Big Companies Hold the Key to Sustainable Commerce

The world’s largest companies hold the key to setting global commerce on an environmentally sustainable path. The top 500 companies in the world generate $23 trillion in annual revenue, more than a third of global GDP. If the world’s largest companies can achieve radical improvements in their environmental performance—slashing their negative impacts while finding new ways of thriving—the effect on our planet and our society will be profoundly positive. To succeed, though, companies are going to need to look beyond their own operations and invest in the sustainable transformation of their suppliers.

Biggest Opportunity Lies Outside Companies’ Four Walls

A growing number of companies are working on reducing their environmental impacts and many are showing impressive progress. The leaders have realized, though, that their biggest impacts are often outside of their direct control, in their supply chains. Apparel maker Puma, for instance, has calculated that over 90 percent of the environmental costs of water use and greenhouse gas emissions connected with its business are attributable to its suppliers’ activities. A 2010 analysis by pharmaceutical maker GSK found that its operations were responsible for just 19 percent of its carbon footprint; the supply chain accounted for 41 percent and product use 37 percent. Baxter, a medical equipment manufacturer, calculated that its own operations account for just 24 percent of its global carbon footprint that same year; its supply chain accounted for nearly 38 percent of the total.

A Large, Untapped Opportunity to Influence Supplier Sustainability

The power of the world’s largest companies is not just in their vast size; it’s in the potential to influence the hundreds of thousands of usually smaller companies that provide them with goods and services and raw materials. Yet companies have been slow to set hard goals to improve their supply chain impacts. Green Research benchmarking studies across multiple industries have found that companies focus their public sustainability goals predominantly their own operations and rarely on their supply chains. For example, in our recent study of the largest medical equipment manufacturers, 87 percent of their public goals focused on operations; just four percent addressed a supply chain opportunity. Our studies of other industries show that this is typical.

Some of the companies we studied have internal goals related to supply chain sustainability but decline to publicize them. One reason: corporate sustainability leaders tend to have little influence over the supply chain function itself. According to a recent Green Research survey of senior sustainability executives, just 27 percent believe they have significant influence over supply chain at their companies. But this is starting to change.

Supplier Scorecards Are Valuable, but Have Their Limits

For years big buyers have used “supplier scorecards” to rate suppliers on a range of criteria. Increasingly, companies are using scorecards to assess and push for improvements in environmental performance. An early example is Walmart, which introduced a supplier packaging scorecard in 2006 with the goal of driving a modest reduction in the volume of packaging (5 percent over 5 years). In 2009, it announced a supplier sustainability assessment to expand the environmental performance measures on which it evaluated its suppliers. Procter & Gamble rolled out its own supplier sustainability score card in spring of 2010.

The two companies, one a giant consumer goods maker and the other, the worlds largest retailer, are now intensifying their efforts with the goal of extending the influence of their environmental aspirations. P&G has recently published its score card, implemented as an interactive spreadsheet, to encourage other companies to adopt it or something similar. Meanwhile, Walmart recently announced that it will broaden its original 15-question supplier scorecard to address 100 major product categories, with category-specific questions by the end of this year.

Requesting sustainability information from suppliers is a start. But it doesn’t go far enough. In our interviews with suppliers, we’ve seen that some are deluged with information requests but have little idea how their customers are using the information. Suppliers often don’t have a clear idea of what is expected of them and where to focus their own sustainability efforts.

Big Companies Must Share Goals and Expertise with their Supply Chains

Large companies should maximize their influence over supplier sustainability by investing in suppliers’ success. P&G says it uses its Scorecard not only as a way of judging its suppliers, but as a way of communicating with them and, ultimately, helping them to improve their own environmental performance. The scorecard clearly lays out what environmental performance criteria—from energy and water use to greenhouse gas emissions—P&G cares about and so, by extension, their suppliers should care about. The scorecard also provides a platform for soliciting feedback and ideas from suppliers about how P&G could adjust its own processes to mesh better with suppliers and yield improvements in environmental performance. And P&G says it has made its experts available to suppliers to help them devise sustainability solutions.

This last point represents a very large opportunity. The largest companies have technical expertise and other resources that smaller suppliers lack. Companies that share this expertise with their suppliers can accelerate suppliers’ performance gains and ultimately improve their own. Walmart made a valuable contribution in this regard by supporting the creation of The Sustainability Consortium. P&G is a member of the Consortium as well. Sharing expertise may require additional investment, but it could also lead to efficiencies that will reduce costs in the long term. And sometimes sharing expertise is even a revenue opportunity. Technology giant Siemens sets energy efficient targets that it expects its suppliers to meet—and then offers energy efficiency consulting services to help suppliers meet them.

The world’s biggest companies can change the sustainability game by sharing their environmental goals and their expertise with key suppliers. Leading companies are already doing this. Other companies that expect to lead or even to maintain their relevance in the future will need to seize this opportunity too.

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.