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How to build sustainable supply chains: An interview with Shaun McCarthy OBE

Sustainable procurement in construction creates value and competitive advantage, says the Director of Action Sustainability and Chair of the Supply Chain Sustainability School

A procurement professional by background, Shaun McCarthy started to get into sustainable supply chains in the 1990s working for the airport operator BAA. He produced the first strategies on how to procure more sustainably around the millennium, a time when environmental awareness was growing internally in companies, but clear plans on how to improve performance were absent.

He launched the business consultancy Action Sustainability in 2006, the same year he took a role as Chair of the Commission for a Sustainable London 2012, an independent assurance body overseeing the sustainable delivery of the Olympic Games, for which he was awarded an OBE in the Queen’s 2013 birthday honours list.

At the time, London’s Olympic Park was the largest construction project in Europe. Reporting directly to political leadership, McCarthy had a unique platform from which to address the problems of sustainable procurement and performance measurement of energy and emissions throughout the construction supply chain.

The gaps he saw in sustainable competency led him to open the Supply Chain Sustainability School 2012, a free learning environment, upskilling those working in the built environment sector. The school launched with the contractor Skanska and six other partners, and has grown to more than 110 partners as of this year, and campuses in the UK, France, and Australia.

McCarthy and Action Sustainability would go on to launch The Sustainability Tool, a cloud-based performance measurement tool which allows organisations to collect, report, analyse and reduce the social, economic and environmental impacts of their supply chain and key departments. The tool was awarded the Innovation prize at the French Chamber’s 2020 Franco-British Business Awards.

You’ve identified huge issues in terms of sustainable competency once you start moving down the supply chain. What is the impact on the construction sector?

If you are a business at the top of the value chain demanding more sustainability from your suppliers, what you will find quite quickly is many of your suppliers are not competent to do that. This is what we saw when we started working in construction. As the demand started to go down the supply chain, there wasn’t sufficient competencies in the supply chains, and when you don’t address that, if you only procure from businesses that have high levels of sustainability competence, your market shrinks. You fish in a smaller pool and your price goes up. Therefore, economically, what we are saying to the sector is that this is bigger than one business. You can’t do it on your own – Skanska, Balfour Beaty, whoever you are – you have to collaborate with those who you might have considered in the past to be your competitors.

You’ve set out to measure the carbon footprint in a direct way. How does this deviate from models which look at true costs or which use financial proxies to interpret carbon emissions on a sector-by-sector basis?

One of the things we are doing is rolling out a version of our performance tool to the supply chain in the construction sector to collect some very simple metrics. We want to know how much electricity you are using, how much gas, how much fuel oil. Tell us about your vehicle miles and what types of vehicles you are using. You put six or seven bits of information into a tool and it will give you your carbon footprint.

With enough supply chain players contributing, we can start to understand the scope of the carbon footprint of the industry, and we can then can apportion it using financial proxies. Take, for example, a groundworks subcontractor. If they put all of that information for their business into the tool, and then tell us from their financial records what proportion of their turnover goes to Morgan Sindall, Balfour Beatty, or Skanska, we can start to understand where that carbon is being allocated to the Tier 1 contractors.

It’s a very different way of doing carbon from input/output models like true costs, or where they are simply using financial proxies related to a sector to guess what the carbon emissions might be. I know it’s more technical than that, and people that do this will say that it is really sound economic thinking. But, I’m a simple person. I just see it as made-up numbers. Whereas, if you can collect real data about real energy consumption from your supply chain you can start to encourage them to manage it in a better way.

What has been the experience of clients and partners you have worked with to help reduce their emissions? Is it a hard sell to get them to see the value in tackling their carbon in this way?

The light bulb moment is usually when organisations realise they can save some money. It seems so obvious, that using less resources will actually cost them less, and makes the industry more efficient. And it doesn’t take much, it’s a nudge. The people that run these businesses aren’t stupid. It is just that day-to-day in their jobs, the energy bill is something that gets paid as overhead, and their profitability concerns are much more around how much business can they win and how efficiently can they deliver it, without thinking of energy as a component of that.

For example, one of our partners in the Sustainable Supply Chain school, Willmott Dixon did some work in this area. It was one of the factors that inspired us to spread it across the industry. They started with their subcontractors, and they did some work with a smallish business which turned over about £5m a year. That business saved £83,000 per year as a result of focusing on energy. For a £5m business that is significant, particularly if you look at the margins in the construction sector which are very small – 3-5 percent is a typical margin for a main contractor, maybe a little bit more for a subcontractor down the line. You have to sell an awful lot of stuff to get £80k in profit, which effectively it is.

As you say, there is an implicit idea of collaboration between traditional competitors in the Sustainable Supply Chain School. What has been the effect of the school on the industry?

The rule is when you come to the school, you collaborate, you share. You might be competing in the market when you’re not in the school, but there is a business imperative for doing this in a collaborative way. Currently, have 110 partners working together to upskill their supply chains and that makes their supply chains more competitive. Then what you will eventually find, once you start pushing all that demand down the supply chain, you will need to measure their performance, which is why we developed the cloud-based tool.

One recent collaboration is with a group of contractors working on a £3bn regional delivery programme for Highways England. Each of the 13 contractors who were tendering for the job had said that they would be working with our school. When they won the business, instead of working independently, they all came together in the school. You might say it’s a collaboration within a collaboration. And incidentally, each of these contractors are now using our performance tool with their pool of 300 sub-contractors, all measuring their performance the same way, with real shared benefit.

It’s a top down, rather than a bottom-up approach.

Our model is to work with the big groups so that they can effect change in their supply chains. The consultancy side of Action Sustainability takes the same approach. But what we have learned about smaller businesses down the chain in terms of their uptake of sustainable measurement and competency is that they are motivated by a straightforward message. It is not about talking to small businesses about Scope 3 emissions or the UN Sustainable Development Goals (SDGs) – all the stuff that professionals in this sector quite rightly worry about. Smaller businesses just want something simple that they can do, something that isn’t intrusive, and they want to see the benefit of doing it.

For the big groups, what are the main drivers to come to you to improve their sustainability?

Previously, it was just about risk and reputation, but there are far greater drivers now. Clients are driving activity, particularly in the UK public sector. There are rules and regulations as recently as January 2021, government and public bodies procurement requires a mandatory 10 percent in tender evaluations against social value, which includes climate change. This is producing shock waves through the entire industry – 10 percent can make the difference in you winning or losing a job, when prices are close.

Another key driver is the activity of financial institutions, particularly in the last year or two. Institutional investors are starting to take all of this very seriously, led initially by Blackrock, but others are now taking a view in terms of business risk related specifically to climate change, and sustainability more broadly. It can affect your share price, and the price of borrowing.

And there is the whole issue of competitive advantage. You only have to watch TV of an evening and see all the adverts about recyclable packaging or zero emissions vehicles. If you think back five years, there was none of that. Few were differentiating their products around sustainability. Businesses are waking up to the idea that green sells, against the counterfactual model that you are likely to lose market share if you do not get on the bandwagon now.