Supply chain decarbonization has long faced a critical challenge: getting suppliers to invest in emission-reducing innovations when it’s unclear if anyone will buy them.
But corporate decarbonization targets can provide the demand signal suppliers need to back promising climate solutions and help them scale. Research by Harvard Business School Assistant Professor Shirley Lu finds that when companies announce these targets, their suppliers buy in, setting off a powerful ripple effect even if the goal is aspirational.
In fact, each corporate target raises the odds of their suppliers engaging in climate-related products and services—evidenced by new contracts—by 1.9 percentage points after their first customer sets a target, and an incremental 1.4 percentage point after the second. Stimulating climate investment among potentially millions of suppliers globally could be a potent way to address climate change.
“A small number of large customer firms, due to their central position in supply chains, can drive system-wide changes,” write Lu and her collaborators in the July working paper “Corporate Emissions Targets as Demand Signals for Supply Chain Coordination.”
While the environmental impact of large corporations has been the focus of regulators, activist investors, and climate-focused consumers, supply chains generate significant emissions in many industries. Although the US government has been paring environmental rules, major companies can still spur change through their suppliers, which tend to be small businesses and less likely to be directly regulated.
Lu coauthored the paper with Shawn Kim, an assistant professor at the Haas School of Business at the University of California, Berkeley, and HBS predoctoral research associate Ling Lin and doctoral student Francesco Tripoli.
Mining 8,000 climate announcements
The researchers looked at more than two decades of FactSet Revere Supply Chain Relationships data, yielding some 5.6 million contract-year observations from companies worldwide. Building on methods from recent research, they used a fine-tuned AI model to identify climate-related contracts.
The general trend toward tighter climate regulation and industry action to reduce emissions, made parsing out the impact of demand signaling a challenge, Lu says.
“Everything was going up,” she says. “Target announcements were going up. Climate solutions were going up.”
To mitigate noise, the researchers focused on 8,000 corporate climate announcements between 2006 and 2023 that were most likely to be visible to suppliers—those mentioned in news headlines. They included only announcements that included a target year, and referenced climate or environmental issues.
The team matched suppliers and clients based on existing contracts and tracked suppliers’ responses to customers’ targets, controlling for industry trends that might be at play. The latter helps separate the effect of a specific customer’s target from broader industry signals, such as climate regulation, that would affect all suppliers in the industry.
While they acknowledge that contracts aren’t an exact measure of investment, the share of climate-related contracts among suppliers expanded by about 5% relative to the mean in the wake of such announcements.
Rippling out across an industry
Emissions targets are most likely to drive change when:
The customer relationship is more economically important.
Suppliers face greater uncertainty.
Targets are more informative.
Notably, the authors find that even seemingly less credible emissions targets elicit significant and comparable supplier responses, suggesting that such targets can still serve as important demand signals that facilitate supply chain coordination.
Beyond the direct impact of an announcement, the researchers also observed a spillover effect: Companies outside the direct customer-supplier relationship also took the target as a sign of future demand, investing accordingly.
A major automaker’s decarbonization target, for example, can prompt not only its current steel suppliers to explore “green” methods, but other steel producers eager to stay competitive.
“We see other suppliers that are not currently linked to target-setting customers” following suit, says Tripoli. “They see a new business opportunity. So they do react and engage in climate solutions … that might help a lot in accelerating decarbonization.”
More than cheap talk
As of 2025, more than 10,000 firms globally had set emissions-reduction targets, according to the Science Based Targets Initiative. Unrealistic goals have been criticized as greenwashing, but companies typically set goals with good intentions, Lu says.
“When I talk to a company, it’s not like they intentionally try to greenwash,” she says. “I think many companies are still learning how to meet these targets.”
Based on the research, companies aiming to effect meaningful change should:
Think of climate targets as procurement signals
Leaders might shy away from setting emissions goals because they fear criticism if they fall short. But Lu’s findings suggest that targets could serve a broader purpose, fueling investment across an industry. These supplier investments could help purchasing companies advance toward their targets and gain an edge in climate adaptation.
“Airlines cannot reach their net-zero goals without sustainable aviation fuel being produced at a scale. Automobile manufacturers cannot achieve net-zero emissions unless steel producers are able to supply green steel at a cost comparable to conventional steel,” the authors write.
Prioritize action, not perfection
Companies with long histories of emissions disclosures didn’t elicit significantly larger investments from their suppliers, the paper says. So, firms that haven’t set climate goals or launched adaptation initiatives shouldn’t wait until they achieve the ideal plan; progress can start now.
“Even though the evidence suggests that suppliers respond more strongly to customer targets that are more credible about future demand for climate solutions, full credibility is not required for the demand-signaling channel to operate,” the authors write.
Act together, where possible
Customers may send a stronger message to suppliers when they set targets alongside other companies, the findings suggest. For that reason, climate alliances could play an important role in signaling future demand. More broadly, the paper highlights the importance of collaboration between customers and suppliers.
“Target credibility is not static,” Lu says. “If customer targets prompt suppliers to invest and innovate, climate solutions may become cheaper and more widely available. Over time, that can turn climate targets from aspirational commitments into achievable business plans.”
Illustration by Ariana Cohen-Halberstam with photo from Adobe Stock/Quality Stock Arts.
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Corporate Emissions Targets as Demand Signals: Evidence from Supplier Climate Solutions