Getting to grips with supply-chain sustainability

Over the past few years, infrastructure managers have had to become experts at managing the environmental and social performance of their assets. Ensuring that emissions are minimised and that any adverse social impacts are mitigated is now a core part of managing an infrastructure portfolio. But what about the sustainability impacts that an infrastructure project creates beyond its direct operations?

Supply-chain sustainability is a much harder issue for managers to grapple with, for the obvious reason that they lack direct control over suppliers. In fact, in many cases, managers are unlikely to even know which indirect suppliers are producing and processing the raw materials used in their assets.

Rory Sullivan, CEO of advisory firm Chronos Sustainability, says investors “have tended to assume a green asset is a socially responsible asset”, and that managers continue to delegate responsibility for sourcing to the project developer. 

But, amid increased scrutiny from regulators and NGOs, Sullivan says investors are now “rushing to cover these issues”. Infrastructure investors, he notes, have become “increasingly aware of the need to properly map the risks and impacts of these investments, and to put robust management plans in place to manage these”.

The dark side of renewables

Even the greenest investments can cast dark shadows in their supply chains. Investors in a renewables project might justifiably trumpet its sustainability benefits, but they could be considered partially responsible for the range of negative environmental and social impacts that occur in and around mines, refineries and factories further up the supply chain.

In the case of solar panels, for instance, around half the global supply of the key component material – polysilicon – is manufactured in the Xinjiang region of China. The Chinese government has engaged in a campaign of repression against the Uyghur ethnic group in the region, including through a well-documented forced labour programme.

According to an influential report published by researchers from Sheffield Hallam University in 2021, every polysilicon manufacturer in Xinjiang is complicit in forced labour. These polysilicon manufacturers supply many of the world’s leading solar panel manufacturers (most of which are also based in China). It is therefore difficult for the developer of a solar park to say with certainty that none of the components are tainted with forced labour.

This issue is an “industry-wide dilemma”, says Harri Halonen, partner at Nordic-focused infrastructure manager CapMan. He says CapMan has “quite strict questionnaires that we need answered before we can approve for panel manufacturers to be used”. But he notes that the underlying problem is the world’s excessive reliance on China for solar panel manufacturing – a problem that cannot be resolved easily, or by a single manager.

This is far from the only major ESG risk in renewable energy supply chains. Cobalt – which is a key component of the batteries used for energy storage – is often mined by child labourers in the Democratic Republic of the Congo. Meanwhile, rare earth elements – which are used in the motors of wind turbines – are linked to a range of environmental and labour abuses, especially in China and Myanmar.

Scrambling for Scope 3

Another key sustainability dilemma revolves around the greenhouse gas emissions that occur in the supply chains of an infrastructure asset. These emissions, which fall within the Scope 3 category of the widely used Greenhouse Gas Protocol emissions accounting standard, are often far greater than the emissions that come directly from an infrastructure project.

For example, a railway line is likely to be responsible for minimal emissions within its direct operations. However, the emissions produced throughout the lifecycle of the project, across all its supply chain stages, can be considerable. Scope 3 emissions would include the emissions produced when steel rails are manufactured, along with the emissions from the mining and processing of the iron ore and other raw materials used to manufacture the steel.

Funds that are subject to the EU’s SFDR have been required to report Scope 3 emissions since January 2023. The Science-Based Targets Initiative’s Net-Zero Standard also requires companies to set targets around Scope 3 emissions. But infrastructure managers, along with companies operating in almost every sector, could be forgiven for feeling confused about the correct approach to calculating their Scope 3 emissions (which includes emissions at both upstream and downstream stages of the value chain). “While there is pressure to report on Scope 3 emissions, there are ongoing discussions about who is actually responsible for these emissions,” says Sullivan.

In practice, almost all methods of calculating Scope 3 emissions rely on some level of modelling. Companies with complex supply chains rarely have full visibility over their potentially huge number of indirect suppliers – and may have limited leverage when requesting emissions data even from direct suppliers. An approach based on modelling is therefore the only practical way to produce a Scope 3 estimate in most cases.

In the long term, Halonen notes that managers and their portfolio companies need to work more closely with suppliers, in order to collect information on their Scope 3 emissions and other aspects of ESG performance. “That also highlights the importance of data because otherwise you can talk about sustainability in high level terms, but you might be talking about different things,” he says. “Ultimately, to be able to discuss more concretely, you probably need concrete data and KPIs to look at.”

The asset class has, however, begun to make progress in finding alignment on its approach to Scope 3 reporting. GRESB, for example, has produced a series of guidance documents for infrastructure managers on Scope 3 emissions reporting.

Halonen agrees that a co-ordinated approach is needed to ensure that suppliers have clarity on the types of data that they will be asked to provide to developers of infrastructure projects. He is optimistic that progress will be made as emissions reporting becomes more embedded: “Over time, we will get there.”