Supply Chain Management

Why It Matters

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Explanation of the material topic and its Boundary

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Robust supply chain management is critical to sustaining a safe and efficient railroad and is one of the numerous practices we have adopted to reduce risk for the Company and our investors. Supply chain management helps us control operating expenses and optimize inventory while providing high-quality service to customers. A sustainable supply chain helps ensure the safety of our suppliers, employees and the environment while supporting the communities where we operate. Accountability is a CP core value, and we recognize that our accountability and process integrity influences our supply chain. With a goal to infuse accountability throughout our supply chain, we are committed to forming business relations with economically, socially and environmentally responsible suppliers and monitoring our suppliers’ sustainability impacts so that we can better understand our scope of influence.

suppliers self-identified as minority suppliers in 2020

Our Approach

Supplier Collaboration

Our Performance

Our Approach

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The management approach and its components

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Evaluation of the management approach

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Prevention and mitigation of occupational health and safety impacts directly linked by business relationships

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We recognize that our supply chain is a critical component to achieving our corporate sustainability objectives and are dedicated to partnering with economically, socially and environmentally responsible suppliers. To support this commitment, we are updating our supply chain management strategy to incorporate sustainability-related objectives, evaluate and mitigate environmental and social risks, enhance our management practices and collaborate with suppliers.

To facilitate this measure, CP has developed a Supplier Code of Conduct that outlines ambitious principles to improve visibility within our supply chain and enhance supplier accountability for environmental, social and governance performance. The Supplier Code of Conduct confirms CP’s responsibility to uphold human rights, environmental stewardship and responsible business practices and articulates CP’s intent to extend these responsibilities to suppliers.

Our centralized procurement approach identifies spending practices to effectively monitor and manage supply chain risk. The Procurement team enacts policies, implements purchasing practices, trains employees, oversees supplier contract negotiations, assures quality control measures and conducts supplier safety assessments to certify that our purchasing practices align with CP business and sustainability objectives. Our Assistant Vice-President (VP) of Procurement, oversees our procurement programs, including sourcing materials, equipment fleets, services and suppliers we use across our organization. CP’s Executive Vice-President of Operations is ultimately accountable for our centralized procurement activities.

SUPPLIER EXPECTATIONS

CP carefully assesses all new suppliers, products and services according to several criteria, including quality, dependability, capacity, cost and technological improvements. We require 100 percent of our suppliers to agree to the CP Supplier Code of Conduct to satisfy our requirements for quality and certification, where required, before passing our supplier approval process. The Supplier Code of Conduct establishes our commitment to environmentally and socially responsible practices throughout our operations, including the procurement of goods and services. It includes expectations for legal compliance, health and safety, respectful workplace practices, environmental protection and commitments to ethical business behaviour. The Supplier Code of Conduct also outlines specific expectations of suppliers to comply with our Human Rights Policy regarding issues such as forced labour and child labour, working conditions and remuneration.

SUPPLIER RISK MANAGEMENT

CP currently manages sustainability risks through ISNetworld, a leading online supplier management system. All suppliers conducting safety sensitive business activities must register with ISNetworld and verify key metrics that include work classification, adequate insurance, health, safety and environmental data. These suppliers must also ensure that their employees complete training through eRailSafe, our mandatory rail safety and security awareness training, before working on CP projects.

CP is increasing our focus on sustainable procurement practices, by implementing processes for identifying, assessing and monitoring broader ESG risks in our supply chain. We are defining and implementing our comprehensive ESG supplier assessment measures, including a Supplier Code of Conduct attestation process, supplier registration process, supplier ESG questionnaire, audit process and augmented category management process which will inform ESG sourcing decision making. CP is implementing the following processes in a phased approach:

• Supplier Code of Conduct Attestation: CP requires all suppliers to agree to our Supplier Code of Conduct. We are in the process of implementing an attestation process to document this commitment for all new and current suppliers.

• Supplier Registration: CP has implemented a specific supplier ESG questionnaire to enhance our current supplier registration process to identify potential ESG risk exposure. Through the supplier registration questionnaire, all suppliers will provide information on human rights practices, diversity, environmental management and business ethics.

• Supplier ESG Questionnaire: CP has recently expanded the scope of our supplier risk assessment to include broader ESG risks through the use of a supplier ESG questionnaire. Key criteria include regulatory compliance, business ethics, safety, labour and human rights practices, diversity, climate change, environmental management, and business practices. This process will enable CP to assess and manage supplier risk through a holistic lens and incorporate ESG risks in the supplier selection process.

• Supplier Audits: As we gain a stronger understanding of supplier ESG risks, we are defining an approach to auditing suppliers. If the responses indicate a heightened ESG risk profile we reserve the right to conduct an audit of suppliers’ processes and require a corrective action plan. All Critical Tier 1 suppliers will be subject to an audit once every 3 years. For Critical Tier 2+ suppliers, this will be managed through contracts requiring relevant Tier 1 suppliers to provide transparency into Critical Tier 2+ and below suppliers. As it is not typically feasible for an organization to perform direct assessment on Tier 2+ suppliers, we will ask suppliers to disclose their critical subcontractors and how they work to assess and manage ESG risk.

CP completed a pilot program to undertake a supplier ESG questionnaire with a group of Critical Tier 1 suppliers to identify and evaluate ESG risks within our supply chain. To date, we have received supplier ESG questionnaires from a pilot group of ten critical suppliers across CP’s supplier categories. We intend to continue to expand this questionnaire to all critical suppliers and suppliers participating in competitive sourcing events over the next two to three years.

We are also assessing our sourcing practices to identify the category-level ESG risks to adapt our sourcing approach evaluation criteria to limit exposure and effectively manage category specific risks. In 2022, we began a pilot to weight ESG assessment questions based on CP’s supplier industry categories in competitive proposals.

SUPPLIER CLASSIFICATION

We have implemented a structured supplier segmentation framework to classify our supply chain and identify critical suppliers. Classifying suppliers allows CP to understand and manage risk profiles across the supply chain, highlighting key dependencies. Through this process, suppliers are characterized by risk, spend and the availability of a particular service or product. We aim to review and classify our suppliers on an annual basis.

CP’s Tier 1 Suppliers are those that supply goods or services directly to CP. Tier 1 suppliers are the focus of our sustainable supply chain improvements and our process aim to regularly evaluate and audit these suppliers against ESG criteria. Tier 2 and 3 suppliers provide their products and services indirectly to CP through our Tier 1 and 2 suppliers, respectively.

CP’s critical suppliers are defined as those goods and services that have significant impact upon CP operations and/or sustainability, which could include high volume suppliers, suppliers of critical components or services, or non-substitutable suppliers.

Additionally, we will identify suppliers that are considered high risk from a sustainability perspective through this framework. CP considers a supplier to be high risk if our assessment processes demonstrate that their practices and performance are not aligned with our Supplier Code of Conduct. The key processes we plan to use to determine high sustainability risk suppliers include our Supplier Code of Conduct attestation process, supplier registration, supplier ESG questionnaire and supplier audits.

QUALITY CONTROLS

To make sure that CP’s quality standards are met, we conduct ad hoc audits of suppliers for our operational and engineering activities to confirm that products and services are delivered to the standards we expect. We also maintain an in-house laboratory for track material quality testing to ensure that materials in service meet the strength, durability and performance qualities required for rugged freight rail operations.

CP partners with an Alberta renewable fuel startup to trial the conversion of scrap railway ties into renewable diesel

CP continually looks for opportunities to increase the amount of material we divert from the landfill in a safe and environmentally responsible way. During the past two years, CP’s Procurement team has assessed a variety of ways to divert one or our largest waste streams, scrap railway ties. Recently, CP has partnered with Cielo Waste Solutions Corp. (Cielo) to evaluate the use of railway ties as feedstock at a renewable fuel refinery in development in Dunmore, Alta.

Cielo uses an innovative closed process to convert carbon-based waste materials into renewable diesel. This process blends pulverized railway ties with a catalyst and carrier fluid under low heat and low pressure to produce renewable fuel. Some of the key aspects of the system include:

Limited waste production: the process produces ash and sulphur, which is used as fertilizer, rather than sent to landfill.
Limited air emissions: There are no waste gas emissions produced, other than limited flaring.
No waste water: there is no water discharge or tailings ponds associated with this process.
Closed process: All conversion processes are enclosed.

Through this arrangement, CP has agreed to supply Cielo with a minimum of 2.5 million rail ties over five years. It is expected that this will enable CP to divert more than 200,000 metric tonnes of landfill waste.

Implementation of enhanced fuel to improve fuel efficiency and reduce emissions

CP works collaboratively with our supply chain to identify products that reduce environmental impact. In 2021, CP implemented the use of ESSO Diesel Efficient^TM fuel for its locomotive fleet in Canada. Based on the results of trials conducted in 2020, this fuel will lessen fuel consumption in 2021 by 3M litres, lower CO₂ emissions by 8M kg and reduce particulate matter emissions by 21,000 kg.

CP’s Procurement, Facility and Pandemic teams rise to the COVID-19 challenge

The COVID-19 pandemic posed significant and unusual challenges for CP’s Procurement team. A prompt and innovative response was required to provide access to the vital supplies and services necessary to keep our people safe and our railway operating. The Procurement team collaborated with suppliers to secure cleaning materials and personal protective equipment. The Pandemic Response team partnered with the Facilities team to identify cleaning and health practices required to allow CP to maintain operations in line with varying public health guidelines.

We relied on the knowledge and expertise of our Procurement team and leveraged relations with our suppliers to keep our business running smoothly. As a result of these efforts, CP received and distributed 850 shipments of personal protection products to more than 350 facilities across our network. "I couldn't be prouder of the collaborative efforts and dedication of the Procurement, Facilities and Pandemic teams for rising to the challenge and applying out-of-the-box thinking to source out these items to keep the CP family safe," said Rhea Adama, Assistant Vice-President Procurement.

Supplier Collaboration

To reduce risk within our supply chain, our Procurement team works closely with suppliers to develop and foster alternate supply streams for critical rail equipment and components. External factors such as trade tariffs, social conflicts and environmental disasters can disrupt our supply chain and impact our operations. CP has implemented several tactics to mitigate supply chain risks to ensure that we continue to deliver on our commitments to customers.

We are steadfast in ensuring the safety of our contractors and employees, so all contractors and employees complete rail industry safety and security awareness training.

For materials and services that are only available from a limited number of suppliers, CP strategically sources from multiple suppliers, occasionally at a cost disadvantage. This practice is important to building resiliency within our supply chain, enabling us to adapt to unforeseen circumstances quickly. In the event that we do rely on a sole supplier, we actively work within the marketplace to identify and develop alternative suppliers of critical materials. Where appropriate, our Procurement team strategically approaches suppliers to develop products or provide services beyond their current scope of business. Through this practice, suppliers can expand product offerings and grow their business while improving CP’s flexibility in the event of supply chain disruptions.

CP is an active Board member of RailMarketplace, an e-commerce exchange created by North America’s largest railways to enhance supply chain processes and strategic sourcing. RailMarketplace is focused on supplier diversity featuring information sharing about minority-registered suppliers.

SUPPLIER DIVERSITY

CP is committed to increasing supplier diversity in our purchase of goods and services and supports opportunities for minority-owned businesses. CP’s U.S. operations follow the Disadvantaged Business Enterprise Program Policy and are aligned with the U.S. Department of Transportation regulations. Disadvantaged Business Enterprise and supplier diversity metrics are self-reported. However, CP has proposed recommendations internally to increase participation and enhance future tracking and reporting metrics. In 2020, 97 CP suppliers were self-identified as minority suppliers.

CP has committed to enhancing procurement outcomes with Indigenous-owned businesses. Our Procurement team has identified a dedicated representative for all opportunities to incorporate Indigenous-owned companies into our organization’s supply chain. We continually assess new initiatives and approaches to build relationships with Indigenous communities and businesses.

CP delivered the first piece of equipment through our surplus asset pilot project to Grand Council Treaty #3. The surplus asset pilot project was developed to promote capacity and relationship building between CP and Indigenous communities.

TRACKING SUPPLIER PRACTICES

CP uses ISNetworld to manage information about our supply chain. We are in the process of implementing a cloud-based supplier management procurement platform to supplement this information. When operational, CP plans to register all suppliers on this platform, capturing data on supplier social and environmental sustainability practices and procedures. In addition, we will incrementally add suppliers based on their criticality to our business. To inform the sustainability aspects of this process, our team is developing a supplier questionnaire to verify that the information we capture is relevant and actionable. This platform will also enable our Procurement team to focus more strongly on strategic improvements of CP’s supply chain management.