Supply Chain Sustainability at the heart of Corporate DNA

Expert Tensie Whelan argues that sustainability as an intrinsic part of corporate DNA drives operational efficiency and innovation, and delivers a range of benefits while also mitigating risk.

Q: How do you make the financial case for sustainability?

Sustainability drives operational efficiency, innovation, employee, customer and supplier engagement, as well as mitigates risk, among other benefits. All these tangible and intangible benefits can be monetized, but generally are not, partially because accounting does not deal well with intangibles and partially because this is all so new, the corporate finance department has not yet caught up.

Q: Is the case conclusive, especially in the absence of better ROI tracking by companies?

The case for cost-based saving through operational efficiencies is very clear and has been demonstrated by companies from Walmart to 3M. Sustainability – meaning balancing environmental, social, and economic goals – has led to cost savings through reductions in waste, energy and water for thousands of companies. The social side is also beginning to demonstrate positive financial impact – Walmart’s increased pay and career path for store employees reversed the downward spiral of negative customer experiences in store, increasing sales.

Q: Is there a penalty for being late? For waiting to see how this plays out and allowing your competitors to go through painful trial and error?

There will be a penalty as this is no longer niche – it is mainstream – and the impacts are no longer in the future – climate change is disrupting supply chains now. Laggards will be penalized, if not through negative impact on their reputation, through higher operational risk and worse margins. For example, coffee farmers are experiencing lower productivity and more disease due to climate change. But changes in sustainability practices can reduce the negative impacts considerably. Companies like Nespresso that are actively engaging with their farmers to help them with these issues will ensure they have a short- and long-term supply of quality coffee.

Q: You’ve used the word “embedded” to describe sustainability in some corporate cultures. Why is that important, and what are the differences between companies where it is embedded and those where it is not?

Traditional CSR and some approaches to sustainability treat the issue as peripheral to core corporate activities. In those cases, the business strategy does not include sustainability issues such as climate change as a disrupter, and thus the impact of sustainability initiatives will be limited. Unilever’s business strategy IS their Sustainable Living Plan and it has driven significant sustainability improvements, but also outperformance by their “brands with purpose,” higher margins than their competitors, and an enviable position as one of the most searched prospective employers on LinkedIn.

Q: How does sustainability drive innovation?

Sustainability is about applying a systems and design thinking lens to traditional processes and products. You provide different design inputs (e.g. reduction of water, improved labor practices) to create products and services that reduce negative impacts and provide a better product for customers. Nike has embedded sustainability into innovation, for example, and that has driven changes in how they produce all their products (reducing environmental impact and costs) as well as led to the creation of a $1 billion plus line of product – FlyKnit sneakers.

Q: What about its importance in attracting talent?

Much of the CEO activism we have seen recently is more for the benefit of employees than customers. Companies know that millennials are looking for companies who share their values and are committed to making the world a better place. As with Unilever, they will attract the best and brightest if they embed purpose and sustainability core to their business.

Q: You’ve spoken of the need to figure out ways to “monetize” sustainability efforts within companies. What does that mean, and why is it important?

Most companies are not tracking the financial benefits of their sustainability commitments, other than cost savings such as energy use reduction. Talent recruitment, engagement and retention, for example, should be tracked in line with a company’s focus on purpose and sustainability. It is possible to monetize the contribution of sustainability to human resource metrics – SAP and PwC have tracked it, for example, and have found significant financial returns. Innovation in processes is another area – companies are innovating new processes in response to sustainability commitments. Domtar, a pulp and paper company, developed a fertilizer from the waste of two plants that had been deposited in landfill previously – a nice circular solution that saved them money and also saved the farmers money as the fertilizer cost was lower.

Q: How has thinking about sustainability been changing?

Companies have been on an evolutionary path, starting with a niche approach, e.g let me try making a green product, to a broader risk management approach, e.g. I need to manage for reputational and operational risk in my supply chain, to a mainstream approach, e.g. this needs to be core to my business, to an innovation approach, e.g. this creates new business opportunities.

Q: How does the calculus differ for B2B companies, vs. those selling to consumers?

Brands in industries such as consumer packaged goods have more pressure on them in terms of reputational risk. But they are passing that down through the supply chain, so B2B companies that are leaders will be able to achieve preferred supplier status and create better relationships with their clients. That said, B2B salespeople are not always well-trained in the sustainability attributes of their products and thus don’t feel comfortable talking about them. That will need to change.

Q: What do you see happening in emerging markets and developing economies?

In my former role as president of the Rainforest Alliance, we worked with companies all over the world and found a wide variety of engagement. There were market leaders like Tata in India and Klabin and Fibria in Brazil that were far more innovative than many US and European companies. And then there were companies in complete denial.

Q: What do you make of the recent letter from BlackRock’s Laurence Fink to CEOs? Do you see it as a watershed moment? Will it change anything?

I agree with Larry Fink that the short-term shareholder focus has done a lot of damage to capitalism, people and the planet and we are facing a reckoning. We need more investors to stand up and require that companies manage for all material stakeholders and ESG issues. And we need to delink executive compensation from delivering on high quarterly margins to the detriment of R&D, employees and the environment.

Q: EcoVadis says companies are shifting focus toward social/labor and business ethics, and going into “maintenance mode” or decreasing investment on the environmental side. Do you agree?

No, I don’t agree. I think companies in the US have been more focused on the environment to date, and they are now playing catch up on the social side, as they should. There are new environmental commitments every day – McDonalds just announced recycling goals in restaurants as well as a commitment to 100 percent recyclable packaging, for example. This is a not an either/or proposition. Companies will need to perform well on material social and environmental metrics. Right now they need to figure out their position on compelling issues that have been ignored for too long, such as employee pay and gender equity.

Q: What else is happening on the social and governance side that’s intriguing to you?

First, we had CEOs publicly state their commitment to reducing greenhouse gas emissions with science-based targets when President Trump pulled the US out of the Paris Accord on climate change. Now CEOs are stepping up on gender issues, immigration, firearms, and so on. As we have a vacuum in governmental leadership on social issues, business is taking the lead. My conversations point to personal commitment by those CEOS, and an acute attention to serving their employees who are asking for executive leadership.

Q: What are you looking for in the next five years? Ten years? What’s going to surprise us?

Just as the march by students in the United States about firearms (which took place on March 25 2018) is unexpectedly changing the dialogue on firearms policy overnight, and as with #metoo and #blacklivesmatter (movements), I think we will see a great reckoning on labor (better pay), climate and water issues in the US and globally in the next ten years. And, hopefully, we will stop looking backward, and, in looking forward, unlock ingenuity and optimism to make transformative changes in how we produce, consume and value products and services.