How to build an environmentally sustainable supply chain
Human activities are contributing to climate change, and business now has a key role in mitigating the negative impact. An environmentally sustainable supply chain is a responsibility of any organization. This blog looks at some of the benefits and challenges of and practical steps to building a greener supply chain.
Industry accounts for nearly 25% of greenhouse gas (GHG) emissions from fossil fuels. So, manufacturers, in particular, should design more sustainable production processes. But business’s supply chain management, in general, is modeled by leading academics as the most important part of ensuring a sustainable environment. Supply chains influence almost all of the United Nations’ 17 Sustainable Development Goals (SDGs) for 2030, and therefore have the highest SDG impact ratio.
Indeed, from regulators and shareholders to employees and consumers, stakeholders are aware of the need for companies to act responsibly throughout their value chains. The US Securities and Exchange Commission (SEC), the regulatory body overseeing that country’s securities markets, has just implemented a new rule toward full accountability for a company’s impact on climate. The SEC now requires any publicly listed company to disclose its climate-related risks, detail how these will affect the business, and report on climate impacts of its activities.
A sustainable supply chain creates value
But adopting an environmental sustainability (ES) strategy, as part of overall Environmental, Social and Governance (ESG) policies, is not about toeing a line. Rather, sustainability improves the business. The supply chain’s economic performance can be directly tied to more efficient resource utilization, improved processes, cost and productivity gains, and enhanced corporate values which result from strong ESG practices. Managing the company’s supply chain to optimize environmental criteria – on issues including, but not limited to, GHG emissions, biodiversity and water stress – creates value, buffers against risk and bolsters the bottom line.
Benefits and opportunities associated with improved ES practices
|Tighter risk management:||Progressive, proactive environmental policies cushion manufacturers against palpable risks. Ensuring reliable ongoing raw material supplies, trimming production waste, embracing the circular economy: these are a few examples of how ES practices – when applied across operations and the supply chain – serve to cut risks.|
|Operational gains:||Environmentally responsible stewardship leads to cost savings. Smoothed resource access, for instance, avoids input cost spikes. Renewable, on-site energy sources reduce fossil fuel costs, which are likely to trend consistently higher in the future. In addition, when ES measures are embedded into the supply chain, a sustainability culture combined with rigorous monitoring of KPIs serves to tighten operations in general. This helps to raise performance standards and drive continuous, integrative improvement.|
|Marketplace opportunities:||Consumers, worldwide, prefer products and brands manufactured according to ES standards and practices. They are increasingly willing to pay a premium for these.|
|Improved investor relations:||Market capitalizations are closely associated with risk. Consider, for example, that in the five years 2014-2019, ESG controversies slashed $500 billion of value from large US corporations. The reverse is also true: studies correlate ESG leadership with equity market outperformance by as much as 11%.|
The benefits are summed up by leading global investment bank Morgan Stanley: “Company management teams and boards are embracing positive environmental and social impact as an opportunity to drive growth and higher public-market valuations.”
However, building and maintaining a sustainable supply chain is a challenge for many organizations:
- Often, short-term objectives, especially current financial year profit delivery, demands full attention
- ES goals can be difficult to identify, partly because they require a medium- to longer-term view. There is also a large spectrum of strategy and monitoring service providers who do not necessarily work to the same standards or methodology
- Another frequent hurdle is limited visibility across the value network. An apparently green supply chain may not be as environmentally friendly as initially supposed when tier-2, -3 or -4 suppliers are assessed, and across the network’s entire geography
Step-by-step thinking toward a green supply chain strategy and practices will help overcome these challenges.
A starting point – and a valuable reminder even for organizations with relatively established ESG programs – is to understand the United Nations’ Sustainable Development Goals (SDGs). Environmental issues feature prominently in what is the blueprint for a better world, for all.
To link these SDGs with specific company strategies, research the appropriate standards to apply. The international Sustainability Accounting Standards Board (SASB) or the Global Reporting Initiative are sound references for developing industry-, country-, and sector-specific sustainable supply chain initiatives. Alternatively, benchmarking could be according to global investment advisory firm MSCI, who generate ESG ratings based on a model of a company’s resilience to “long-term industry, material environmental, social and governance (ESG) risks.”
Engage the company’s leadership to formalize high-level policies and approach (if this has already been done, reassess for updated circumstances and amend appropriately). ES goals must be aligned with the company’s business strategy, and the Board should be closely involved in communicating the mission of supply chain sustainability, internally and externally. Senior leaders should set top-line objectives, allocate resources, and instill a culture which understands the strategic value of, and the need to prioritize, environmental sustainability.
From preparation to actions
Following the preliminary work, five actions provide practical impetus:
Delve into the supply chain
Understanding the company’s current environmental sustainability situation requires a comprehensive evaluation of suppliers, logistics, routes-to-market and customers. This will reveal areas to improve both supply chain stability and environmental measures.
Whether in securing ethically sourced raw materials, reducing the carbon footprint of transportation, or overreliance on customers unaligned to the company’s sustainability values and mission, there will most likely be gaps between the supply chain’s delivery and its goals.
Look for issues of materiality. Mapping the supply chain should indicate where major ES risks lie or where significant operational improvements can be made – or both. The two primary areas of ES are likely to be GHG emissions and raw material resourcing, particularly in its impact on biodiversity and natural ecosystems. But a matrix can be compiled to rank all aspects of ES according to degree of risk, modeled in financial terms, against potential value gains of risk mitigation.
An option is to start simpler: prioritize initiatives by ranking the company’s environmental impact, according to judgement, on issues such as GHG emissions from own operations, water usage, effluent treatment, protection of biodiversity on owned and suppliers’ lands, and similar.
The analysis may reveal a shortage of information and data. Don’t be discouraged; this is a good sign, because it prompts further analysis to close the information gap.
Communicate the ES strategy widely
Communicate policies, goals and practices to all stakeholders, in straightforward language which is tied to actions – and pinned down to portfolios of responsibility.
Engage with suppliers
Involve key, identified suppliers in sustainability target-setting. Importantly, because ES requires improvement, set stretch targets rather than agree to easily achievable measures. The targets should be incremental each year, too. Compliance requires assessment and monitoring protocols, which should be formalized, upfront, in updated supplier contracts. Consider financial incentives – and penalties – where appropriate.
Set the reporting protocol
Building on the preparatory work, KPIs need to be set with reference to the identified standards and benchmarks.
Partner with expert industry bodies
Collaboration is vital to scale goals and accelerate achievements. Consultancies and training organizations can help design programs and instill best practices. Build knowledge and seek out learnings within the many case studies from around the world and in all industries.
Think about the future
The five actions above may not be straightforward. Depending on the complexity of the overall network, and on related issues such as the organization’s digital maturity or the culture of key suppliers and partners, “getting started” may evolve into an ongoing supply chain sustainability exercise.
The power of patience, together with strong and principled actions, can be seen in Unilever’s “Full Year 2020 Results & Strategic Refresh” report. The consumer-packaged goods giant commenced a concerted program of more sustainable sourcing in 2008. By 2020, the initiative had generated cumulative savings of $1.5 billion – proof that an ES strategy can significantly boost the bottom line.
A longer view also requires leaders and management to gain awareness and understanding of societal and geostrategic issues. When businesses do not implement environmental laws, the costs to society are astronomical. In the EU alone, the cost and forfeited benefits are estimated at €55 billion per year – but the European Commission’s report states that it could be as high as €79.6 billion.
Sustainable initiatives need to be sustained
Sound ESG practices are an essential part of doing business right now. Proactive and intensified initiatives toward a more mature green supply chain will drive competitive advantage.
But the actions Chief Supply Chain Officers take today will also determine the organization’s longer-term resilience and performance in a world increasingly constrained by climate change and resource scarcity. An environmental sustainability strategy, and best practice sustainability programs, serve to anchor a manufacturer’s future.