Download Why sustainable supply chains make business sense

Why sustainable supply chains make business sense
To protect against reputational damage and the effects of climate change, do
companies need to implement sustainable business practices throughout their supply
chain?
Workers at Thailand’s biggest semiconductor factory clean up after the 2011 floods; hard-drive prices soared
afterwards. Photograph: DAMIR SAGOLJ/© DAMIR SAGOLJ/Reuters/Corbis
If you were looking to buy a hard drive for your computer around December
2011, you might have noticed prices had been steadily risingsince October.
But this was no simple case of high-street retailers cashing in on the
Christmas rush: the cause was far more complex and revealed much about
the vulnerability of global supply chains. The rising prices were a direct
result of devastating floods in Thailand, caused months earlier by an
unusually severe monsoon season, which in turn was attributed to climate
change.
Along with the tragic loss of more than 800 lives, the floods cost the country
an estimated $45bn (£28bn). With two of the world's largest hard-drive
manufacturers being heavily reliant on Thai suppliers, costs skyrocketed for
global companies such as Hitachi, Dell and HP.
The disaster highlighted an increasingly common problem: for any
company relying on a global supply chain, the risks facing suppliers on a
local level can have a domino effect until damage is felt in boardrooms
thousands of miles away. That could be having to raise prices, as was the
case with the Thai floods, or it could be reputational damage, such as
Apple experienced when it was claimed workers in a Chinese factory,
which manufactured some of the company's products, were working in
substandard conditions.
So in an increasingly global marketplace, how can businesses ensure their
supply chains are resilient to the many risks posed by climate change and
the possibilities of unethical practices in distant factories?
That question was at the centre of a roundtable discussion hosted by the
Guardian and held in association with the global engineering and
environment consultancy URS. For many of the contributors, one of the
biggest issues facing the introduction of more resilient, sustainable supply
chains is the quarterly report-dominated thinking of many boardrooms.
Speaking off the record, one participant said it was important for business
leaders to focus on the "20-year results" – not just on the quarterly results.
In other words, long-term resilience is often overlooked due to
understandable pressure to focus on short-term profits. However, if
sustainability were viewed through the lens of risk to business continuity,
the case for a longer-term approach would be easier to make.
The debate also heard how The UN Global Compact-Accenture CEO Study
on Sustainability shows the percentage of CEOs who reported that
sustainability would be "very important" to the future success of their
business had fallen to 45% in 2013 – it was 54% in 2010. So how can the
business case for social, environmental and governance issues be
championed?
Common sense
For Simon Pringle, head of sustainability and cleantech at the accountancy
group BDO, the solution starts with ensuring sustainability is understood in
the boardroom. Pringle told the roundtable about a discussion he'd had
with a business leader who disagreed that "making the business more
efficient, spending less money on resources and wasting less" were
necessarily "sustainable" issues. To the business leader, they were simply
"common sense".
Pringle therefore stressed the need to make the language of sustainability
relevant to the boardroom by placing it in context. "If businesses are talking
about sustainability being in some way separate from the 'day job' … we
won't make the same level of progress as if those roles dissolve into the
fabric of the business and it becomes part of people's day jobs."
Other delegates agreed that making the business case for introducing
sustainable practices across companies and their supply chains was key.
Jonathan Maxwell, CEO of Sustainable Development Capital Limited,
pointed out that "this isn't about trying to sell morality into the boardroom,
it's about providing the ability for businesses to make better decisions to
reduce costs, improve productivity, support growth and take longer-term
decisions". Introducing a more sustainable way of doing business "stands a
good chance in the boardroom", he added, by focusing on the "resourceefficiency agenda".
While the roundtable agreed that focusing on resources would highlight
potential financial gains and liabilities, the challenge was finding ways to
quantify them on a macro level. In particular, it was felt that identifying the
benefits provided by the natural environment, such as fuel, water, climate
and land was particularly difficult for companies. Robert Spencer,
sustainability business line director at URS, said these "eco-system
services" are not correctly valued by most businesses. "Once you have a
system to value [eco-system services], then the business case for
embedding sustainability will be easier."
Spencer pointed to the work of Puma, which developed an environmental
profit and loss approach that tried to work out the true cost of the
company's water use, greenhouse gas emissions, land use, air pollution
and waste. The 2011 report showed the cost of these services to Puma
was about €145m (£125m). If companies knew the true value of these ecosystem services they could make better-informed decisions about how to
manage their environmental risks, the roundtable heard. "You can't change
anything until you've first measured it," Spencer added.
Alongside identifying the cost of these externalities, Richard Waterer, head
of Marsh Risk Consulting, said companies needed to reduce the risk of
reputational damage emanating from the supply chain. "There is more than
one way to create profit," he said. "You can create it long term by reducing
volatility in your business by saying, 'we will not walk consciously into a
relationship or a contract where we know we are taking on risks that prove
to be damaging to our reputation'."
So how can companies reduce volatility and introduce sustainable business
practices across supply chains? Pringle suggested larger companies could
"create a new competitive landscape" by moving from "requesting" certain
standards from suppliers to "requiring" guidelines to be met. He added that
a very positive change could result from saying to suppliers, "we've just
made a promise and now you're all going to have to go and keep that
promise".
However, some participants thought the idea of asking companies to
enforce standards across their supply chains was unrealistic at present.
Companies need to source competitively priced materials, the roundtable
heard, and enforcing standards would result in suppliers raising their
prices. Maxwell summarised the current state of the sector: "This is crawl,
walk, run and we're at crawl on supply-chain management, which is 'we will
talk and engage with suppliers, but we're not going to mandate anything
because we can't afford to yet'."
Maxwell was referring in particular to time he'd spent "on the ground" in
factories in China, working for big corporates on their supply chains. The
fast-moving consumer goods sector, he said, likes the sustainability
agenda but, at the end of the day, they will say "my suppliers are my
biggest asset". Managing suppliers is the critical element, he added. "The
guys in the factory in China have no interest whatsoever in moral
sustainability outcomes," he said, unless the customer was prepared to pay
a really good margin.
This view was not reflective of all industries, said Graham Dickson of
npower, who pointed out that many businesses were asking suppliers to
adhere to certain standards as part of their contracts. Other contributors
thought that if enough businesses collaborated and all asked their suppliers
to take sustainability seriously, those factories would have to change their
business models to keep their customers happy.
Government legislation was therefore suggested by many participants as a
way to move the agenda forward and encourage collaboration. Spencer
suggested the Landfill Tax offered a good example in the UK economy of
how a tax could transform industry. The Landfill Tax was introduced in
1996 and charges companies and councils for every tonne of material sent
to landfill. By making the disposal of waste in landfills more expensive, the
government hoped to encourage the development of innovative recycling
infrastructure. "That is a great example of the right regulation causing
collaboration in the supply chain, having a financial incentive, but not
having the government writing the blueprint saying 'this is how you have to
do it', but instead taking a step back and letting industry take that over," he
said.
Global carbon tax?
Michael Stein, the founder of Trillion Fund, specialising in clean energy,
agreed that legislation could be used to create a "level playing field" that
would also introduce a profit motive for making businesses more
sustainable. He suggested the best way of doing this would be to introduce
a global carbon tax, which would be in "all our interests", pointing to data
which shows global warming is a very real existential threat to future
generations and therefore the long-term survival of businesses.
There was a feeling among some other delegates that while such a tax
would certainly be a driver for change, it was perhaps slightly quixotic to
expect such legislation to be implemented on a global scale. Stein
disagreed, stressing the need for CEOs to lobby governments as it was in
their "enlightened self-interest" to do so. "Unless we get real, unless we go
and get our leaders to wake up and get strong and passionate about this,
we're not going to get anywhere," he said.
The discussion closed with delegates summarising their thoughts.
Legislation and collaboration across supply chains and among competitors
were suggested by many as ways of creating a level playing field so all
businesses could be confident of operating in the same commercial
environment, which would encourage behavioural change all the way
through the supply chain.
However, the overriding feeling among participants was that the business
case for sustainability-focused companies and supply chains was so clear,
it had to be a priority in boardrooms. The $45bn cost of the flooding in
Thailand and the subsequent rise in the price of hard drives demonstrates
the need to take climate change – and the effect it will have on business –
seriously. "Let's think about what is good for business and good for
countries and make decisions on the back of that," said Maxwell. "If it's not
commercial, it's not sustainable," he added, highlighting just how
interchangeable those words have become.
In focus
• Companies are becoming increasingly exposed to risks across their
supply chains, either by disruption resulting from climate change or
reputational damage.
• Building resilience into supply chains is necessary to ensure a company's
long-term survival.
• There is a strong business case for developing sustainable ways of
working throughout a company and its supply chain: saving resources is a
more efficient and profitable way of doing business.