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Will decarbonisation and ESG redefine the transport market? The challenges and opportunities of green logistics

Up to 15% of global logistics revenues may belong to green operators in 6 years, representing a services market worth USD 350 billion. However, companies are feeling the burden created by costly decarbonisation and ESG strategies. There are many problems, yet the motivation to continue on a sustainable path remains high.

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The logistics sector has been facing ambitious goals for the decarbonisation of operations for years, set by regulatory authorities, international organisations, contractors, and individual customers. This is not without reason. The International Transport Forum (ITF) estimates that cross-border freight transport related only to trade is responsible for over 7% of global CO2 emissions.

Other ITF forecasts are also not optimistic. For example, total transport emissions in 2019 were almost equally split between passenger (54%) and freight (46%) transport. We will observe this state of affairs more or less unchanged until 2030. However, if all current transport decarbonisation policies are maintained and implemented, the proportions will change significantly by 2050, when freight will account for 61% of emissions. Moreover, total emissions from cargo transport will increase by 28% by then.

The scale of the challenges is gigantic, but if we consider that logistics broadly includes not only transport but also other operations related to cargo, the sector’s impact is even greater. According to calculations by the International Energy Agency (IEA), if global goods transport is responsible for even 8% of global greenhouse gas emissions, this share increases to 11% when the warehouse sector and ports are included.

Green logistics can be profitable

Reducing emissions generated by the global logistics sector, especially transportation, will not be easy or cheap. According to McKinsey analyses, the cost of decarbonisation, e.g., of air transport using sustainable fuels, the so-called SAF (Sustainable Aviation Fuel), which is up to three times more expensive, may increase transport costs by approximately 60% by 2030.

Implementing adequate solutions in the case of transporting bulk cargo by sea may increase the cost by 50%, and in the case of containers – by 20%. Increases on roads may reach 5%. These are scenarios assuming the use of only biofuels. The use of synthetic alternatives could increase costs even further.

Analysts also point out that customers of logistics companies want green solutions but are reluctant to pay for them. Over 80% are unable to pay even 10% more for sustainable products, and only 10% of contractors are willing to pay an additional 20% to use a more ecological option.

However, green logistics can be profitable for efficient and brave operators—a blue ocean, in the sense of a well-known business strategy. In a blue ocean, the organisation focuses on searching for and utilizing undeveloped market areas, rather than competing for existing, crowded space under old rules. New rules in green logistics are just being established, and the independent creation of the offer, market, and demand may well be done through the guarantee of sustainable logistics services that meet the needs of demanding contractors who expect and are willing to finance such services.

This is visible, for example, in the data prepared by McKinsey experts, who, based on the emission reduction goals in scope 3 (generated in the supply chain) and the logistics needs of 2.8 thousand of the world’s largest enterprises from various industries, estimated that the demand for green logistics in 2025 will amount to approximately USD 50 billion. This will account for approximately 2% of total logistics expenses. Demand is then expected to increase to approximately USD 350 billion in 2030, reaching about 15% of general expenses. In just 6 years, there will be a large area of the logistics ocean to be developed, where the rules and footholds are still being formed.

The potential of sustainable logistics

In the European Union, the potential of sustainable logistics was noticed many years ago, and the next milestone on the way to greening the sector falls this year. At the beginning of January 2024, the first period of mandatory data collection began as part of non-financial reporting regarding ESG indicators achieved by enterprises, i.e., environmental protection, social policy, and corporate governance (Environmental, Social, and Governance).

The new provisions included in the CSRD directive oblige selected, currently the largest enterprises, to monitor, document, and transmit structured data from areas E, S, and G, including issues related to climate change, pollution, the circular economy, biodiversity, and human rights.

The first data sets for the 2024 financial year will be published in the first half of 2025, and in the following years, they will concern increasingly smaller companies, including small and medium-sized enterprises listed on the EU regulated market.

This is important for the TSL sector because organisations, as part of reporting in area E – environment, will be forced to report emissions generated throughout their entire business cycle, also in the third scope of emissions, i.e., those generated along the value and supply chain, and therefore also as a result of transport, storage, and other logistic operations.

Requirements formulated in this way will naturally affect a gigantic set of logistics companies, which will be obliged to collect and submit data on their own emission levels so that their contractors can report them. In addition, currently eligible operators will report on their own ESG metrics and require data from their subcontractors.

Logistics and ESG

A large dose of interesting information about the motivations, concerns, and current importance of ESG policy in the TSL sector is provided by the 2023 report on sustainable development in European logistics and supply chains published by Panattoni and HFW. The industry publication is the result of a survey conducted in 15 European countries among 101 presidents, managing directors, and senior management employed both in the logistics sector (47% of respondents) and in manufacturing and retail companies purchasing 3PL services (53%).

The analysis shows, for example, that on a ten-point scale, the argument that most encourages logistics operators to take up ESG activity is the desire to make a positive impact on the environment (rating 8.4). A regulatory requirement is an equally high motivator, but slightly lower (8.3). In last year’s study, the situation on the podium was exactly the opposite. In the current analyses, it turned out that the factors most inhibiting the implementation or expansion of sustainable activities are their complexity and the financial cost of solutions (77% of responses each), as well as the lack of human resources (43%).

However, the effort related to the implementation of the ESG strategy will pay off, as evidenced by as many as 62% of declarations that a strong ESG policy helped gain new customers and enable access to subsidies or other government financing (28%). More than half of 3PL companies also noticed an increase in employee motivation (51%) and better internal cooperation (55%).

The portfolio speaks through ESG The report clearly shows the willingness of 3PL companies to improve sustainable activity, especially where it is most needed, i.e., in the area of ​​international transport (53% of responses) and when purchasing goods or materials (49%). The cost of changing the current business model is equally clear.

Visitors indicate that the greatest incentive to remodel operations would be financial support in the form of subsidies or grants (70%), but also pressure from customers (68%) and the availability of solutions that would increase revenues while evolving the business (66%). While in the case of the first two factors (financing and customer pressure) there was a decrease in their importance compared to the previous edition of the study (79% and 72% respectively), in the case of the demand to improve the financial result, there was a visible increase by as much as 11%.

In the current edition of the survey, fewer managers also wanted to link their own remuneration to the achievement of ESG goals. In 2022, it was 31%, while last year it was only 23%. However, another factor, also related to finances, increased significantly. Significantly more respondents (64%) indicate that the motivation to intensify ESG activities would simply be the lower implementation cost. In 2022, 48% of respondents paid attention to this factor.

This is not surprising, considering that the transition to sustainable solutions is highly capital-intensive, time-consuming, and largely related to the general situation in the economy and the condition of contractors on which the TSL sector depends. However, this does not mean that customers are not interested in sustainable operations.

ESG appears in inquiries, but less frequently in contracts

Currently 69% of Request for Proposals (RFPs) in 3PLs include issues related to ESG goals, but their importance varies greatly. As much as 33% of respondents indicate that the importance given to sustainable development goals is 5-10% of the RFP. Slightly fewer responses, 30%, declare significance at the level of 10-15%.

However, the role of ESG weakens as the contractor selection process becomes more advanced. Only 39% of operators (compared to 69% at the inquiry stage) have minimal ESG goals during the initial tender qualification, which would be quite a good result if it were not for the fact that 19% ultimately set goals that end up in the contract as an obligation. This is exactly the same as the year before. A decrease by 1 percentage point up to 38% was recorded in the scenario when ESG was included in the contract as an aspiration, and in the case of 43% of contracts, the Sustainable Development Goals are not part of the final contract at all, and this percentage increased by 1 percentage point relative to 2022.

For buyers of 3PL services, ESG goals are still a bonus According to Transport Intelligence’s analyses conducted in the last quarter of 2023 among managers responsible for purchasing logistics services (3PL) in the retail or industrial-manufacturing sectors, issues related to environmental efficiency were ranked 7th out of 11 key criteria determining the choice of a specific logistics service provider. This factor was appreciated by only 4.1% of respondents.

The most important elements influencing the signing of a contract are: constantly hard indicators, i.e., reliability and accuracy of operations (32.1%) and prices of services (20.5%). Similarly, low quality of services (33%) and price increases (28.3%) have the greatest impact on contract cancellation. In the opinion of managers surveyed by Ti, the operator’s sustainable activities are still not a significant benefit resulting from outsourcing logistics operations. In the opinion of merchants, the key advantage of outsourcing logistics is cost savings (23.3%), followed by increasing their own competitiveness (13.8%) and access to specialised knowledge (13.4%).

The logistics operator’s help in achieving its own ESG goals accounts for only 0.4% of the decision-making process and it is the last of the 9 key criteria, and at the same time the only one that did not exceed the significance level of 1%.

Most companies do not implement climate strategies However, this does not exempt operators from continuing their decarbonisation efforts and implementing other goals included in their ESG strategies. All the more so because, according to available data, the advancement of sustainable activities in other sectors of the economy does not look good. According to the international consulting company Accenture, in order to stop the global temperature increase by 1.5 degrees in the spirit of the Paris Agreement, global greenhouse gas emissions must reach their peak in 2025 and then decline by 43% by 2030 so that the global economy can reach net zero emissions by 2050.

However, a large-scale study conducted for 3 years indicates that in 2023, out of 2,000 largest companies in the world by revenue (Accenture G2000) only 37% has made a commitment to achieve zero emissions by 2050. At the same time, among the surveyed enterprises disclosing data on emissions, half of them are constantly increasing them, not reducing them, and 33% does reduce, but too slowly.

Ultimately, only 18%of enterprises are on track to meet their 2050 declaration. It is disappointing, however, that 63% of G2000 companies still do not have a specific strategy for achieving net zero in 2050 in the full range of emissions, i.e. 1, 2, and 3.

As for the data dedicated to the TSL sector, it is difficult to find reliable estimates in the analysis, because freight and logistics were classified in the same category as industry, e.g., industrial equipment manufacturers. Nevertheless, according to Accenture, 35% of companies in this category have a fully defined goal of achieving net zero in terms of emissions 1, 2, and 3.

Only 15% of companies have set targets for emissions 1 and 2, and 21% does have specific decarbonisation goals, but they do not assume reaching net zero. In 30% of organisations, there is no evidence that decarbonisation goals were set at all. In practice, this means that nearly one-third of the largest industrial companies in the world do not implement a documented scenario that would lead to a reduction in emitted pollutants.