As corporate non-financial reporting becomes ever-more sophisticated, one blind spot remains: the supply chain. The majority of environmental impacts often lie further down in the supply chain, where robust data and reporting practices are often a challenge. On what topics can global brands engage in with their suppliers to address this problem?
More than 90% of the Global 250 (top half of the Fortune Global 500) companies are reporting on corporate responsibility to various stakeholder groups consisting of investors, B2B customers, and regulators, among others. Reporting through standardized initiatives such as GRI, CDP, and the Dow Jones Sustainability Index has become business as usual. Within environmental sustainability, areas of disclosure have expanded to cover greenhouse gas (GHG) emissions, as well as corporate exposure to water risks and deforestation-related commodities.
As non-financial reporting becomes ever-more sophisticated, one key blind spot remains: the supply chain.
Companies are turning their focus to better ways to manage supply chains sustainably in view of protecting bottom lines and future-proofing business. Some software providers and NGOs that already support corporates in their own reporting extend their offering into the supply chain, allowing companies to gather relevant data from their suppliers directly. Dedicated supply chain solutions combining self-assessments and audits have emerged, covering both environmental and social aspects of sustainability. However, the majority of environmental impact often lies further down in the supply chain, with tier 3 or 4 suppliers: Puma’s environmental profit and loss account (P&L), for instance, shows that 57% of impacts are at tier 4 level, compared to the 6% residing in their own operations and 9% at tier 1.
In other words, well over half of the environmental impacts associated with supply chains can lie far from the direct reach and control of end-consumer-facing businesses. To add to the challenge of adequately addressing environmental or social impacts along the supply chain, suppliers are often less able – or ready – to provide the right data as sustainability departments are usually not as well-established and funded as those of the big brands. This is concerning especially when looking at the bigger picture: GHG emissions are going down or plateauing in Western countries due to increasing outsourcing of emissions-intensive manufacturing to lower tiers of the supply chain. Geographically, these lower tier suppliers are situated in emerging markets, where regulatory reporting and transparency requirements are not always vigorously enforced.
If “the real impact” indeed lies at the tail-end of the supply chain, how can global brands especially in end-consumer-facing business, engage in meaningful ways with their suppliers?
Consumer companies can already start making their supply chains more sustainable while seizing the business opportunities brought by robust water, forest and energy management. The three key steps to take include identifying risks around natural resources, switching production to renewable energy and offsetting unavoidable emissions. By addressing these issues in close collaboration with suppliers, smart businesses can reduce their social and environmental impact and position themselves for strong growth.
1) Identify risks in resources, raw materials, and commodities
To identify risks around raw materials or natural resources, such as water or forests, along the supply chain, companies need to merely know the geo-coordinates of their raw material processing, regardless of how far down in the supply chain that is.
Using sophisticated geographical information systems (GIS), tools such as South Pole Group’s “BigChainTool”, a company can map out whether their raw material sourcing and processing is contributing to deforestation in a specific location, or whether there are water issues to be monitored. Taking the example of raw materials and commodities for consumer goods companies, many organisations are not clear about their forest impact due to lack of transparency of raw materials sourced from lower tiers of the supply chain. This can leave brands exposed to environmental campaigning, without much of a communication or policy response. Furthermore, degrading ecosystems is an inefficient way of production in the long term, and sustainable management of natural resources makes more sense for business continuity.
Where a raw material is impacted by deforestation, action can be taken in the form of policy formulation, implementation and monitoring to ensure mitigation, allowing organisation to effectively report back to stakeholders who are starting to demand more proof on substantiated sustainability action. And for good reasons: latest corporate forest scoring by South Pole Group and CDP reveals that only 30% of companies reporting to CDP can trace deforestation-linked commodities back to the point of origin. Up to US$906 billion in company turnover depends on commodities that drive the majority of tropical deforestation globally.These two factors together make it crucial for any forward-looking consumer goods company to have a clear understanding of every commodity they procure, across all global sourcing locations.
On the road to excellence, a commitment to deforestation can be the next step once issues around raw materials and natural resources are identified. Commitments to zero-deforestation are already becoming best practice, as can be seen by the increase in commitments of 30% year-on-year since 2009, and accelerating by 80% from 2013 to 2014.
2) Switch production to renewable energy
If corporate policies ensuring zero deforestation are in place with corresponding monitoring, corporate production and manufacturing should also have a net zero impact on the environment. Where most manufacturing and packaging occurs in the supply chain, consumer-facing brands can help their suppliers procure renewable energy if they lack the in-house capabilities.
Thanks to initiatives such as RE100 or the Renewable Energy Buyers’ Principles, many major companies have set time-specific goals to reach 100% renewable energy. In the same way that CSR departments in large companies are often more advanced than those of suppliers, so are their procurement units. Energy buyers collaborate with CSR departments to ensure the right quantities and quality of renewable energy is purchased, ranging from national green tariffs to Power Purchase Agreements (PPAs) for major own production facilities, to Renewable Energy Certificates (RECs) for offices and retail outlets with low electricity consumption and no option to choose the utility directly.
Manufacturing suppliers need to jump on the bandwagon: suppliers have a great deal to benefit from bigger brands leading the way and generating more demand for more renewable energy while the cost of renewables continues to decline. Companies, on the other hand, can work in collaboration with their manufacturing suppliers in many different ways, from sharing their expertise in procuring renewable energy to providing financial support to secure on or near site PPAs.
As GHG-intensive manufacturing often takes place in emerging markets with low regulation and potentially unstable economic and political conditions, big companies can advocate for renewable energy as a way cost-effective way to become energy-independent, and show increased commitment to suppliers pursuing their own renewable energy strategies.
3) Offset unavoidable emissions
Despite many large corporates having offsetting in place for their own residual emissions, emissions in the supply chain related to, for instance, logistics or raw material procurement still remain largely unaddressed.
In the same way as providing manufacturing suppliers with support for renewable energy, commitments to raw material suppliers and others can be demonstrated by “insetting”: this refers to the development of carbon reduction projects along a company’s own supply chain. The focus is on quantifying impact across all relevant dimensions beyond carbon, including local communities, employees, and other natural resources. Developing Climate Change resilience becomes one feature of demonstrating commitment to suppliers. A typical insetting project will quantify effects on business performance, the relationship with suppliers, and efficiency gains. Depending on corporate requirements, projects apply the most appropriate monitoring, reporting and verification/auditing standard, including the Gold Standard, Verified Carbon Standard, Plan Vivo, GHG Protocol, CCB Standards, etc.
Companies have mounting pressure to bring to light the impacts and risks along their entire supply chain – an area that is becoming the primary focus of climate-change related sustainability action. Crucial, value added non-financial information can already be gathered with increasing availability of relevant data and transparency.
Nonetheless enduring impact along the supply chain can only happen in collaboration between major corporates and their key suppliers. The purchasing power held by big consumer companies gives them pivotal influence over their suppliers’ business practices. Ultimately, consumer companies can only achieve their own sustainability goals if they set high standards for their suppliers’ performance. Long-term engagement with suppliers is thus “the next frontier” for big brands – and a crucial step in keeping dangerous levels of global warming at bay.