Let’s talk about climate change and the IT channel supply chain

Can partners put a price on carbon consciousness?

The 2021 United Nations Climate Change Conference – known as COP26 – kicked off on 31 October, bringing to the fore, yet again, the sometimes-thorny topic of climate change mitigation and the role that curbing carbon emissions can play in it.

One of the big focus areas for COP26 was to underscore the Paris Agreement, the legally binding international treaty on climate change that was signed in 2015, and review progress made thus far by signatories to the accords.  

At the core of the Paris Agreement was the goal to limit global warming to well below 2 degrees Celsius, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.  

Countries that are signatories to the Agreement are expected to reach a global peak of greenhouse gas emissions as soon as possible to achieve a climate neutral world by mid-century.

COP26, held in Glasgow, has certainly made the issue of emissions reduction seem more prominent and urgent than it usually is – and it’s almost always bubbling away in the public discourse.  

And major players in the global tech industry appear to be responding in droves.  

The two-week event has arrived amid a year in which an increasing legion of prominent IT firms have either ramped up, or pledged, their commitment to net zero, also known as carbon neutrality – a state in which carbon dioxide emissions are either balanced by their removal from the atmosphere or are simply not produced in the first place.  

In September, for example, cloud customer relationship management (CRM) software vendor Salesforce claimed that it had become a net zero company across its entire value chain and had achieved 100 per cent renewable energy for its operations.

Salesforce also unveiled something called ‘Sustainability Cloud 2.0,’ an offering designed to accelerate its customers’ path to net zero by giving organisations the ability to track and reduce their carbon emissions and become a sustainable business.

“Climate change is one of the most pressing crises we face as a planet and each one of us has a responsibility to help,” Salesforce chair and CEO Marc Benioff said at the time. “I'm proud that Salesforce is one of the few companies to have achieved net zero and 100 per cent renewable energy, but we can't stop until we embrace every solution and get every business on board.  

“Together, we can sequester 100 gigatons of carbon by restoring, conserving or growing 1 trillion trees; energise an ecopreneur revolution to develop innovative climate solutions and accelerate the Fortune 1000 to reach net zero,” he added.

The move saw Salesforce join a chorus of tech players, particularly large global cloud and software vendors, clamouring to outdo each other in their race to reach net zero.

The energy production parlay comes as many of the world’s largest cloud services vendors are getting in on the action. Indeed, some have been on the path to net zero for years, while others claim to have already contributed towards the change.

In 2019, Amazon Web Services (AWS) parent Amazon, together with Global Optimism, co-founded The Climate Pledge, a commitment to be net zero carbon by 2040. Signatories to The Climate Pledge agree to measure and report greenhouse gas emissions on a regular basis and implement decarbonisation strategies in line with the Paris Agreement through business changes and innovations.  

AWS alone claims to be making progress towards powering its operations with 100 per cent renewable energy by 2025.

On 20 September, a day before Salesforce announced its net zero milestone, Amazon announced that 86 new signatories had joined The Climate Pledge, including HP and Salesforce, bringing the total to over 200.  

Microsoft has also been focusing on the issue for years and, in early 2020, made a pledge to be carbon negative by 2030. By 2050, Microsoft hopes to remove from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975.

“We recognise that progress requires not just a bold goal but a detailed plan,” Microsoft president and vice chair Brad Smith said in a blog post published on 16 January last year. 

“We are launching today an aggressive program to cut our carbon emissions by more than half by 2030, both for our direct emissions and for our entire supply and value chain.  

“We will fund this in part by expanding our internal carbon fee, in place since 2012 and increased last year, to start charging not only our direct emissions, but those from our supply and value chains,” he said.

Now, Microsoft is working to support its customers on the path to net zero, with the vendor announcing in late October this year – just in time for COP26 – the public preview of its Microsoft Cloud for Sustainability offering, aimed at helping organisations to effectively record, report and reduce their carbon emissions.

And Microsoft isn’t the only vendor extending its climate initiatives to customers, with a number of cloud providers and software-as-a-service (SaaS) vendors making similar moves.

Indeed, it seems that pledges of net zero and overt climate-related initiatives have been rife primarily among those vendors that sell cloud services or supply much of their wares via the cloud.  

Certainly, just about all of the world’s major hyperscalers are getting in on the action, meaning that any other SaaS vendors that tap into those hyperscalers’ infrastructure can draw upon their upstream cloud suppliers’ carbon emissions reduction efforts in order to make their own offerings a little cleaner.

But it’s not just cloud providers that are pushing the climate agenda, plenty of hardware vendors are getting in on the action as well.  

Dell Technologies, for example, has made a commitment to reach net zero greenhouse gas emissions across Scopes 1, 2 and 3, as laid out by the Greenhouse Gas Protocol (GHG) – a widely used greenhouse gas accounting standard – by 2050.

Scope 1 emissions, as defined by the GHG, are direct greenhouse emissions that occur from sources that are controlled or owned by an organisation.  

Scope 2, meanwhile, refers to indirect emissions associated with the purchase of electricity, steam, heat or cooling, according to definitions outlined by the United States Environmental Protection Agency.  

Scope 3 is a somewhat trickier proposition, relating to emissions that are the result of activities from assets not owned or controlled by a reporting organisation but which can indirectly impact the value chain.

“Operational GHG emissions are only part of the story,” Dell claimed in a statement on its corporate website. “The largest parts of Dell Technologies’ carbon footprint occur upstream in our supply chain and downstream as our customers use our products.

“So, we are partnering with our direct material suppliers to meet a greenhouse gas emissions reduction target of 60 per cent per unit revenue by 2030,” the vendor noted.

And herein lies the crunch for many players in the technology industry: it’s all about emissions occurring up the supply chain.

The same applies to consumers of technology, particularly enterprises, many of which are adopting their own climate goals and carbon emissions pledges – this is especially true at the big end of town and is often incorporated into organisations’ broader environmental, social and governance (ESG) policies.

So, is this prioritisation of environmentally progressive policies affecting the decisions that enterprises make about which IT vendors and partners they engage for technology products and services?

Well, yes and no.  

Counting carbon as a competitive differentiator?

Given that the upstream supply chain seems to account for a fair proportion of an organisation’s carbon emissions footprint, it would make sense to think that the emissions footprint of IT providers and their vendor partners would be a major factor when companies decide which partners and vendors to engage.  

Anecdotally, however, this doesn’t seem to be the case – at least not in the cloud software and cloud services game. Cloud and SaaS-focused channel players on the ground in the region suggest that such conversations rarely come up, if at all.  

Which is strange, because it is software and cloud services vendors that seem to be making the biggest show and dance about their pledges of net zero and other environmental initiatives.  

Perhaps this has something to do with where their investment dollars are coming from rather than broad stroke trends in demand from customers.

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According to Neil McMurchy, research vice president at analyst firm Gartner, much of the drive behind such initiatives for big cloud services and software vendors is probably coming from the investment community.

“It [customer demand] is probably non-existent,” McMurchy told ARN. “But it’s going to change. Any publicly traded vendor is well advanced in terms of their ESG. From a capital market perspective, investors...are putting a value on compliance.  

“The large vendors and smaller vendors too...whether it’s altruistic or if it’s the case that they don’t want to be a standout, those suppliers are going to do it.

“Eventually it will work through the procurement processes of end customers. Even now, there will be some procurement departments increasing their compliance focus on ESG.”

Indeed, many of the big capital investment firms have, over the past several years, developed a fierce appetite for companies that align with the evolving environmental responsibility concerns and requirements of investors.

US-based multinational investment management firm BlackRock, for example, has been busy positioning itself as a global ESG leader – and this has affected many of the decisions the company, considered by many to be the largest asset manager in the world, has made in recent years.  

In 2020, BlackRock’s chairman and CEO Larry Fink famously wrote an open letter addressed to CEOs of major companies everywhere revealing that climate change was almost invariably the top issue raised by its clients – investors – around the world.

“From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios,” Fink said in the letter. “They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs and demand across the entire economy.

“These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself.  

“In the near future – and sooner than most anticipate – there will be a significant reallocation of capital,” he added.

In his letter, Fink took his firm’s position a step further, stressing that BlackRock would begin to be “increasingly disposed” to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.

This, no doubt, would have been a wake-up call to the companies BlackRock and other firms like it, invest in.

It is significant that BlackRock is known to be among the top investors in Microsoft which, even among cloud and software vendors, seems to be ahead of the curve.

Clearly, if there’s little or no direct demand for climate-conscious operations from customers, directives from institutional investors appear to be having no small effect on the actions of their investments.  

As McMurchy suggests, these top-down initiatives are likely to be trickling down through the IT supply chain, all the way to procurement.  

And this is at least one reason why channel players should have climate change and carbon emissions on their radar – especially from a supply chain perspective.  

Another reason, according to McMurchy, is that making moves to address environmental considerations in the IT supply chain is probably good for business.

“It’s going to play out through procurement,” he said. “Does the channel need to worry about it at the moment? No. But they have to think about it because it will become part of what they need to do [to be on the playing field].

“Ultimately, larger organisations are going to insist on a level of compliance right through the IT supply chain. Is it urgent? No. Is it demand driven? No. But why would you not do it? It’s ultimately good business,” McMurchy added.

It turns out that McMurchy’s observations are already playing out in at least some areas of the channel, if not others. 

Although conversations about carbon emissions footprints and ESG more generally don’t appear to be particularly widespread in the cloud and software services space, they are definitely becoming more prominent on the hardware side.  

Anecdotally, it seems that there is legitimate demand among at least a handful of larger partners in the hardware space for environmentally sustainable practices and ESG initiatives more broadly across the IT supply chain, including vendors and their upstream partners.  

This is being driven by many of the customers that larger partners often find themselves pitching work for, such as large enterprises and government organisations.

It should be noted that, on this front, such demand fluctuates throughout the entire Asia Pacific region. In Australia, for example, it seems that the demand for an environmentally-sound supply chain remains very much in its infancy, although it is definitely present.  

In Singapore, however, where the government has been particularly progressive on such matters, it would make sense that the demand for partners to meet stringent ESG requirements is very much alive and well.  

Singapore, considered the top hub in ASEAN for data centre sites, has even placed a moratorium on new data centre developments due to environmental impact concerns, effectively pausing all new data centre facility development applications.

As such, some partners are now finding themselves employing environmental aspects provided by their vendor partners as a 'pass to play' in a particular market or as a point of differentiation – this is especially true in the hardware space, where there are considerations of logistics and manufacturing emissions in addition to the general carbon footprint any organisation would need to think about. 

From McMurchy’s perspective, carbon emissions and ESG considerations in general throughout the IT supply chain should not be thought of merely a point of competitive differentiation, but more as a factor that can help partners and vendors “get on the playing field” for various market sectors.  

And while the private sector – with the exception of large enterprises at the big end of town – continues to see little overt demand for such considerations, the government sector seems to be coming to the party, with partners that service the public sector increasingly finding themselves needing to comply with certain conditions if they want to vie for government work.

Naturally, this need fluctuates from market to market, but it does appear that the government sector, being particularly beholden to top-down regulatory initiatives, is driving some demand for organisations with a sound ESG footing in their own businesses and across their supply chains.  

McMurchy suggests that this expectation will continue to spread out across industry.

“If you're in the IT supply chain, you have to assume it will become a baseline requirement to play,” he said. “Will it happen to tomorrow? No. But why would you not do it now?  

“For the majority of players in the value chain...why not do it? You have to assume that, probably, in about four or five years, maybe faster than that, if you want to sell to big enterprises, you’ll need to get your act together. There may not be a commercial advantage, but it's a licence to play.”

The message? Even if partners aren’t already getting asked point-blank about the emissions footprint of their supply chains or about their internal ESG policies, they should get ready for such questions to come their way in the near future.

Some partners are already taking the plunge. Japanese IT services group NTT, for example, revealed on 4 November a series of commitments to reduce its carbon footprint, including a pledge to work towards achieving net zero emissions across its operations by 2030 and its value chain by 2040.

For others, perhaps it's time to follow suit.

“Demand will be relatively hidden at the moment, but you’ll have to assume it will roll on very quickly,“ McMurchy said, noting that the procurement process is increasingly coming with check-box lists for things like diversity and inclusion (D&I) policies and ESG policies.

“I think every participant in the supply chain has to assume it will be a get on the playing field requirement. Is it going to provide competitive differentiation? No. But it will make a difference. It’s a good thing to do. And don’t assume it’s a cost. Ultimately there is an economic benefit,” he said.