Apple, Nike, and Walmart have at least two things in common: they are among the most well-known brands in the world, and they all outsource environmentally intensive manufacturing processes to other companies in order to produce the vast majority of the goods that we buy from them. Today, these companies are also increasingly investing in the management of the risks embedded in their supply chains.
For example, the Foxconn factory in Shenzhen, China, along with other suppliers, manufactures Apple’s iPhone 5, with sales of the device in the millions since its release this fall. The manufacturing of the iPhone produces pollution; who is responsible for that pollution? Is Foxconn responsible, since the emissions and waste derive from their plants? Or is Apple responsible, since it depends on the services of Foxconn? Both have some responsibility. Without Foxconn or the other suppliers, Apple would not have the iPhone to sell. Some responsibility also sits with the financial institutions that benefit from the shares of Apple stock they own. As the old saying goes, you are what you eat, or in this case, what you profit from.
In order for companies like Apple, Nike, or Walmart to manage the environmental impacts embedded within their supply chains, they need to be able to measure them. Standards for measuring and reporting supply-chain environmental performance are still new. One of the most widely used, the Greenhouse Gas Protocol’s Corporate Value Chain Accounting and Reporting Standard, was published only in September 2011, and took more than 2,300 experts from 55 countries more than two years to develop with the World Resource Institute and World Business Council for Sustainable Development.
The use of these standards to focus and report on the environmental performance of supply chains is happening in a small but growing number of companies. Last year 54 companies were involved in Carbon Disclosure Project’s (CDP) supply-chain initiative accounting for supply-chain environmental impacts (PDF). We are seeing increased progress in this area. In this year’s Newsweek Green Rankings, 168 of the 838 companies—20 percent—disclosed some supply-chain emissions data. The most commonly reported, by 129 companies, were emissions for employee travel on airlines. But only 36 companies (4 percent) disclosed information on outsourced services they purchase from other companies, and just 6 companies (1 percent) disclosed the environmental impacts associated with their investments; only one of these was a financial institution (Citigroup, which disclosed the emissions associated with a thermal power plant project that it financed (PDF).
While the current number is small, the growth is comparable to the exponential growth in the reporting of direct greenhouse-gas emissions data back in the early 2000s, when the GHG protocol for these emissions was first launched. In 2003 there were fewer than 300 companies reporting some of their direct greenhouse-gas emissions; today more than 3,700 companies report this information.
The list below highlights the 28 companies listed in the Green Rankings that have disclosed information on their supply-chain impacts in 2012. These are the leaders in supply-chain emission disclosure. The companies span a number of sectors and levels of performance in the Green Rankings, but all are leading the way in taking responsibility for their outsourced environmental impacts.
GRAPHIC – Leaders in Supply Chain Emission Disclosure by Sector
As highlighted above, an increasing number of companies are measuring some of the environmental impacts of their supply chains. Companies ignore the magnitude of these environmental impacts—and the environmental (and financial) risks and opportunities that they represent—at their own peril. A Trucost study for the United Nations Principles for Responsible Investment (UN PRI) found that of the $2.15 trillion of environmental damage caused by the world’s largest 3,000 companies annually, 49 percent comes from impacts hidden within supply chains. Integrating this information into the management of business can help companies mitigate risk, reduce costs, and reduce their impact.
Water is a case in point. Water lies at the heart of our global economy. The majority of raw materials that businesses depend on require water in one way or another. However, a gap already exists between supply and demand. If we do nothing to correct this imbalance, by 2030 demand will exceed supply by 40 percent.
As the old saying goes, you are what you eat, or in this case, what you profit from.
We are already experiencing the effects of water scarcity—just this year, the United States experienced the worst drought in 50 years, sending commodity prices skyrocketing. Part of the problem is that water is not correctly valued. Inaccurate pricing of water as a valuable resource leads to perverse market incentives. Demand for water is often at its highest in places where water availability is low. For example, the “Dry 11” of the 31 regions of mainland China provinces create 52 percent of China’s industrial output and 40 percent of its agricultural products. As the name suggests, these are the driest provinces, with water resources comparable to those of the Middle East.
Trucost found that if water subsidies were to be removed and water was priced according to its availability, more than a quarter of profits of the world’s largest companies would be wiped out.
Another example of the significance of these hidden environmental impacts in companies’ supply chains can be seen in financial-service companies. These companies have a relatively light environmental footprint within their operations, consisting primarily of electricity consumption, water use, and waste disposal from their offices, but the environmental risks associated with their investments are much greater. For example, as of June 30, 2012, T. Rowe Price owned about $400 million, or about 6 percent, of the utility FirstEnergy. The emissions associated with this one investment, making up less than 0.1 percent of T. Rowe Price’s total investments, accounts for more than 900,000 of FirstEnergy’s 15 million metric tons of greenhouse-gas emissions. This is almost 24 times greater than the greenhouse-gas emissions from T. Rowe Price’s offices and electricity use.
Some companies, such as Puma, are actively collecting supply-chain environmental performance information for use in their business decision making. Puma, part of the PPR Group, conducted a detailed analysis of the environmental impacts of its operations and supply chain as a part of its Environmental Profit & Loss initiative. The results showed that only 6 percent of the company’s environmental impacts come from Puma’s offices, warehouses, stores, and logistics. The rest come from its supply chain—more than half (57 percent) from the production of raw materials, including leather, cotton, and rubber, for the shoes and apparel they sell. The findings of this assessment can be used by Puma to review where it sources raw materials from and which materials to source at all. Having this information available can change company strategy.
While few companies measure these impacts, and fewer still have been as proactive as Puma, there is an increased understanding that there is a business case—and an environmental imperative—for coming to grips with the environmental risks and opportunities of supply chains.