In a recent webinar on understanding the new GRI G4 standard, speaker Elaine Cohen referred to the ‘black hole’ that is logistics.[1] It’s true; particularly for large corporations with complex, global supply chains, getting a handle on what suppliers are doing and how they are doing things would seem a rather daunting task. Even more so from a sustainability perspective, where businesses might feel that they can barely get to grips with accurately identifying, measuring and addressing impacts within their own boundary of operations, let alone those of a multitude of suppliers.  The overused phrase ‘logistical nightmare’ springs to mind, and sticking one’s head in the sand might seem the best option.

Yet, seeing as the supply chain tends to be the largest function of a business, covering everything from sourcing materials, manufacturing, planning, and distribution, it is definitely not something to be ignored.

Undeniably, supply chain management is of strategic significance. A solid procurement policy will not only drive cost-savings but also reduce risks and lead to a competitive advantage –it has a direct bearing on a company’s bottom line: profit. But what about the role it can play in terms of the so-called ‘triple bottom line’ – that is to say, a company’s wider environmental, social and economic impacts? More importantly, why should companies, whether purchasing or supplying, care, and how can they act?

The business case for a sustainable supply chain is clear.

First and foremost, legal developments in this area are on the increase. On the US-side, the California Transparency in Supply Chains Act of 2010[2] requires large businesses in the federal state of California to disclose on policies, if any, to help eliminate human trafficking along their supply chains.[3] In 2008 and 2010, the US and the EU, respectively, introduced regulations under which companies have to verify the legality and sustainability of sourced timber.[4] Most recently, attention has turned to conflict minerals. Under new disclosure requirements in the US[5], some companies are required to report on their use of certain conflict minerals originating from 10 central African countries, where human rights abuses in the mining industry are rife and funds go towards supporting armed groups.[6] The EU is tipped to follow in similar footsteps to the US, having recently closed consultations on the matter.[7]

In asking for disclosures on these matters, regulators are encouraging businesses to start thinking more seriously about both the ethical and environmental impacts they may be indirectly responsible for. No doubt there is more to come on this and companies would be well advised to adopt forward thinking, if only to facilitate their future compliance.

However, there are reasons to go beyond mere box-ticking.

Chris Whitehead from Balfour Beatty plc writing for 2degreesnetwork described procurement practice as the ‘acid test’ of whether an organisation ‘gets’ sustainability.[8] The international infrastructure services provider recently published a comprehensive UK procurement policy[9], consolidating its commitment to sustainability. Over the last couple of years, the UK Government has under its sustainable development policy also been turning its attention to procurement policy in the public sector, the country’s largest single purchaser of goods and services. As more and more organisations adopt stringent procurement standards to minimise risks, a tender that clearly accounts for sustainability issues and long term viability will outshine competing bids.

Also inducing behaviour change are investors.[10] Climate change is arguably the most serious form of market failure threatening us today. A 2012-2013 supply chain survey report produced by Accenture and the Carbon Disclosure Project[11] states that 70% of respondents considered extreme weather to be a major risk to their bottom line.[12] Yes, that’s right, we are talking money. The world over, from Japan to the US, storms, tsunamis, floods and drought have already affected crop yields and resulted in billions of dollars of loss to a range of industries, including manufacturing and electronics.[13] Even the least risk-averse investors are bound to think twice before putting their currency into companies who don’t transparently acknowledge the full range of potential costs.

Moreover, those companies who not only identify risks but invest in innovation to address them stand out as leaders in their respective markets. Johnson & Johnson has focussed particularly on identifying and mitigating water risks and reduced consumption in the production of its goods.[14]

But where is the business value in this? For one, there are savings to be made through improved operational efficiency. Another 73% of survey participants claimed that supplier engagement on sustainability had led to lower running costs just from emissions reductions.[15]

There’s also reputation to consider. It’s not just about companies avoiding negative attention for turning a blind eye to unsafe working conditions in factories or using cocoa beans produced by exploited labour. Take Unilever, for example –a growing multinational which continuously and effectively capitalises on its sustainability story. The Green Express, a sustainable logistics programme which will take 3,500 trucks off the road each year, will not only lead to an estimated 6% savings in costs per year,[16] but is one of many initiatives pursued by Unilever that have kept the household name constantly in the limelight for good corporate citizenship.

Having briefly touched upon a range of drivers, it becomes evident that by broaching the subject of the elephant in the room, companies can open up a world of opportunity, both in terms of minimising risk and generating value. Those who haven’t –stand a lot to lose.

More to come in Part II on the importance of strategically categorising suppliers and the key ingredients for achieving a sustainable supply chain.