it’s too late? As we watch the world dither and bicker over how best to solve climate change, are the answers actually right in front of our faces? If so, how do we compel those who can, to act?
Dave Kaufman – host: Welcome to the second season of The New Normal, the podcast exploring management research brought to you by Delve, the official thought leadership publication of McGill University’s Desautels Faculty of Management. I’m your host, Dave Kaufman.
Dave Kaufman – host: On this episode of The New Normal, we will discuss the impact that supply chain management has on our environment, how to mitigate the environmental impact caused by supply chain greenhouse gas emissions, the importance of fairly calculating a carbon tax, and whether all the progress made in the rationalization of greenhouse gases will actually make a difference and allow for us to achieve the Paris Accord targets.
Dave Kaufman – host: Joining me for this episode is Professor Sanjith Gopalakrishnan, an assistant professor of operations management at the Desautels Faculty of Management at McGill. His main research interests are in environmental and socially sustainable operations management. Dr. Gopalakrishnan is also interested in the interplay of information, incentives, and fairness in multi-agent environments and networks.
Dave Kaufman – host: When I sat down with him in mid-November 2021, British Columbia was being devastated by flooding and landslides. Entire communities lay underwater. Roads had been washed out. Some highways had been completely destroyed. It seemed that a natural jumping off point for our conversation was just how much of an impact supply chain management has on the climate change issues that we are witnessing today.
Sanjith Gopalakrishnan: When a company evaluates its environmental impacts or specifically its carbon emissions, emissions from its own direct operations, say for example, from its facilities or company vehicles accounts for a small fraction of its overall emissions. A 2019 study finds that the emissions from a company supply chain are on average about 5.5 times its direct emissions.
Sanjith Gopalakrishnan: And in certain sectors such as the retail sector or food and beverage companies, this ratio can go up to even 10 times or 20 times. And many companies nowadays, for example, tout their goals to be carbon neutral by let’s say 2030 or 2040, but often these goals do not include emissions from their supply chains. Reducing emissions from your own operations is certainly a good start.
Sanjith Gopalakrishnan: But given that your supply chain emissions six times, 10 times or 20 times your direct emissions, if companies want to seriously consider their carbon footprint and make a meaningful change, the holy grail of sustainable operations is in reducing your scope three, that is your supply chain.
Dave Kaufman – host: Let’s delve into this. According to leading Greenhouse Gas Protocols, a company’s greenhouse gas emissions are classified in three scopes. Scope one covers direct emissions from owned or controlled sources. Scope two covers indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the reporting company. Scope three emissions are a consequence of the activities of the company, but are from sources that are not owned or controlled by that company. Examples of scope three activities are extraction, production, and the transportation of purchased materials, as well as the use of products and services.
Sanjith Gopalakrishnan: Direct emissions from a company, which are typically, as I mentioned, the emissions from a company’s facilities or company vehicles, are often termed as scope one emissions. Scope two emissions are emissions which are used in the energy that a company needs. It could procure this energy from let’s say a utility company and all the emissions involved in that are scope two emissions. Scope three emissions are the emissions associated with the company’s supply chain. What these studies essentially show is that the scope three emissions far outweigh the scope one emissions.
Dave Kaufman – host: So scope three emissions are the hardest to eliminate and have the biggest negative environmental impact. If that is indeed the case, I was curious if Dr. Gopalakrishnan had suggestions for how to motivate organizations to take actions to fix or reverse the impact of scope three emissions. He suggests a twofold approach of both public pressure and government regulation.
Sanjith Gopalakrishnan: One is via increased consumer awareness and how consumers are moving towards making more informed and sustainable choices. The second is, of course, a much bigger piece, government regulations or sometimes even the threat of impending regulations, right, which in turn may lead to investor pressure. And for the most part, how our governments have backed away from regulating supply chain emissions. There are various reasons for this.
Sanjith Gopalakrishnan: The primary one being supply chains nowadays are truly global, and so there’s this problem of global coordination. A carbon tax in one country is, of course, helpful, but does little in mitigating supply chain emissions in the absence of a global carbon tax. From the perspective of a company, there are several challenges associated with managing supply chain emissions. The first and foremost being it’s even hard to define the scope of your supply chain. Should you consider only your own direct suppliers?
Sanjith Gopalakrishnan: Should you also engage your supplier’s supplier? And oftentimes companies may not even know who the suppliers of their suppliers are. Apart from knowing the scope of your supply chain, there are also difficulties involved in simply calculating the emissions from all supply chain members. But despite all this, there is some positive news. To go back to your question, companies are aware of these challenges and consistent attempts are being made by firms to measure their supply chain emissions.
Sanjith Gopalakrishnan: There are also accounting standards that have been developed. It is generally suggested that firms should follow the corporate accounting and reporting standard instituted by the Greenhouse Gas Protocol, GHG Protocol, which clarifies the accounting methodology, also provides examples of multiple firms, such as Ford, Walmart, and so forth that have successfully implemented their emissions accounting procedures.
Sanjith Gopalakrishnan: And following this trend, many companies like Walmart, Dell, Amazon, Ford have acquired with nearly 8,000 of their suppliers about their carbon emissions. This does show that there is a concerted effort by several major companies in managing their supply chain emissions.
Dave Kaufman – host: Let’s take a deeper look at Walmart and see if they’re as passionate about rolling back greenhouse gas emissions as they are about rolling back prices. I asked Professor Gopalakrishnan what tangible actions Walmart is taking to attempt to rationalize emissions in their supply chain.
Sanjith Gopalakrishnan: Yes. Walmart is an interesting case, right? As early as 2005, then Walmart CEO Lee Scott came out and announced that being a good steward of the environment and being profitable are not mutually exclusive. They’re one and the same. And since 2005 until now, Walmart has set a series of ambitious environmental targets for itself. Note, of course, Walmart is a retailer and it’s a retailer that in fact specializes in low price products. So naturally most of its emissions arise from its supply chain.
Sanjith Gopalakrishnan: Some are estimates are that about 90% of Walmart’s emissions are in fact from its supply chain. So if Walmart wants to be a good steward of the environment, then naturally it has to manage and mitigate its supply chain emissions. And it has set targets to do so, right? In 2017, it came out with Project Gigaton.
Dave Kaufman – host: Project Gigaton is an initiative announced by Walmart in April 2017, which aims to inspire suppliers to reduce greenhouse gas emissions from the global value chain. Specifically, the goal of Project Gigaton is to avoid one billion metric tons or one gigaton of CO2 emissions from their global value supply chain by 2030. One gigaton or a billion metric tons, is equal to the emissions from 211 million average passenger vehicles in a year, according to the Environmental Protection Agency’s greenhouse gas equivalency calculator.
Dave Kaufman – host: Project Gigaton is the scope three component of Walmart’s science-based emissions reduction target, which was announced in November 2016. As part of this science-based target, Walmart has also set up a goal to reduce scope one and two absolute emissions by 18% by the year 2025 compared to 2015 levels.
Sanjith Gopalakrishnan: And these are ambitious targets. Certainly it remains to be seen whether it can pull it off. Walmart has also engaged its suppliers beyond its immediate ones. It has inquired, as I said, with more than 6,000 or 8,000 of their direct, as well as indirect suppliers about their carbon emissions and has begun engaging with firms that are deeper in its supply chain.
Sanjith Gopalakrishnan: Towards this end, it’s also collaborating with academics and environmental third party groups to identify processes in its supply chain that generates significant carbon emissions. And it is noteworthy, as I said, Walmart is an interesting case because it’s doing this voluntarily in the sense there is no government regulation asking it to manage its supply chain emissions.
Dave Kaufman – host: I was left curious though. Without them being forced to undertake these initiatives, what is motivating Walmart to act on its own without the government forcing them to take action?
Sanjith Gopalakrishnan: There are some possible reasons. There is a small, but growing segment of environmentally conscious consumers. So it is possible that there’s some benefit in going green because it will allow Walmart to attract these customers. It is also well-known that Walmart has and continues to receive some bad press for its wages, how it workers are treated, and so forth. And it is possible that this is a way by which Walmart aims to repair some of its tarnished reputation by positioning itself as a company that takes environmental sustainability seriously.
Sanjith Gopalakrishnan: It is also possible that it simply wants to get ahead of any future government regulations and not be caught flat footed. Again, many of these initiatives remain in the realm of ambition and it remains to be seen whether it follows through. However, its efforts in engaging its supply chain and not just its direct suppliers, but also indirect ones is a model that other companies can emulate.
Dave Kaufman – host: For more information on Project Gigaton, you can visit Today, Walmart remains the exception to the rule. Most companies have not taken as ambitious an initiative as Project Gigaton to make their supply chains more environmentally friendly. Here is where a carbon tax could make a difference. I asked Dr. Gopalakrishnan if he believes that the benefits of carbon tax outweigh the drawbacks. I also asked him to highlight some of the challenges that companies who operate under a carbon tax system face.
Sanjith Gopalakrishnan: Carbon taxes are definitely an important policy tool in the arsenal of regulators. Economists, for example, overwhelmingly support carbon taxes as the right policy instrument to tackle this problem. However, as regards to supply chains, as I’ve briefly alluded to before, supply chains are global and carbon tax instituted in one jurisdiction of one country, like let’s say Canada or the US, does not do a whole lot. I mean, it’s, of course good, but it does not change the landscape completely.
Sanjith Gopalakrishnan: What we instead need is a globally coordinated policy framework. In the recently concluded COP26 Summit, for example, Prime Minister Trudeau has called for a global carbon tax of some sort. This is a proposal that is more on the right track, right? Because in the absence of such a global carbon tax, companies, particularly let’s say manufacturing companies that are operating in high carbon tax jurisdictions, are in some ways being unfairly treated with respect to manufacturers in other countries who do not have to face this tax.
Sanjith Gopalakrishnan: This is something that you hear about a lot as you also brought up, which is companies fight these carbon taxes because they feel they’re being penalized with respect to other companies in low carbon tax jurisdictions. Another potential solution that is gaining currency is the idea of carbon tariffs. Carbon tariffs is essentially an import tax on carbon intensive imports. This will also help level the playing field a bit.
Dave Kaufman – host: I was curious if a company operating in multiple regions could perhaps shift their work so that aspects of their supply chain management that would fall under a carbon tax would be shifted to other countries where there is no carbon tax. In other words, are we already seeing companies gain the system?
Sanjith Gopalakrishnan: Certainly. Certainly this could happen. In fact, you already see a bit of this happening with corporate income taxes, right? Because you have different levels of corporate tax across countries, companies do tend to shift around their operations a little bit in order to take advantage of these differences.
Sanjith Gopalakrishnan: If you also add on top carbon taxes and you have different carbon taxes in different countries, certainly companies would locate more carbon intensive parts of their operations, like let’s say manufacturing, in low carbon tax countries or countries without a carbon tax. This certainly happens within a firm or within a company, but it also happens across companies.
Sanjith Gopalakrishnan: In the sense, you have let’s say a manufacturing company in the US is going to find it harder to maintain its operations or maintain its profitability when it’s competing with a manufacturing company in let’s say Bangladesh or India, which may not have to pay this tax.
Dave Kaufman – host: In that case, how would we fairly calculate greenhouse gas emissions and get companies to pay their fair share, especially when we think about the impact of products that are made in multiple regions?
Sanjith Gopalakrishnan: This is a great question, but it’s a very hard one to answer. For example, something you hear about very often when you talk about let’s say Canada’s a responsibility to climate change is the number 1.6%, right? Because 1.6% is roughly Canada’s share of global emissions. The point being that even if Canada magically let’s say disappear tomorrow, it would not make much of a dent on global emissions, but this misses a lot of nuance.
Sanjith Gopalakrishnan: Because when we talk about this number 1.6, that only considers production emissions, so that’s the share of emissions that are being generated within Canada’s borders. Should we not be looking at consumption emission? Wealthy countries like Canada and their citizens certainly consume a lot more. Should we not be looking at the share of consumption emissions that Canada contributes to?
Sanjith Gopalakrishnan: Further, should we not also be looking at let’s say historical responsibility or share of historic emissions? And all of these are different metrics of responsibility which help us form a more accurate picture overall. But at the end of the day, there is some merit to this criticism that Canada can only do so much on its own. This essentially goes back to what I said before that is we do definitely need global action in cooperation.
Sanjith Gopalakrishnan: And we do not yet have legitimate global institutions that can achieve cooperative action on climate change in a meaningful way. We need to bring in countries like China and India onboard and ensure their corporation. It may be via incentives, climate financing, or maybe carbon tariffs, as I mentioned before. But long story short, we need to have effective global governance mechanisms in place.
Dave Kaufman – host: And herein lies the problem. Without those effective global governance mechanisms in place and without a basically agreeable worldwide consensus on curbing greenhouse emissions, how can we solve this problem in an equitable fashion?
Sanjith Gopalakrishnan: You essentially have this dichotomy, right? You have countries like let’s say the US, Canada, and essentially Western countries, or as they now call them the Global North, who have a higher historical responsibility for carbon emissions. But now a bulk of the emissions arise from countries like China and India who are still developing.
Sanjith Gopalakrishnan: You essentially have this tension which plays out in all global conferences, like the COP26 and even the earlier versions, which is China and India are resistant to take on a bulk of the responsibility on climate action, because they rightly feel that it’s going to hinder their economic development. A key part of this puzzle is I would say climate financing, which will ensure that these countries like China and India are able to come onboard without really hindering their own economic growth and development.
Sanjith Gopalakrishnan: Another part of the puzzle is also investments in renewable technologies, right? Countries like US and Canada can lead the way in investing in these technologies, demonstrate that these technologies are indeed viable, and hopefully then service templates which countries like India and China can then emulate.
Dave Kaufman – host: Therefore, is government intervention the only way that corporations will achieve the intended Paris targets? And if that’s the case, I was curious if Dr. Gopalakrishnan thinks that the way to truly solve this problem is to incentivize the solution or if there is any room at all for altruism.
Sanjith Gopalakrishnan: I do not want to say that government intervention is the only way, but certainly, as I mentioned before, government regulations let’s say carbon taxes or other form of regulatory action do go a long way in ensuring companies act responsibly simply because, as you mentioned, it incentivizes them to be sustainable. However, there is a missing piece between government interventions and altruistic intent, which I again want to bring up, which is consumer action and choice.
Sanjith Gopalakrishnan: Companies do want to be seen as being responsible corporate citizens. There are numerous instances as they’ve cited where companies are going above and beyond what the regulators are currently asking of them. Certainly there’s a possibility of greenwashing, but there are many cases of companies genuinely taking responsibility for their supply chain emissions and finding ways to mitigate them. Sometimes this also results in some ancillary benefits for the company, such as simply more cost efficient production processes.
Dave Kaufman – host: Greenwashing is the term for when a company claims to be acting in an environmentally sustainable fashion, but their actions are not in step with their claims. Sadly, this happens more than we think.
Sanjith Gopalakrishnan: A good example would be a company which aims to be carbon neutral by 2030, let’s say, and it is completely ignoring the fact that maybe 95% of its emissions are from its supply chain and it does not include the supply chain emissions when it says it wants to be carbon neutral. This is a form of greenwashing where you’re not really revealing the clear true picture, but you’re trying to get the benefits from being seen as environmentally sustained.
Dave Kaufman – host: When I think of sectors that try extra hard to make a point of how environmentally conscious they are, the oil and gas behemoths come to mind. Can this sector actually make a difference, or is this an example of greenwashing? And are there other sectors where greenhouse gas mitigation will be equally difficult to achieve?
Sanjith Gopalakrishnan: It is true that there are certain sectors in which mitigating the greenhouse gas impact is going to prove to be impossible or at least challenging. I hesitate to use the word impossible, but there certainly are sectors, as you mentioned, oil and gas is one example, where mitigating supply chain environmental impacts will prove to be far harder and far more challenging than in others. Another example that comes to my mind is fashion and, more specifically, fast fashion.
Sanjith Gopalakrishnan: And in both these cases, oil and gas and fast fashion, really it is due to the nature of the industry, right? If you’re producing oil and gas, it’s hard to see how you would pivot it away from that. Similarly, if you are in fast fashion, low prices, mass production, fashion styles that appear and disappear rapidly, which require quick turnarounds from manufacturers, all of those places, an enormous focus on efficiency and speed at the cost of or the expense of other considerations, right, like environmental and social responsibility.
Sanjith Gopalakrishnan: It is too early to say whether fast fashion can become green. It is also not clear to me how the oil and gas industry can become green. But as a society, are there solutions to this problem? Certainly, right? In terms of oil and gas, clearly the solution would be moving towards let’s say electric vehicles or renewable electricity. In terms of fast fashion, maybe it may involve going back to the basics, right? Reduce, reuse, recycle, and thereby limit the demand for fast fashion in the first place.
Dave Kaufman – host: And to conclude, I wondered if Dr. Gopalakrishnan held out hope for the future. His response is one that we continue to hear in this New Normal series and is one that is shared by many of those who are leaders of thought. Hope springs eternal. But in itself, it is not enough to rest on without the hard work needed to accomplish enormous things.
Sanjith Gopalakrishnan: I am indeed optimistic. I do think there’s a growing recognition surrounding the urgency of mitigating carbon emissions. People are demanding more of their governments, as well as of their corporations. Consequently, wherever we look today, there are both small and large scale initiatives, both public and private, that are taking shape. To summarize, I would say we have reason to remain optimistic, but not complacent.
Dave Kaufman – host: The technology is available. The urgency is obvious. The mitigation of greenhouse gases and supply chain management could have a massive effect on the world ability to achieve the target set out in the Paris Accord. But the roadblocks on the road to success are many. Will companies lead the way, or will they be forced into sustainability through legislation? Join us as we navigate this new normal together.
Dave Kaufman – host: The New Normal is brought to you by Delve, the official thought leadership publication of McGill University’s Desautels Faculty of Management. I’m your host, Dave Kaufman. Producers of today’s episode, Dave Kaufman, Robyn Fadden, and David Rawalia. The technical producer of The New Normal is David Rawalia.