Research shows that steelmakers’ suppliers are poorly aligned with decarbonization efforts

Master’s thesis analyzed the greenhouse gas mitigation strategies of a steel mill’s suppliers.
Administration
08 December 2023
Research shows that steelmakers’ suppliers are poorly aligned with decarbonization efforts

Climate change is now a reality and there is growing pressure on companies to adopt measures to mitigate its impacts. Faced with this market reality, a study carried out at FGV investigated the reality and motivators of a supply chain in the steel industry – one of the most polluting in terms of carbon emissions.

Marino Yago Fagundes’ thesis for the Professional Master’s in Management for Competitiveness Program (MPGC) at the Sao Paulo School of Business Administration (FGV EAESP), which obtained an Honorable Mention in an awards scheme, sought to investigate whether the suppliers of a steel company have decarbonization strategies and what the motivators were for adopting such strategies. Emissions in the supply chain are significant, but they are still often seen as a non-mandatory item in greenhouse gas measurement protocols, meaning they are sometimes neglected.

In general, Fagundes observed that there is still a low level of adherence to decarbonization strategies in the supply chain in question, although there are signs that a significant number of the examined companies are planning to adopt such strategies in future or at least considering this.

Fagundes spoke to FGV about his research findings and their impact on academia and the business world. Check out the interview below:

1.      In your research, you set out to answer the following questions: “Are suppliers of steelmaking raw materials adopting decarbonization strategies? What strategies are being adopted and what are their motivators?” What path led you to these questions?

When I started my master’s degree, I wanted to research another subject, but halfway through I realized that the hot topic at the company I was working for was something else. Everyone was discussing climate issues and decarbonization in the steel industry, which is naturally very polluting. Based on this perception of the business world, I found a gap, because everyone was talking about climate issues but they didn’t know what to do, where to go or exactly what it was all about. When you look at supply chain research, it’s extremely hard to find the topic of decarbonization. Everything is focused on steelmaking companies themselves and what they do directly, but there is a huge gap in the literature when it comes to their supply chains.

2.      And what did your results indicate?

The first point is this gap in the literature. We can see it reflected in the business environment. We don’t have any theory and we don’t have people working empirically on the subject either. We did a cluster analysis to understand the situation of suppliers in this area and found only two types of companies. I expected to find various levels of development: a model company, one in transition, a beginner, and so on. That’s not what I found. There were only two levels. First, there were virtual beginners, with some degree of motivation and an intention to think about the subject, but no governance or strategy in place. Second, there were suppliers with a higher degree of motivation, a certain level of governance and some type of strategy in place. I didn’t find any intermediate level between these two profiles. I looked at companies of all sizes, from small to multinational ones. In other words, it’s a topic that is still starting to gain traction in the market and we don’t have any good models of suppliers that have strategies to reduce greenhouse gas emissions.

3.      What factors can influence a company to adopt decarbonization strategies?

In the research we saw that nationality and whether a company is publicly traded are influencing factors. This is due to legislation. Companies based in Europe are generally more advanced on the subject because Europe is driving these discussions worldwide and implementing regulations in this area most intensively. Publicly traded companies are generally more regulated and more transparent, and they were the companies that were most engaged in the study’s data.

4.      What motivators did you find for companies to engage in decarbonization?

The biggest pressure factor found in the study was clients, i.e., the steel mills they supplied. On the other hand, employee pressure had the least influence. In other words, what employees think is of little relevance to decision making in terms of sustainability. Instead, suppliers are more concerned about their clients’ position. Along with clients, internal risk assessments and encouragement or pressure from society were the most relevant factors. This gives a guide to the pressure point that needs to be used for policies to be developed, both within companies and for public policies. I believe that the research also provides guidance for those who are legislating.

5.      We’re just starting to discuss decarbonization in the supply chain, but what are the next steps?

The industry is still very little engaged in decarbonization. The study showed that part of the problem is due to a lack of legislation. Brazil’s Congress is now discussing some measures to regulate the carbon market. Europe already has a tax per ton of greenhouse gases emitted, but the protocols for measuring these gases generally oblige companies to measure scope 1 and 2 emissions, meaning the gases that they directly emit (scope 1) and those that come from the energy they use (scope 2). Scope 3 emissions, which my research looked at, are indirect emissions, which come from suppliers and clients, and measurement is generally optional in the legislation. Europe, at the forefront of this debate, realized that there is no point in making scopes 1 and 2 mandatory but not scope 3. Companies started sending highly polluting operations to other countries whose regulations are not as strong, and where they will not be taxed. This is what they call carbon leakage and a new protocol is being discussed to prevent this type of deviation, to ensure that all emissions are measured for taxation purposes, regardless of where they occur. This will have an impact on the whole world. Those who aren’t prepared are in for a very unpleasant surprise, as it will generate more costs and affect the ability to export products. Business competitiveness will be affected if companies are not prepared.

6.      And is Brazil prepared?

No, far from it, despite our enormous potential in agriculture and all our land, where we could plant eucalyptus trees to generate biomass and have clean energy, for example. We depend heavily on hydroelectric power, which is clean, and we have more potential for wind power. What Brazil has in terms of preparation is organic and accidental. The country already has this potential and now it has the chance to generate a competitive advantage regarding sustainability. However, in terms of preparing companies, we’ve seen that everything is still in its infancy. There is still a lot to be done.

7.      What advice do you have for supply chain professionals in this context?

Supply chain professionals increasingly have to know a bit about everything. It used to be about logistics, distribution and storage. This is broadening and now you need to understand automation, information technology and global chains. Now, more than ever, supply chain professionals need to be able to understand the context of sustainability. Both from the point of view of what it means for society effectively and your image as a company, but also because it influences day-to-day decision making. Due to new taxes on greenhouse gas emissions, the most polluting supplier may be more expensive than the least polluting one, even if the latter supplier charges higher prices. I believe that existing zero-carbon certifications could generate a lot of money in the medium term for those who ride this wave. Today, professionals need to understand how sustainability issues affect business and how this can translate into costs for the business. These are skills that professionals are not yet used to.

8.      Has the Professional Master’s in Supply Chain Program helped you prepare more for this new context?

It gave me a much more holistic view of supply chains. I previously did two non-degree specialist diplomas, both of which left something to be desired. The master’s degree exceeded my expectations by combining three things that I think are important. First, it provided technical knowledge and a more holistic view of supply chains and the issues that permeate them, including sustainability. Second, I gained management skills based on evidence, which is lacking in the market. Too many people make decisions based on their feelings. Third, I developed my soft skills. The networking was fantastic and so were the exchanges in the classroom. The level of professionals was very high. All of them were very interested in learning and had backgrounds that contributed a lot.

To find out more about the FGV Professional Master’s in Supply Chain Program, click here

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