An environmentally sustainable supply chain is the responsibility of any organization. It also future-proofs the company – and can deliver immediate bottom-line gains.
Stakeholders – shareholders, regulators and consumers – are increasingly pressurizing companies to act responsibly throughout their value chains. The US Securities and Exchange Commission (SEC), for instance, has just implemented a new rule towards accountability for a company’s impact on climate, now requiring publicly listed companies to disclose its climate-related risks, detail how these will affect the business, and report on climate impacts of its activities.
Sustainable supply chains create value
Adopting an environmental sustainability (ES) strategy, as part of overall Environmental, Social and Governance (ESG) policies, fundamentally improves the business. “There’s no conflict between sustainability initiatives and profit deliverables,” says Graeme Faulkner, Competitive Capabilities International (CCi) VP for Greater China. “The only trade-offs are in prioritizations and investment payback periods.”
The supply chain’s economic performance can be directly tied to resource utilization efficiencies, improved processes, cost and productivity gains, and corporate values bolstered by its ESG actions. The benefits and opportunities associated with improved sustainability practices include:
- Tighter risk management. Progressive, proactive environmental policies, applied across the supply chain, cushion manufacturers against both business and operational risks, such as regulatory infringements or unreliable raw material supplies.
- Operational gains. 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, improving the bottom line.
- Marketplace opportunities. Consumers worldwide, prefer products and brands manufactured according to environmental standards and practices. They are increasingly willing to pay a premium for these.
- Improved investor relations. Market capitalizations are closely associated with ESG risks. Studies correlate sustainability leadership with equity market outperformance by as much as 11%.
The benefits are summed up by 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.”
Dilemmas and deliberations
However, building and maintaining a sustainable supply chain comes with its own complications, according to Phillip Meier, Competitive Capabilities International (CCi), Director of Supply Chain, Europe.
“Sustainability goals can be difficult to pin down because the environmental impacts of interconnected, globalized supply chains are complex to identify or quantify. Sustainability also requires overcoming inertia: the range of issues and the immensity of the challenge dwarfs what individual organizations can realistically accomplish,” explains Meier.
“There is also a large spectrum of strategy and monitoring service providers who do not necessarily work to the same standards or methodology. This may lead to a confused clutter of options which slows decision-making and sustainability actions.”
Context and benchmarking
Overcoming these hurdles requires preparation. It is a valuable reminder, even for organizations with relatively established ESG programs, to understand a company’s role and responsibilities across its supply chain by digesting the 17 United Nations’ Sustainable Development Goals (SDGs) for 2030. In addition, the Intergovernmental Panel on Climate Change (IPCC) has produced a series of reports, the latest in April 2022, which are required reading to grasp the severity of climate change impacts, their consequences, and the path to mitigation.
To link the SDGs and IPCC reports with specific company strategies, research the appropriate initiatives, standards and benchmarks to apply. These could be referenced and selected from, among others, the Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative, or investment advisory firm MSCI, who generate ESG ratings by modeling a company’s resilience to material ESG and industry-related risks.
Leadership must be committed. The C-suite should formalize high-level policies and be aligned to the company’s business strategy. Senior leaders should set top-line objectives, allocate resources, and instill a culture which understands the strategic value of, and the need to prioritize, sustainability.
Practical steps to boost sustainability impetus
Following this preliminary work, the supply chain will require comprehensive mapping and evaluation across suppliers, logistics, customers, and routes-to-market. This exercise will highlight areas to improve the supply chain holistically, whether improving raw materials sourcing to reduce the impact on biodiversity and natural ecosystems, minimizing the carbon footprint of transportation, or reducing reliance on customers unaligned to the company’s sustainability values and mission.
Faulkner, from China, advises prioritizing materiality. GHG emissions from own operations, water usage, effluent treatment, protection of biodiversity on owned and suppliers’ lands: each will have varying impacts depending on the company’s sector, spread, and operations. Prioritize those which will contribute most significantly to sustainability. “In general, however, remember that attaining net-zero carbon emissions is the critical, urgent global objective,” he says.
The supplier network must be harnessed. Engage tier-1 suppliers in sustainability target-setting, with the aim of extending these to lower tiers as soon as possible. Formalize monitoring and compliance protocols; consider incentives and penalties where appropriate. Ensure climate and environmental impact criteria are integrated into all new procurement decisions.
All sustainability strategies and initiatives will benefit from three enablers: expert guidance, technology, and communication.
Partnerships with third-party consultancies and authoritative industry bodies can improve knowledge, instill best practices, scale goals and accelerate achievements. Technology is integral to the innovation needs of manufacturing industries involving carbon capture, renewable energy, and environment-friendly materials and packaging within their supply chains. It also facilitates extensive data gathering and analysis to model risk-investment-improvement trade-offs and step up the monitoring and delivery of sustainability KPIs.
Ongoing communication is important. Internally, this solidifies the entire organization’s buy-in to the importance of the sustainability strategy. External communication contextualizes the company’s actions, signaling and codifying its behaviors to the marketplace.
Think about the future
Decoupling humanity’s economic activity from problematic environmental consequences has become the most pressing challenge of the 21st century.
The power of principled actions is evidenced by Unilever’s ‘Full Year 2020 Results & Strategic Refresh’ report. The consumer-packaged goods giant commenced a concerted program of sustainable sourcing in 2008. By 2020, the initiative had generated cumulative savings of $1.5 billion – proof that sustainability can significantly boost the bottom line.
Safeguarding the future requires long-game strategies as well as important, immediate actions to mitigate threats. “Sustainability strategies and best practice sustainability programs are vital to anchor a manufacturer’s future,” concludes Faulkner.
CCi is a privately held global company that enables organizations to deliver sustainable results across the value chain through TRACC, a solution for continuous, integrated improvement.
Contact CCi to find out how CCi can accelerate your organization’s improvements in Environmental Sustainability (ES) practices and unlock sustainable competitive advantage. Or to learn more about their ES TRACC improvement model.