Supply Chain Sustainability Takes Root

Stephen DeAngelis

October 26, 2011

Steve Hall, Deputy Editor of Procurement Leaders, asks an interesting question in a blog entitled “Sustainability: When is it your problem? [“Procurement Blog, 21 January 2011] What inspired him to write his post was a talk given by Professor Richard Lamming, who explained to a roomful of Chief Procurement Officers “that the time to answer [this question] is much closer than it might seem.” Hall explains:

“Sustainability is often, as you’d expect, about emotive language and rhetoric. Lamming’s path was to present some very challenging ideas – for example, suggesting we are collectively using the resources of around 1½ planet earths – but then framing it with ‘do you care? Maybe, maybe not’. He has a point. There are very convincing arguments as to why sustainability can save money and drive revenue, but that has its limits and certainly some industries find they simply don’t apply. So from a business point of view maybe they didn’t care.”

As I’ve previously argued, the only sustainability initiatives that are going to have legs are those for which a business case can be made. Hall goes on to report that “Lamming presented plenty of reasons why even [those who don’t care now] might reconsider.” He continues:

“[Lamming] referenced research by Chemistry Innovation KTN, which looked at the availability of elements over the next 20, 50, 100 years. For some the threat is immediate, for others, a long term scarcity of supply of basic elements is a real danger. [Particularly eye-catching was] one slide in particular with big red crosses through elements in the periodic table that were likely or predicted to be disappearing. As one CPO asked after: ‘My organisation needs a lot of these materials, and if they’re disappearing what can I do about that?’ No-one, for me, had a convincing answer. But what struck me more was the earnestness of the question. This is was a CPO of a major technology company and he wanted to know what he or his team should be doing to combat a threat that was, quite possibly, many years away. Perhaps that was enough to prove Lamming’s original point about where this horizon is, over which these sustainability problems were going to start being CPO’s problems. For some it’s just about here.”

CPOs, of course, view sustainability from the perspective of diminishing resources. But there are other C-level perspectives that are also at play. Robert J. Bowman, Managing Editor of SupplyChainBrain, reports, “A growing number of shareholders are pressuring companies to take action on a slew of social and environmental issues. And management is starting to listen.” [“Environmentalists, Human-Rights Activists Take Aim at Global Supply Chains,” 29 August 2011]. He goes on to detail a number of statistics about the rising number of shareholder petitions that are being introduced at annual meetings which are aimed at pressuring companies into becoming more sustainable. He concludes:

“Regardless of the issue at hand, all of the proposals were in some way related to the makeup of companies’ supply chains. A common theme among activists today is a lack of transparency – that companies are not revealing ‘where their supply chains go, and where the goods they ultimately sell come from,’ says Amanda Kloer, senior organization with Change.org. Kloer’s group specializes in generating online petitions for social change. It’s pressuring companies on a number of fronts related to human rights – again, a major issue for multinationals with complex supply chains. … For any company concerned about its image – and, not incidentally, the welfare of workers all over the world – it pays to be proactive when it comes to human rights. As Kloer puts it: ‘Most companies don’t just want to be perceived as ethical. They actually want to be ethical.’ The best way to make that happen is to be intensely aware of what’s going on at every stage of your supply chain. Even before shareholders stand up and start making noise.”

Kloer may be giving companies too much credit. Historically companies seem only to worry about ethical practices when disregarding them affects the bottom line. That is why many activists look for ways negative ways to impact profits. According to Duane Stanford, CEOs are starting to listen — not because they want good PR, but because sustainability initiatives are saving them money. “Long a cause célèbre of the eco crowd,” he writes, “sustainable business practices are yielding big savings at companies like PepsiCo and Wal-Mart.” [“Why Sustainability Is Winning Over CEOs,” Bloomberg BusinessWeek, 31 March 2011] Stanford continues:

“At many companies, being socially responsible has typically meant handing out checks to victims of natural disasters, environmental groups, or producers of green TV commercials. Now the corporate sustainability movement has a simple premise: Saving the planet can save big bucks. Executives are trying to realize meaningful cost savings by coming up with innovative ways to go easier on the environment.”

Stanford again underscores the point that it is the business case that wins not ethical argument. He notes that commodity volatility — the boogeyman for procurement professionals — is one reason that practices that reduce waste have become so important. He continues:

“How fully companies adopt sustainability efforts in this decade could have a real impact on their shareholder value, says Daniel C. Esty, an environmental policy professor at Yale Law School. Esty thinks sustainability will become as transformative for business as the earlier quality and information technology revolutions, once more top executives recognize the huge potential to trim costs. Sustainability has emerged as a factor in determining which companies win in the marketplace, and smart CEOs are investing in a more rigorous approach to the environment,’ says Esty, on leave from Yale to run Connecticut’s Environmental Protection Dept., which will have additional energy responsibilities pending approval from the legislature. ‘A good number of companies begin to see the upside opportunity. The very best companies see the brand and corporate identity opportunity.’ Wal-Mart Stores is far ahead of Target and Sears Holdings when it comes to realizing savings by working with retailers to reduce packaging. That translates into lower freight and warehouse costs. Wal-Mart’s Seiyu chain in Japan in 2009 converted packages for its private-label fresh-cut fruit and salads from oil-based to corn-based plastic. That cut the packaging’s weight by 25 percent and its cost by 13 percent, saving more than $195,000 a year.”

Seiyu’s actions, while laudable from a packaging standpoint, probably raised the hackles of other activists by using a food crop to produce plastic. It’s a tough world out there. Stanford goes on to provide other examples of companies that have helped the bottom line by implementing sustainability initiatives. PepsiCo is one such example. He reports, “At PepsiCo, Chief Executive Officer Indra K. Nooyi has pushed a strategy she calls Performance with Purpose, which links green efforts in all businesses to the bottom line.” Stanford concludes his article by detailing many of PepsiCo’s initiatives.

 

Ed Crooks reports that not every company is adopting sustainability initiatives voluntarily. Some companies, he asserts, are succumbing to outside pressure. The kind of pressure described above by Bowman. [“US companies yield to environmental push,” Financial Times, 7 March 2011] He reports:

“Twenty US companies have agreed to take more account of environmental issues, such as water use and greenhouse gas emissions, as a result of investor resolutions, in a sign of increased pressure on industries such as power generation and oil and gas production. This year’s round of proxy voting at US companies’ annual meetings saw 96 environmental resolutions filed by shareholders, according to Ceres, the Boston-based network of investors and environmental groups.”

Being forced by your shareholders to become more sustainable can’t be good for a company’s image. “Of those resolutions – which included calls for actions such as investigating the threat of the loss of water supplies or aligning executive pay to environmental performance,” Crooks reports, “20 have now been withdrawn because the companies satisfied the investors’ demands.” He continues:

“The pressure from shareholders for companies to meet environmental objectives comes as regulations proposed by the US Environmental Protection Agency are being challenged by Republicans and some Democrats in Congress. More than 30 investors, including state pension funds from California, New York and Connecticut; Calvert, a sustainable investment company; and religious groups such as the Adrian Dominican Sisters, have filed environmental resolutions.”

Not all shareholders concerns deal with the impact that companies have on the environment. Some concerns have to do with the effect that the environment will have on the company. Crooks explains:

“One of the resolutions that has been withdrawn called on the board of Southern Company, the large Atlanta-based power group, to publish a report on the threat that water shortages might pose to its operations and set out how it planned to mitigate those risks. Brooke Barton of Ceres said investors had become increasingly aware of the costs of forced shutdowns or expensive modifications to enable plants to keep running. ‘The rivers are getting hotter, and they are getting hotter at the worst time of year, when power systems are strained because of the demand for air conditioning,’ she said. Southern has promised to deliver its report by November.”

You would have thought that Southern Company’s executives would have been doing that kind of “what if” scenario planning themselves without having to be prompted by shareholders. According to Crooks, Southern’s shareholders are not alone. He explains:

“Investor interest in climate risk was demonstrated recently by a report from Mercer, the consultancy, on the implications for long-term investment strategy. The report was supported by 16 large investors including state pension funds from California and Maryland, the British Telecom Pension Scheme, and AustralianSuper, a multi-industry retirement fund. Kevin Parker, global head of Deutsche Asset Management, described the Mercer report as a ‘watershed event’ in shareholders’ views of the threat of climate change. He said: ‘The nature of the risks that these investors are considering is inherently long-term. And they get it. They understand that climate change is a quantifiable, long-term risk that is extremely germane to their asset values.'”

The answer to the question posed by Steve Hall at the beginning of this post — when does sustainability become your problem? — is: Yesterday, if not years ago. Does that mean that your company needs to scour the horizon looking for green initiatives to implement? No. It means that you need to start thinking about how commodity shortages, climate change, shareholder pressure, government regulations, environmental groups, and other factors could affect your bottom line. Whenever you find something that could be substantially (and adversely) affect your company’s future, that is where you should look to initiate sustainability programs. It is in those areas where the business case can be made and the initiatives will have lasting impact.