green for go

Green for goSupply chain sustainability

2 Green for go Supply chain sustainability

There is no doubt that the growing urgency around green issues will mean that they are set to rise ever higher on the business agenda. The impact of this will be felt across the board, with increasing pressure on the supply chain and procurement arenas to respond and introduce new measures accordingly.

3Green for go Supply chain sustainability

From fair trade to climate change, sustainability and corporate social responsibility have risen inexorably in the public and corporate minds over the last decade. While governments, businesses and consumers are vying to outdo each other’s green claims, the scientific community is issuing increasingly stark warnings about the urgency and depth of cuts required to avoid the most dangerous impacts of climate change.

With growing legislation, dwindling resources and increasingly vocal consumers, sustainability will only continue to grow in importance as an opportunity for forward thinking firms and a threat to their competitors that fail to act.

In conjunction with the Economist Intelligence Unit, our survey of executives from $1bn-plus corporations indicates a high level of awareness of sustainability, with an appreciation of the opportunities it offers within the supply chain, coupled with concerns over the cost and complexity of addressing it.

Reputation, cost reduction and revenue growth were the top three widespread opportunities cited by more than half of respondents. An increased cost base was also highlighted as the greatest risk, suggesting that anticipated operational and energy savings would be offset by increased capital costs and price increases from suppliers.

Sustainability — an inescapable truth

Similarly, regulatory compliance was reported as both an opportunity and a threat, indicating there will be individual winners and losers, dependent on firms’ preparedness to stay ahead of new legislation.

While companies acknowledge the importance of green issues, many are confused about how to act. Only 12% of firms rated it among their top three supply chain priorities.

71% 21% 8%

50% 31% 19%

63% 29% 9%

43% 25% 31%

29% 29% 43%

Reputation/brand

Cost savings

Increase in cost base

Growth

Regulatory compliance

Opportunity No impact Risk

How does your organization view the impact of sustainability, green and carbon related issues on its supply chain and sourcing in the following areas?


Mixed messagesDespite this widespread recognition of sustainability as a significant opportunity and threat, only 12% of firms rated it among their three supply chain priorities for the next two years.

This may be indicative of the mixed messages businesses are receiving from governments, regulators and consumers — the three key stakeholders indicated by respondents. While concrete legislation lags behind government rhetoric on emissions reduction targets, a significant gulf exists between consumers’ green claims and their actual purchasing behavior.

Who or what do you believe will be the main drivers behind implementing sustainable, green and carbon related strategies in your supply chain?

Select up to three.

Managing uncertaintyFirst and foremost, climate change is a political problem. While the scientific consensus is now beyond doubt and technical solutions are well understood, significant uncertainty remains over the scope, severity and timing of new legislation that will drive business and consumer behavior.

To avoid the worst impacts of climate change, this regulatory uncertainty must be limited to the short term. As the UN has emphasized, the global economy has less than a decade to transition to a low carbon path to enable global emissions to fall 60% by 2050.

In the UK, the Climate Change Bill will set a legally binding target for emissions cuts by 2050. The current target of a 60% cut is likely to be raised to 80%, setting the benchmark for industrialized economies and laying the foundation for legislative reform. Across the EU, businesses are already subject to an expanding range of environmental legislation, including carbon cap and trade schemes, energy efficiency standards, recycling targets and limits on hazardous chemicals.

In the US, climate change legislation is more firmly on the political agenda and Australia has ratified the Kyoto protocol. This new consensus amongst industrialized economies will leave a handful of contrarian states in increasing isolation and set the foundation to credibly engage the new economies of India and China.

It is not a question of ‘if’ but ‘when’ new legislation will bite — and the when is likely to be within the next five years.

The impact of sustainability

Consumers/customers

Regulators

Governments

Competitors

Investor community

Shareholders

Media

Non-government organizations

Suppliers

57%

50%

36%

25%

24%

20%

19%

15%

13%


Regardless of the pace of legislative reform, there is already a strong business case for sustainability. Energy and materials intensive supply chains typically account for 75% of a firm’s emissions — where there is carbon there is cost. Coupled with varying environmental and labor standards across global suppliers, particularly in the developing world, supply chains can make or break corporate reputations.

Cost savings: operational and energy efficiencyEfficiency and sustainability are two sides of the same coin. Soaring energy and raw materials prices and the spectre of recession only serve to strengthen the business case.

There is a strong possibility that carbon will become a parallel currency to money in the future. Already the norm for energy intensive companies under the EU Emissions Trading Scheme, more businesses will need to operate within a carbon cap, or else pay for the excess they produce. As schemes such as the UK’s Carbon Reduction Commitment capture new sectors, carbon intensive suppliers will become an expensive burden.

Significant opportunities exist throughout the supply chain:

• Planning: Demand management and improved forecasting should reduce over-purchasing, over-production and waste

• Manufacturing: Lean process improvement should lessen over-processing, energy intensive storage and waste

• Distribution: Adopted by 54% of respondents — network re-design, smart routing, backhauling, fill optimization and mode switching — are all likely to lower freight miles

• IT: Video-conferencing and remote servicing can reduce business travel

• Estates: Investments in building air tightness, insulation and energy efficient heating, cooling, lighting, plant and equipment has been made by 55% of firms.

Although currently difficult to achieve, it is imperative that international corporations take steps to measure their supply chain emissions to give themselves an accurate predictor of their future costs and liabilities.

In some cases, footprinting can yield surprising results. For example, importing produce by air freight from Africa may appear to be alarmingly carbon intensive, yet when compared with importing the same produce from closer, heated greenhouses, it is actually a greener practice. Being aware of the energy sources of your suppliers is another important step. The true environmental cost of manufacturing goods in China should recognize the dual impacts of high-carbon power generation on top of emissions from transportation.

So far, only 35% of respondents have embarked on carbon foot printing of any description, although a further 50% have imminent plans to do so.

Which of the following initiatives have you implemented or are planning to implement within your organization?

The business case for sustainability

Labor standardimprovements

Waste/packagingminimization

Phasing out ofhazardous materials

Community projects

Estate/plant energyefficiency improvements

Renewable energy

Carbon footprinting

Carbon offsetting

Logistics optimization

Supplier qualification

Sustainabilityprogram

Chain of custody/product traceability

63% 27% 10%

58% 33% 9%

56% 28% 16%

55% 32% 13%

54% 38% 8%

52% 39% 9%

48%

51% 37% 12%

40% 47% 13%

30% 52% 18%

35% 50% 15%

56% 31% 13%

36% 16%

Have implemented Planning to implement Not planning to implement


Revenue opportunities: energy and carbon tradingTo combat rising energy prices and reduce in-house emissions, 40% of firms have invested in on-site renewable energy generation — particularly those with significant land bank or waste resources. Onshore wind on telecoms sites and biomass Combined Heat and Power (CHP) at food factories are two such examples from the UK. This offers greater control over energy costs, enhances corporate reputations and promises profits from the sale of surplus renewable electricity.

Similarly, an increasing number of firms are creating revenues from carbon trading. Under the EU Emissions Trading Scheme, participating firms must operate within an annual emissions cap. Those which have made emissions reductions through energy efficiency and renewables projects can sell surplus allowances to others unable to meet their targets. As well as a strong financial incentive, this ensures carbon savings are delivered in the most cost effective manner.

Outside Europe, the Clean Development Mechanism provides finance for greenhouse gas reduction projects in the developing world in return for Certified Emissions Reduction permits. Currently purchased by governments to help meet their commitments under the Kyoto protocol, these can also be included as a source of allowances under the EU scheme. Multinational businesses can use this mechanism to finance energy efficiency and renewables projects for their developing world sites and suppliers.

As the flip side of carbon trading, offsetting should be treated with caution, used as a last resort when all other emissions reductions opportunities have been exhausted. Without these measures, offsetting can be seen as an excuse for inaction. Unlike operational and energy efficiency, offsetting is a cost rather than a saving to your business and at its most extreme, it is environmentally inefficient. For example, funding a community energy project in a developing country could take decades to offset the emissions from a year’s business travel.

Revenue opportunities: new product development and green marketingBurgeoning energy efficiency legislation promises to phase out energy-profligate products such as incandescent lighting, gas-guzzling vehicles and inefficient housing.

At the same time, consumer campaigns and a plethora of product labels aim to increase demand for more sustainable products and services — a trend mirrored by sustainable procurement initiatives across the public sector.

Whether through incremental efficiency improvements, disruptive new technologies or service innovation, an increasing number of businesses are competing to launch sustainable products and services to increase their market share. All these contrasting approaches can be seen in the automotive industry:

• Incremental engine, drive train, weight and aerodynamics improvements to efficient diesel cars

• Innovative new hybrid, electrical and hydrogen technologies

• Shared car pool services to supplement public transport for unavoidable car journeys

• Offsetting programs for vehicle purchases.

While many firms limit innovation to isolated flagship products, benefiting their reputations by association, the real challenge is to mainstream them across existing product ranges.

63% of respondents see sustainability as an opportunity for revenue growth.


Managing riskAs well as future proofing products and supply chains against regulatory risks, many supply chains have already been affected by physical and economic impacts of the changing climate and growing demand from Asia. These include global shortages of water, grain, timber and metals. Improving all forms of resource efficiency lessens exposure to these risks.

Annual insurance losses have climbed due to extreme weather events such as floods and hurricanes, which have also caused major production losses in the oil and farming industries. Investments in new buildings and infrastructure also have to be mindful of operating in a warming climate.

Safeguarding reputationJust as corporations are now sourcing their materials from new and distant locations, consumers in the Internet age can not only compare prices and get instant product comparisons and reviews, they can also find information on a company’s reputation and its commitment to corporate social responsibility.

Managing reputational risk through the supply chain is becoming ever more important, whether guarding against accusations of exploiting child labor, pollution incidents or selling unhealthy products.

As supply chains have grown more lengthy and complex, it has become harder for businesses to maintain the same oversight and control that they have traditionally enjoyed. If you outsource manufacture to a low-income economy and visit the facilities, can you be sure that the spotless and well-maintained building that you see is typical, or is there a child labor sweatshop across town? As the top initiative reported in our survey, 63% of firms had introduced labor standards to their supply chains.

Because legislation varies so greatly by market, companies should be wary of accusations of double standards within their global operations. For example, if a company tells its European customers that it uses only sustainable timber products, it should avoid unsustainable timber in overseas markets.

A side-affect of globalization has been for some businesses to shift operations to locations with weaker environmental protection. These lower standards have resulted in costly product recalls of contaminated goods, damage to workers’ health and pollution of public drinking water with electrical waste.

Companies need to beware of such practices, partly because of reputational risk, but also because local standards are likely to rise sharply in the coming years as the dangers of climate change become more evident, fuel costs rise, pollution is taken more seriously and governments act more robustly on the issues. If a business does not apply the highest standards, it will store up problems, requiring severe and painful short term cuts in future.

71% view reputation and brand as the area where sustainability, green and carbon issues will provide opportunity.


From viewing sustainability as a buzzword to be used in marketing materials, companies are now obliged to live up to their word.

In retail in particular, a genuine desire to act on climate change has been fueled by consumer pressure and PR spin — resulting in some very challenging and public commitments. The complexity and enormity of carbon labeling tens of thousands of products means some businesses risk over-promising and under-delivering. Before going public with their good intentions, firms should create a challenging but deliverable carbon reduction portfolio, underpinned by sound business cases.

Our survey found that 44% of respondents said they were confident they can deal with sustainability issues. Yet this is matched by an alarming amount of inactivity on the part of many large global companies, who have yet to realize the full potential of the savings and benefits that can be achieved by integrating sustainability issues into their supply chain management.

Living up to promises

44% of respondents said they were confident they can deal with sustainability issues.


Survey details

For this survey, The Economist Intelligence Unit surveyed 257 C-suite and board level executives on its panel.

The cohort included a significant number of CFOs. Respondents were drawn equally from North America (30%), Europe (34%) and Asia (33%) with the remainder from the rest of the world. All executives polled worked for businesses with a turnover in excess of US$1 billion and businesses were cross-industry. The interviews were carried out during September and October 2007.

What is your title?

What is your primary industry?

Board member

CEO/President/Managing director

CFO/Treasurer/Controller

CIO/Technology director

Other C-Level executive

12%

11%

31%

38%

9%

Financial services

Consumer goods

Manufacturing

IT and technology

Energy and natural resourcesHealthcare, pharmaceuticals

and biotechnology

Professional services

Transportation, travel and tourism

Logistics and distribution

Construction and real estate

Automotive

Retailing

Telecommunications

Chemicals

Agriculture and agribusiness

Government/Public sector

Entertainment, media and publishing

14%

12%

12%

11%

8%

7%

6%

5%

5%

4%

3%

3%

3%

2%

2%

2%

1%

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It is not a question of ‘if’ but ‘when’ new legislation will bite — and the when is likely to be within the next five years.


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