“The thing that makes this real is this alignment of factors. It’s the alignment of the supply chain, it’s alignment and acceleration of the regulation,” John Spear explained.

Spear was talking to 6GWorld recently alongside colleague Alan Riley. As well as leading EPI Consulting, he is also General Manager of the joint alliance for CSR, a trade body for the Telco sector looking at practical sustainability in the supply chain.

He and his colleagues were explaining the significance and context of a piece of regulation that might well have a big impact on the evolution of the telecoms supply chain: the Corporate Sustainability Reporting Directive, or CSRD.

“Basically what CSRD is trying to do is to apply the same level of discipline and rigour that you have with financials and Sarbanes-Oxley controls compliance – applying those sorts of audit controls to the sustainability data,” Spear observed.

People who recall the business disruption caused by preparations for Sarbanes-Oxley reporting will no doubt be groaning at the thought of more red tape and more hoops to jump through. Coming now, though, this may be the trigger for much more sweeping changes in the structure of the telecoms market as a whole.

Follow The Money

“I think I’m right in saying that the biggest sector for ESG investment is the telco sector running roughly about 15% of all ESG investments,” Spear commented.

This sounds good – and has a very material element to it.

“Telefonica recently closed a billion-Euro green bond that comes at preferential rates for funding and financing these big corporates. They come with a requirement that Telefonica hits their green targets and decarbonises supply chain and material, etcetera,” Spear noted.  

“But if they don’t hit those targets they’re penalised, which can run into hundreds of millions when you’re raising billions of these bonds.”

In fact this year Telefonica has raised at least four green bonds worth in total over 3bn Euros. They have a stated aim of tying 40% of their financing to sustainability metrics by 2026. This scale of activity has a huge impact on the bottom line and means they can’t afford not to take it seriously.

Riley observed that “It’s fair to say that telcos’ sustainability has been 50% about marketing and telling stories and 50% about performance management. CSRD is really making it a performance management-driven discipline – 90% performance management, 10% storytelling.”

The legislation comes at a time when organisations such as the NGMN have been working hard on improving sustainability in networks – both in the supply chain and energy reduction – as well as 6G initiatives. The plans are detailed and include very fine-grained metrics, which is just as well.

“With CSRD coming in people have to actually demonstrate performance against metrics holistically for every single topic. It’s no longer about cherry picking,” Spear explained.

“The first thing is to look at their own business and identify risks and opportunities. The second thing it’s forcing you to do is look beyond your own nose. That is, it’s not just my immediate impact and my immediate tier one suppliers, but right through.”

This kind of audit can have its upsides. Riley gave an example.

“There are also some opportunities, where telcos can get more credit, more recognition and promote more of the things that they are doing around enabling the sustainable transition,” he explained.

 “6G is part of how Telcos are becoming more sustainable, if you can get more free throughput and lower power. Depending on the dirtiness of the energy source that you’re using for the 6G network, there’s a facility within CSRD there where you can, you can report on that and say “we’re doing good things here.””

Down the Value Chain

How far does this kind of requirement on the value chain go? Sooner or later pretty much any company in the value chain is going to get hit with some fairly unpleasant reading, such as the impact of copper mining in Papua New Guinea or Cobalt in the DRC.

“It’s not clear exactly to what extent companies will apply the letter of the law,” Spear explained, “But there are other provisions that are tackling this.”

These include the Sustainability Due Diligence Directive [SDDD] and European Batteries Regulation

“I do think that they’re going to have to take more notice and telcos will have to have a plan and consider how are we going to address this and what stance are we going to take?”

There are two major factors in the supply chain for the telcos, of course. One is about the network equipment and related materials and energy. The other relates to user devices. With pressure from buyers, is that likely to have an impact on both these value chains?

In fact, it already is, according to Spear.

“There is a massive desire by the likes of Vodafone, Orange, people like that to really boost the market for second-hand network equipment. These bits of equipment typically might have 25 or 30-year lifespans yet they want to be at the cutting edge. They want to be rolling out 6G; what do they do with the 5G network they’ve just spent billions on?” He asked.

“We’ve been doing work with some of the big telcos at the minute particularly around IP routers, where a big sales message is “We’ll upgrade your network to the more sustainable and we’ll take the old boxes away. We’ll give you a great commercial deal and then we’ll have second use.””

While that sounds promising, until now this has not been vetted, or needed to be.

“The question is, what do you do with them? Have you a chain of custody?” Spear asked. If not – if that repurposing can’t be demonstrated – it won’t count under the CSRD act.

“I think we know that with some of the Americans actually crush them to keep them out of the supply chain, but they’re telling people they’re reusing them… So there’s some big battles shaping up across the industry at the moment.”

What about the consumer device side? It’s a little more complex.

“You have a convergence of regulations, particularly around smartphones – around repairability, right to repair, etcetera. There’s a lot of talk now within the regulation about extending the life of smartphones,” Spear pointed out.

Not only that, but from the consumer side there is less excitement about new devices than there was early on, and less desire to upgrade. The global replacement cycle has extended from 28 months in 2014 to 41 months in 2022, and little surprise; it’s becoming harder to tell the difference in performance and functionality from one year to the next.

“On the flip side, you have the big vendors basically holding on for grim death to their linear model. Apple and Samsung only want to sell new phones, though they’re starting to bring in pre-owned sales… What’s missing is that middle segment, those second-hand or repaired phones which are all guaranteed.”

With regulation putting pressure on them anyway, this could turn into a method for device manufacturers to generate additional secondary revenue from their devices.

“Our trusted brands could offer warranties, could offer a free screen replacement insurance, etcetera. You are going to see a big move now with people working up business models,” Spear said.

A Changing Recycling Landscape: Incentives and Impacts

While this will clearly help with extending device lifetimes and reducing waste, it doesn’t help with making the devices any greener in and of themselves. While there are examples of sustainable devices coming out of companies like Fairphone, Spear sees a challenge there based on some consumer research that they conducted across Europe in 2022.

“Consumers want to be sustainable,” he explained, “But they also want the latest tech, they want it at an affordable price and they want the telco to accomplish all this.”

There are definitely moves to improve the reuse and recycling of devices, however, with people starting to see the value of the elements within electronics.

“There is a lot of urban mining going on in Japan because they can’t get the rare earths from the Chinese,” Spear commented. “If you want to see practical examples of urban mining for tantalum and some of these things, it’s happening in Japan.”

However, in Europe and more broadly there are green shoots as well; not so much in smartphones for now but Spear gave an example from set-top boxes.

“Set top boxes used to be made in a factory in Lyon. About 15 or 20 years ago the factory was shut and they shifted all the manufacturing to Suzhou.”

Later they moved from selling you your set top box as part of your subscription to a rental model where the boxes are returned at the end of the contract. They then opened a repair and recycling centre in the old mothballed factory.

“It’s now one of the largest repair facilities in Europe. It’s bigger and employs more people than it did at the heyday of when it was actually manufacturing linear set top boxes.”

There is a significant reason why set-top boxes are further ahead of the smartphone market.

“The design and the spec is controlled much more by the telcos; then they put it out to ODMs to make it; whereas you’ve got the smartphone brands who are very different,” Spear commented.

Nevertheless, things are changing, putting pressure throughout the value chain in ways which previously didn’t exist and which are encouraging a drive to scale in more sustainable device manufacturing and recycling.

“You have these things all lining up and accelerating in three to five years, I’m talking about scale.”

If that seems unlikely given how long it’s taken to get to this point, think about the investment which is going into semiconductors within the EU. Supply chains and their vulnerabilities have risen to top of mind for many business leaders. Recycling makes more sense as a commercial strategy.

“Big telcos are trying to derisk supply from China at pace, because if China makes a move on Taiwan then we are in deep trouble. They had a very, very sharp wake-up with COVID as to what happens in case of their inability to source a product either for their network or for consumer devices,” Spear pointed out.

“We have start-ups like Fairphone and these types of people demonstrating the art of the possible but they’re not at scale. Once you get a big global brand – your Verizons, your Deutsche Telecoms, your Telefonicas doing things, now we’re talking about things happening at scale.”

All of which brings us around to the initial conversation about an alignment of factors driving change in the market.

“You’ve got cost of living crisis, you’ve got slowing down of technological innovation, you’ve got a real concern over supply chains and now you’ve got a healthy dose of legislation. Put it all together and that shows you a commercial opportunity. That will drive things quite dramatically.”