Companies are setting goals for improving supply chain environmental performance, but are experiencing real challenges in making those goals a reality, a new survey finds.
“ESG Survey: Environmental Performance and the Stakes for Your Business,” by international law firm Crowell & Moring, surveyed 225 corporate decision-makers in sustainability and found that nearly 6 in 10 are setting goals for improving supply chain environmental performance.
However, the survey also points to key challenges companies face as they green their supply chains, from increased costs to the difficulty of holding suppliers to verifiable standards. While more than half of companies have set goals, about one-third are actually measuring supply chain sustainability.
Supply chains often contribute substantially to a company’s carbon footprint; supply chain sustainability represents an important opportunity to meaningfully reduce it.
Making Goals Happen
A key challenge emerging from the data is that carbon emissions result from indirect activities not controlled by a single company and are ubiquitous throughout the supply chain. Decentralization and interdependency— fundamental characteristics of the modern global supply chain—represent the chief hurdles to effective corporate “greening” efforts described in the survey.
At best, many companies find themselves at the goal-setting stage. Companies likely resist including supply chains as core pillars of sustainability programs because it requires participation and cooperation in an area that is often neither a priority for supply chain partners nor promoted by their host countries.
But successful sustainability programs require transparency among partners. For example, companies must obtain detailed information about suppliers’ own sourcing patterns and operations, along with transportation and logistics data associated with moving materials and finished goods across borders. Suppliers often view this type of due diligence as burdensome, resulting in higher costs. Here are some key considerations for companies moving toward greener supply chains as they engage supply chain partners on ESG diligence matters and embrace environmental sustainability elements within their broader partner qualification and auditing processes.
1. Assessing Current Supplier Relationships
Companies concerned with potential reputational risks associated with supply-chain activities are increasingly reviewing suppliers’ environmental profiles. One-third of survey respondents have fired a supplier based on their environmental performance. A company normally fires a supplier for violating the terms of their sourcing agreement. Presumably, the termination of a sourcing relationship based on environmental performance involved the supplier’s failure to comply with a particular sustainability requirement in the contract.
To incorporate a supplier’s carbon footprint into the conditions of an agreement, the terms must include (1) a mechanism to audit or measure emissions output (according to the survey, 51% audited or measured the environmental performance of their suppliers), and (2) minimum environmental standards.
Methods for measuring the environmental performance of a supplier are readily available. See, e.g., GHG Protocol Calculation Guidance, which offers several methods for calculating greenhouse gas emissions. Some methods call for companies to collect data directly from suppliers, while other methods permit secondary data (i.e., industry average data), which can be less intrusive to the supplier relationship but likely are less precise.
Adding further complexity, supplier disqualification also must consider host country policies and legal considerations, as well as the availability of acceptable alternative suppliers. The survey results reflect generally low attention to host country legal regimes and practices.
By not accounting for local legal requirement, companies risk running afoul of local laws that could adversely affect their sourcing in a particular country.
For example, China recently implemented its Anti-Sanctions Law (ASL), which could impede a company’s progress in its sustainability efforts. The ASL provides the Chinese government and Chinese companies a wide range of tools to retaliate against U.S. and EU efforts to impose laws that China deems “discriminatory or restrictive.” China is sensitive to foreign laws and policies, including those relating to ESG efforts, that serve foreign interests at the expense of Chinese companies. Prior to canceling a supply agreement with a Chinese company, a company must consider whether its actions may trigger negative ASL implications.
Fortunately, the rising profile of environmental sustainability issues on an international scale stands to assist companies’ efforts in this space by bringing ESG into the mainstream. For example, countries are increasingly incorporating environmental sustainability into the negotiation of free-trade agreements. The U.S.-Mexico-Canada Agreement (USMCA) includes an entire chapter focused on environmental protection that requires enforcement by all three governments: USMCA, Chapter 24 (Environment), Art. 24.4 (Enforcement of Environmental Laws). The WTO similarly is shining a spotlight on the nexus of international trade and carbon emissions. As ESG considerations become more prevalent in the global trade community, barriers may erode and pave the way for progress.
2. New Suppliers Bring New ESG Opportunities
Companies also may qualify potential new suppliers to replace current suppliers that fail to meet new sustainability goals and requirements. The survey indicates that 41% of respondents have hired a supplier based on its environmental performance. Shifting sourcing to more sustainably-conscious suppliers may be difficult depending on the number of available alternative suppliers, the complexity of production and the necessary regulatory approvals.
However, unlike longstanding supply relationships that predate a company’s ESG efforts, new suppliers provide a fresh opportunity to realize sustainability goals A company may issue RFPs requiring measurable criteria and reporting metrics for both qualification and ongoing compliance. At the outset of a new supplier relationship, a company may impose more stringent ESG requirements in its supply agreements, including audit requirements for monitoring ongoing sustainability efforts.
3. Clear Paths to Meaningful “Greening” Lie Downstream
Unlike upstream links in the supply chain, companies often have more visibility and control over downstream activities. Better visibility and control translate to clearer paths for companies determined to meet their emissions goals. For instance, the survey describes opportunities for companies to reduce the carbon footprint of their own products by considering emissions at the design stage, which determines 80% of a product’s environmental impact. Design initiatives to extend the useful lifespan of products and to facilitate reuse and recyclability are directly within companies’ control.
Companies that are serious about their commitment to “greening” may leverage product design to improve sustainability and long-term profitability. Additionally, companies have more control over the transport and distribution of their own products and possess the capacity and opportunity to select service providers and logistics companies that further their sustainability goals.
Meaningful sustainability efforts require a committed and coordinated effort, including buy-in from upper management to empower all in the organization. The survey highlights the need for clear direction from leadership as a core driver to achieve sustainability goals, as well as informed and purposeful action based on measurable data both within the company’s operations and externally. Collaboration among partners is also key to the successful “greening” of a company’s supply chain, and companies must evaluate where they possess the requisite leverage and incentives to coax partners to engage in these efforts. Once an effective program is in place, companies must be vigilant in monitoring and measuring supply chain performance to ensure environmental objectives remain relevant priorities.
David Stepp is a partner and Maria Vanikiotis is a counsel in Crowell & Moring's International Trade Group.