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What 2011 Taught Us about the Green Supply Chain (and What It Means for 2012)

As regular readers of Environmental Leader know, there was a blizzard of corporate sustainability news in 2011. There are lots of lessons to be learned from the prior year, and some important implications for 2012. Some of the biggest lessons surround sustainability in the supply chain.

Supply Chain Impacts Can Swamp a Company’s Direct Impacts

2011 may be the year in which the importance of sustainability in the supply chain became widely understood. This was the year, after all, that PUMA issued what it billed as the world’s first corporate “environmental P&L” statement.  In it, the company put a financial value on its environmental impacts and found them to be substantial, equal to nearly 72 percent of its net earnings. But more to the point, it attributed over 94 percent of its environmental impact, and the associated costs, to its suppliers.

Some companies have known for a while that their supply chains accounts for a major portion of their environmental impact. As Green Research noted in a recent study of sustainability goals in the pharmaceutical industry, GlaxoSmithKline reported in 2009 that life cycle assessment work revealed that its supply chain and materials accounted for 41 percent of its carbon footprint, whereas its operations accounted for only 19 percent.

PUMA’s work in translating environmental footprint into financial terms should help raise awareness of the critical role the supply chain plays in corporate sustainability.

Supply Chain Sustainability Goals Are Scarce

While some companies have long understood the importance of the supply chain in sustainability performance, so far few companies have committed themselves to specific supply chain sustainability goals. Green Research found that even among companies that set public sustainability goals, specific supply chain-related sustainability goals are still rare. According to the benchmarking work we did in 2011 in the banking, beverages, computer manufacturing, food processing, oil & gas, pharmaceuticals and telecommunications industries, fewer than 2 percent of the goals, by count, are supply chain focused.  The vast majority of goals, 79 percent, focus on internal operations issues; 14 percent focus on product and packaging.

At some companies, the scarcity of supply chain sustainability goals may reflect a lack of understanding of the significant impact the supply chain has on a company’s overall environmental footprint. But it also reflects the fact that companies do not like to set goals in areas where they lack direct control. And many companies feel they lack control over the environmental performance of their supply chain.

Sustainability Performance in the Supply Chain Is Poor

Figure 1 Sustainability Maturity Tiers (Source: Green Research)

The lack of specific supply chain sustainability goals, and limits to control over suppliers, are among the reasons many sustainability executives rate their companies supply chain sustainability performance as poor. Green Research’s annual sustainability executive survey asked executives about their companies’ level of excellence and maturity in each of a list of key sustainability issues. We classified sustainability issues in tiers according to the level of maturity that companies have achieved in dealing with them. Tier I issues are those where a majority of sustainability executives see their companies leading. These include greenhouse gas emissions, energy efficiency, recycling, and solid waste. Most companies are not leaders on Tier II issues, even though some companies perform strongly on them. For each Tier II issue, between two thirds and 80 percent of companies consider themselves either average performers or leaders, and over 90 percent have begun to tackle the issue. Tier II issues include paper use, water and packaging. Tier III issues see a lot of average performers but also many companies that have done little or nothing about the issue. Supply chain sustainability falls in Tier III, along with more esoteric issues such as biodiversity and conflict minerals. Over a third of respondents to our survey said they have a “long way to go” on supply chain sustainability; about as many considered their companies to be average performers. And 21 percent considered their companies to be leaders.

Sustainability Executives Have Little Influence over Supply Chain Policies

Sustainability executives generally have substantial influence over areas such as communications and external affairs at their companies. But when it comes to other corporate functions such as procurement and supply chain, they carry less sway. Over a quarter of respondents to our annual survey say they have little or no influence over supply chain policies or procedures at their company and another half have moderate influence. In fact, sustainability execs say they have less influence over supply chain practices than over practices in nearly every corporate function we asked about except for product marketing, human resources and finance. It seems clear that there is an opportunity for companies, and sustainability execs, to improve their game when it comes to supply chain environmental performance.

Supply Chain Sustainability Will Be a Key Focus in 2012

All this is the backdrop for a key finding of our annual survey: improving sustainability in the supply chain will be one of the top sustainability goals for companies this year, behind only employee engagement. Seventy-three percent of the execs responding to our survey said their companies would be dedicating significant staff time or financial resources this year to improving the sustainability performance of their suppliers. This is a really important development.

I expect to see companies aim for closer collaboration with suppliers, adopt more stringent scorecarding, put a greater focus on ecosystem services and biodiversity, and apply the new Scope 3 carbon accounting standards (released in 2011) to their supply chains, among other initiatives.

How is 2012 shaping up for you?

David Schatsky, principal of Green Research, is a consultant and adviser to businesses on a range of topics, from clean tech markets to corporate sustainability best practices to business strategy in the Internet and information technology markets. Having spent almost a decade as an analyst and senior executive at JupiterResearch, a leading research and advisory firm focused on Internet business, Schatsky is an expert in business strategy, industry analysis and market research.

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