Two new standards were published this week for businesses to measure, manage, and report their greenhouse gas emissions. The guidelines, jointly developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), were launched under the Greenhouse Gas Protocol, an “international accounting tool for government and business leaders to understand, quantify, and manage greenhouse gas emissions”.

There is no way a company can be sustainable if it doesn’t make sure its supply chain is sustainable. Likewise, there is no sustainable products, only sustainable product life cycles, from “cradle to cradle”. WRI interim president Manish Bapna said that with these new standards “ companies will be able to measure and manage the full scope of emissions in their value chain and products”. He added that they “will help move businesses and reporting programs to one harmonized global reporting framework”. WBCSD president Bjorn Stigson said the new standards “provide companies with a comprehensive view of the emissions produced when making a product and across the value chain. They will help companies make better business decisions”.

These standards provide a good opportunity for companies to seriously look at their carbon footprint. Reducing emissions and the company’s carbon footprint is a clean way to enhance productivity, reduce costs, and manage risks. This process creates value for shareholders, not expenses for companies. As Heather Clancy, contributing editor to Smart Planet, puts it: “the time for corporate procrastination when it comes to assessing the environmental impact of business partners across the supply chain is past”.

The Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard is here.

Greenhouse Gas Protocol Product Life Cycle Accounting and Reporting Standard is here.

Sergio Abranches

The Carbon Disclosure Project (CDP) its annual survey of the Global 500 largest companies by market capitalization included in the FTSE Global Equity Index Series provides some interesting indications on how the larger public corporations are dealing with climate change.

The study on behalf of 551 investors with US$71 trillion of assets, has asked the Global 500 to measure and report what climate change means for their business. This year, 81% (404) of the Global 500 responded to the CDP questionnaire.

These responses provide some insight into “how companies are preparing for a resource constrained world and show a shift in company strategy to prepare better for a low carbon economy and act on the business opportunities”, says de  CDP report.

The most interesting indication from the survey is that those companies with more advanced strategies and better carbon performance, those in the Carbon Performance Leadership Index (CPLI) – tend to perform better, not only in terms of greenhouse gas emissions management, but also in terms of financial performance.

The companies in the 2011 Carbon Disclosure Leadership Index (CDLI) and Carbon Performance Leadership Index (CPLI) provided approximately double the average total return of the Global 500 between January 2005 and May 2011. Companies in the CPLI had a total average return in this period of 82.44%. Those in the CDPLI yielded a total average return of 85.72%. Their rates of return compare to 42.71% for all Global 500. This suggests “a strong correlation between higher financial performance and good climate change disclosure and performance”, concludes the report.

Other interesting findings are:

74% (294) of the Global 500 respondents disclose absolute or intensity emission reduction targets, an increase from 65% (250) in 2010.

68% (269) of companies are integrating climate change initiatives into their overall business strategy, up from 48% (187) in 2010.

The majority  of 2011 respondents (93%, 368) report board or senior executive oversight for their company’s climate change program, up from 85% (328) in 2010. This shows a marked rise in companies linking their climate change strategy with their overall business strategy.

45% (178) of respondents have made emissions reductions in some or all of their business from specific measures. This compares with 19% (75) of respondents that had reduced emissions in 2010. The leaders are clearly moving ahead in this regard with all of the CPLI (2010: 52%, 25) and 73% (38) of the CDLI (2010: 47%, 24) showing emissions reductions.

59% of emissions reduction activities reported by the Global 500 respondents have a payback period of three years or less and 41% of initiatives have paybacks of over three years.

A total of 1,780 emissions reduction activities are reported by 97% (384) of responding companies in 2011. Energy efficiency (building fabric, building services and processes), low carbon energy installations, and behavioral change are the most commonly identified activity types.

65% (259) of respondents provide monetary incentives to staff for managing climate change issues, versus 49% (188) in 2010.

The Energy sector is showing the lowest proportion of companies with targets (55%, 22) and is underrepresented in both the CPLI and CDLI. In view of the high emissions from the Energy sector, this points to the need for improvement. The Consumer Staples sector has the highest proportion of companies with emissions reduction targets (94%, 32).

Utilities emerged as the sector with the best average climate change performance (band B). The sector with the lowest average performance score was Information Technology (band C). The only sector with no companies in the CPLI was Telecommunications.

Companies in Australia, Germany, Italy, Switzerland and the UK are demonstrating strong performance leadership. Canada, Japan and the USA lag behind on performance^.

Sergio Abranches

Climate-related risks and greening the supply-chain are common features of most presentations about sustainability and corporate social responsibility. Sometimes they are presented as “trends” or future threats. But they are not something that will happen in the future. They are already part of the daily affairs of most companies. And they are inseparable from each other.

Climate-related risks are a matter of present concern to every major insurance company (here, here and here) and to an increasing number of institutional investors. Green procurement is a key competitive factor today (here). Not a trend for tomorrow. Companies are looking deep into their supply chains not because of their view of the future, but because of present dangers to their business. They know they have to reduce their carbon footprint. WallMart Nike and Timberland banned beef and leather produced in the Amazon because of present consumers reaction to evidence that their procurement behavior was contributing to deforestation. Every company will have to account for GHG emissions caused by their demand for products and services as well as for the impact of what they sell on consumers’ carbon footprint. The time of the company that is clean and green indoors, but pays no attention to what it buys and to what happens to the goods it sells is over.

Going green is not easy. This is now a stock phrase. But, no matter whether easy or hard, going green has become a necessary and urgent step to every industry. To some industries, how to go green has a straightforward answer. It may be hard, but the knowledge base already exists. It will require leadership from the top; getting the right response from the corporate citizenry; better integration between procurement and finance; finding qualified people to lead changes; develop capabilities along the supply-chain.

Some industries still find greening their services a difficult and elusive task (here). On a recent roundtable at Cornell’s prestigious School of Hotel Administration, participants found that green standards for the industry are unclear and consumer’s views inconsistent. Hotels are reluctant to implement sustainable systems although they recognize the need to green their operations. It is a bit surprising to read that. From the standpoint of hotels’ supply-chains there are plenty of visible points where greening is possible and straightforward.

To anyone having a long view on what is happening now and of probable future trends, climate change-related risks are no longer a matter of doubt or probabilities. Probabilities are so high, that one can’t simply design a plausible “no climate change scenario”.  The long view tells us that the economy is already reshaping itself responding both to structural crises and risk-driven change. Greening the supply-chain is part of the present drivers of competition and innovative behavior. It is no longer a feature of future scenarios. Future scenarios are about things that go beyond a green supply-chain.

The ongoing process of corporate greening is at its beginning, but it is already visible. It is very likely one of the paramount factors that may lead to a new long-cycle of investment and economic growth, within less than a decade. Just think for a moment about the enormous dynamic push of leading companies at the top of the productive and commercial sectors greening their supply-chain. This movement forces all suppliers of major companies to also green their own supply-chains, if they want to stay in the economy’s major clusters. And their suppliers will have to follow suit for the same reason, and so on. The demand for green or low-carbon supplies where there are none, becomes an irresistible incentive to innovative startups. This movement goes from the global economic clusters, to the national ones, and to the sub-national ones.

There are already systemic movements visible in the global economy. They point to emerging processes and behaviors that will effectively reshape the corporate environment. Present production and consumption patterns that still appear to be dominant will inexorably be replaced. We are already riding the giant waves of a scientific, technological and behavioral revolution in every field of human activity. Overlooking these movements is accepting a present danger, not disregarding a possible future threat.

Sérgio Abranches

Sustainability cannot be a solitary quest of a few heroic companies. It has to be a collective action within and across the major supply chains of the economy. Yet, larger corporations have a leading role to get any real progress in greening the supply chain.I was once speaking about corporate and public corruption, illegal business practices, such as deforestation and forced labor, and sustainability to a very select audience. The point was that firms that indulge in such practices may be profitable for some time, but will eventually fail and fall. The broader issue was corporate risk management and sustainability. The focus was climate change risk. The specific reference was to business practices in Brazil. The audience, a global advisory board of CEO’s of large corporations that belonged to the supply chain of a firm that has an important stake in the Brazilian market.

I argued that climate change risk was a real and present danger that required prompt action of major corporations. They should start leading their supply chains towards a low-carbon model. I wanted to convey the idea that a firm’s carbon footprint was inextricably linked to its supply chain’s footprint. “A dirty link in the chain ends up by making the whole chain dirty.”

I gave several real-life examples related to sustainability and corporate social responsibility. Amazon deforestation was linked to soy and beef exports, hence deforestation was part of these industries’ carbon footprints. Cattle ranching, soybean, sugar cane plantations, and charcoal production were tainted by the use of forced labor. I showed how the supply chains for these activities housed both illegal and legal activities. How, for instance, pig-iron mills bought legal iron-ore from a top mining company, illegal charcoal from loggers in the Amazon, or the Brazilian savannah, and legally sold their product to top steel mills. The mining and steel companies were ranked among the best, most competitive Brazilian firms with a sizable share of their global markets. Or, how sugar cane cultivated and harvested with the use of forced labor would lead to two of the country’s major export commodities: sugar and ethanol.

When I finished talking, one of the CEO’s was outraged, and asked me on a high pitch: “Why are you doing this? Why are you doing this?” As he looked around the round table to his peers, he saw they were perplexed by his reaction. He, then, added: “I agree with everything he has said, I agree with everything he is proposing. But why he’s chosen to say it so bluntly?”

I know what he wanted to hear. An unspecific, general, motivational defense of sustainability, without naming names, or blaming the leading corporations for the blunders across their supply chains. Except for a few foreigners that knew very little about Brazil, all the others were acquainted with this reality. As this CEO had been at the top of a supply chain with all the problems I mentioned, he blamed me for a useless blame game.

I’m used to this sort of reaction from some audiences, when I speak too candidly about corporate misbehavior. They get even angrier when I say that large globalized firms that buy illegal products, that won’t take action to clean up their supply chains are even more responsible than the small sheep in the herd. It is a simple argument. When one looks into, let’s say, the supply chain for the Brazilian steel industry, what one see is a very heterogeneous mix of practices, uniting giant corporations and small and medium low quality ones. Now who is to blame? The smaller and weaker parts of the chain, or the larger and powerful ones? The former can’t survive without the complacency of the latter. Large corporations can make do without small and mid-sized low-quality suppliers, especially those who resort to illegal practices. The larger have the power to discipline the smaller.

There is no sustainable firm, if its supply chain is not entirely sustainable. An unsustainable supply chain is ultimately the responsibility of the larger companies in it, both upstream and downstream.

Usually Brazilian law enforcers and regulators tend to go after the smaller fish, rather than the big ones. This has proven useless again and again. Getting the few larger ones to behave and to lead their suppliers and buyers into good behavior will do the trick. Shut down the smaller companies, and others will emerge to replace them.

It was tough talking and enforcement through market leadership that made possible the “pact against slave labor” in Brazil. ILO and the Brazilian Labor Ministry cooperated to identify cases of forced labor in the Brazilian economy. Investigative reporting by the NGO Brazil Reporters brought further evidence to a dirty list of proven cases of “slave labor”. The business-oriented NGO Ethos Institute took care of mobilizing and coordinating corporate support to an “anti-slave labor pact”. A company would commit not to buy from those in the dirty list by signing the pact. A significant number of large corporations operating in Brazil signed it.

The pact has not eradicated slave labor yet, but it has contributed to reduce its scale in the economy. Forced labor is gradually being eliminated from the larger and more value-added supply chains.

It was tough talking that enabled Greenpeace to bring large consumers of Brazilian soybean, like McDonald’s, to discuss Amazon deforestation. After Greenpeace named the names and showed the data, McDonald’s called the large traders and told them to stop buying soy from illegally cleared land.

The so-called “soy moratorium” has contributed to significantly reduce the role of soy export production in land-grabbing and land clearing in the Amazon.

It was though talking that has also helped Greenpeace to convince large supermarket chains like Walmart, Carrefour and Pão de Açúcar to tell beef wholesalers they would not buy meat from their Amazon operations. Cattle-ranching and beef wholesaling were the leading factors of Amazon deforestation.

The “beef moratorium” has not yet yielded the same results the “soy moratorium” has achieved, but it has made visible progress. Other large players on the beef and leather supply chains felt compelled to join the agreement.

Corporations adhere to these “pacts” for sustainability because of their values, or due to market pressures from large scale buyers and consumers’ manifest preferences? I’d say market pressures and consumer preferences have, at the very least, a decisive role in strengthening and enforcing corporate values.

These are extreme examples, but they help to make it very clear that sustainability is about market leadership. Leadership may require the help of regulatory inducements and constraints or some other form of pressure to emerge, though. They also help us to understand that there can’t be sustainable companies operating within unsustainable supply chains. An internal sustainable logistics and an indoors low-carbon operation by themselves do not make a firm sustainable or low-carbon, if its supply chain continues to be a high-carbon one. A “no questions asked” policy is antithetical to a sustainability policy. Sustainability has to be obtained throughout the product’s life cycle, from the very beginning of the supply chains leading to the final product, and up to its end use or consumption, waste and disposal.

Particularly now, in the climate change era, sustainability cannot be a solitary quest of heroic few companies imbued with high values. It has to be a collective action within and across the major supply chains of the economy.