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Whether Baked or Embedded, Experts Agree: Sustainability is Part of Organizational & Supply Chain DNA

14 Jun

In a new report, sustainability in the supply chain is one of four key indicators covered.  The report is entitle The Chief Supply Chain Officer Report 2011 and is  co-authored by Dr. Hau Lee (from the Stanford Graduate School of Business), and Kevin O’Marah (group vice president, supply chain research for AMR Research).  Over 750 global executives completed the survey, including SCM World members and non-members, with over 50% of respondents at VP-level and above within their organizations.

The authors prioritized issues across four key areas:  value-driving supply chain management, globalization, sustainability and talent management.   One of the key findings (and it’s no surprise in my mind is that sustainability “ increasingly forms part of the DNA for high performing supply chains, with 65% of respondents characterizing pressure from senior management and the board as the source of sustainability efforts “.    The second source of sustainability efforts is pressure (interesting enough) comes from customers (46%), followed by pressure from government (35%).

The study also surveyed whether the use of the “carrot” or “stick” had greater effectiveness in encouraging supplier collaboration. The study found that companies appear to react to supplier breaches in sustainability standards by warning i.e. the “stick” and then taking punitive actions, while some act even more promptly without warning.  Most companies use reduced business as the “stick” (73% would reduce business after warning and 56% would reduce business without warning), while some act even more drastically, terminating the business relationship with suppliers (36% after warning and 42% without warning). On the “carrot” side of the study, enhancing  business relationships through “ preferred supplier status” or increased business engagements were found by most companies surveyed to be effective in supplier collaboration  (66% and 48% respectively).  The study compared well with some thoughts I shared in this space last year on the effectiveness of the carrot and stick approaches in changing supplier behavior (using examples such as Walmart, GE and Hewlett-Packard).

The authors concluded that “Ultimately, customer relationships and business opportunities with customers form the most important cornerstone of all sustainability activities” and that that the survey results positively indicate that “sustainability forms an integral part of a company’s supply chain improvement journey”.  So besides working within its own four walls, organizations continue to realize this year (like the previous few years) that sustainable supply chain management and responsible procurement has taken a solid place in business circles to enhance the corporate brand and deliver further value.

Embedded, Baked or Bolt-on?

The Chief Supply Chain Officer report  finding  on supply chain sustainability lends itself well with a key thought communicated at last week’s Sustainable Brands ’11 conference by Dr. Chris Laszlo (I was there and hopefully some of you found my Twitter stream).  Laszlo and Dr. Nadya Zhexembayeva have coauthored a new book, Embedded Sustainability: The Next Big Competitive Advantage, which explores the operational advantages, cost efficiencies and reputational gains that can be made from embedding sustainability, rather than taking a “bolt-on” approach.  Being a fan of baked goods, I have often referred to “baked in “sustainability practices, but it’s all semantics when you get down to it and the outcomes remain the same.

“Embedded Sustainability is the incorporation of environmental, health, and social value into the core business with no trade-off in price or quality – in other words, with no social or green premium.”- Laszlo and Zhexembayeva

Source: European Financial Review

As noted in the graphic, the goals, scope and outcomes associated with embedded sustainability (as compared to a “bolt-on” approach) drive  deeper and farther . In their research, the authors noted some interesting “lessons learned” from the many leading, innovative global companies that have embraced an embedded sustainability perspective.  One of those takeaways was that “the pursuit of sustainability involves hidden choices – whether to reduce negatives or provide positive solutions, and whether to pursue incremental change or heretical innovation – which are proving crucial to business strategy.”  In other words, it’s not easy to make the types of change needed without making some tradeoffs along the way.

In a crisp summary by Jen Boynton (@jenboynton) of Triple Pundit,   Dr. Laszlo deftly summarizes “three ways that sustainability initiatives build value for a firm:

  • Declining Resources-as energy and other inputs get more expensive, it makes financial sense to conserve them.
  • Increasing Expectations– customers, investors, regulators and employees expect more (as I mentioned above) and therefore a company has to deliver more in order to remain competitive.
  • Radical Transparency, often associated with CSR reporting, puts NGOs, unions, and government officials on the outside looking in with no secrets. A company has to do good things, otherwise their reputation and brand value will quickly suffer.”

As both authors noted in a European Financial Review article, “the linear throw-away economy, in which products and services follow a one-way trajectory from extraction to use and disposal, can no longer be supported, as we are simply running out of things to unearth and place to landfill. Consumers, employees, and investors are beginning to demand socially and environmentally-savvy products without compromise, while radical transparency is putting every company under a microscope.”  Just as I stated in last week’s blog, which addressed the threats and impacts of increased consumerism on sustainability itself, both businesses and consumers have an obligation to rethink the entire “make-consume” model, and explore design and end of life product management at both ends of the value chain.

The authors suggest that for companies to embrace the embedded approach to sustainability, “four interdependent and interconnected lines of action [can] help guide the journey:

  • Getting the Right Start: mobilizing, educating, and acting around specific low hanging fruits. Building momentum in the organization for sustainability projects that support existing business priorities and provide demonstrable pay-off.
  • Building the Buy-In: aligning company, value chain, and all other stakeholders around the vision of embedded sustainability.
  • Moving from Incremental to Breakthrough: developing clear but unorthodox goals, designing the strategy and capturing value through co-creation and innovation.
  • Staying with It: managing learning and energy while making sustainability ubiquitous but largely invisible in the business practice.”

So before you leap, plan ahead.  Build a system to plan, implement, measure and check progress of your sustainability initiative.  Look for the quick wins.  Build an innovation-based culture and reward positive outcomes.  Bake the initiative into the governance, operational, and communications of every corner of the four walls.  Expand your reach upstream to your key suppliers and spread the word to your customers.  Measure, manage, report and build on the early wins.  But more than anything, keep on baking…

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Sustainability that You Can ‘Bank’ On: Value-Added Steps to ‘Green’ Financial Institutions

7 Jun

This past week, the Financial Times and IFC (World Bank Group) announced the winners of the 2010 Sustainable Banking Awards (http://bit.ly/ZNISO).  The annual awards recognize banks and other financial institutions that have shown leadership and innovation in integrating social, environmental and corporate governance considerations into their operations.  Short of two funds, American banks were absent from the list.  Let’s face it, with the global economic collapse of the past two years, and the banking industry’s corporate social responsibility reputation in the tank, Wall Street firms and the banking industry in general is under pressure to “do good”  (http://bit.ly/a5D7r4).  But all is not lost and it’s not too late for banks to regain consumer confidence while improving their operations and bottom line.

Unfortunately, the current economic downturn and lending issues faced by the banking sector has created a threat to “triple-bottom-line” focused sustainability i.e. green programs that are meant to manage banking risk being neglected or moved to the bottom of the “to do” list.  I am not talking about the ‘low hanging fruit’ like lighting retrofits or e-statements or recycling programs (all good starts by the way).   My focus is on seeing banks implement deeper initiatives focused on governance, sustainability focused risk, reputational management, and value-added community benefit.

The Environmental Minefield that Banks Walk Through

The banking sector generally perceives itself as environmentally neutral.  However, the regulatory landscape that large commercial and community banks often find themselves walking through is constantly changing and looks more like a minefield.  Although banks themselves do not largely impact the environment much through their own ‘internal’ operations like a large scale manufacturer or developer might, the ‘external’ impact on the environment can be substantial.  That is because banks like any other business may be potentially liable for environmental damage that their operations or fiduciary involvement may cause.  In banks cases, the concern is on derived environmental liability through debt and equity transactions.

The “Green” Question

Environmental and corporate social responsibility issues highlight both risks as well as opportunities to banks.  The banks and financial institutions that made the FT 2010 list are serious about greening their operations and financing sustainably-focused projects that put sustainable governance at the heart of decision-making.  Not only does this leverage a bank’s risk, but it’s value-added in the long run.  How?  Because substantial evidence is available that demonstrates how environmentally responsible investments and projects that ’give back’ to a local economy more than they “take’ are better investments in the long term.

There are no specific legislative drivers to encourage better performance in terms of sustainable lending or project finance.  However, several voluntary standards and sets of principles exist and are gaining steam in the business marketplace.  Examples include the Equator Principles (http://www.equator-principles.com) , World Bank IFC Guidelines, Global Reporting Initiative (GRI) Finance Sector Guidelines (http://bit.ly/aFmaYe), and even Securities and Exchange Commission federal reporting requirements.  Leading international finance and local banking institutions have signed on to many of these guidelines, which are rapidly becoming the “norm” in the banking industry.  Only a few U.S. financial institutions have stepped up to the plate so far, notably Citigroup, Wells Fargo, Bank of America and JP Morgan Chase.

The Risk Management Challenge

Environmental   issues present the banking sector with a daunting and often long term challenges. Banks can face financial risks from borrowers defaulting on the repayment of their loans because of fines imposed for poor environmental performance.  As I already noted, current environmental regulations in the U.S. can make banks liable for environmental damage caused by borrowers.  Banks, therefore, need to strive to minimize these risks with the introduction of measurable and verifiable environmental criteria into their credit policies and overall lending processes.  All too often, evaluations are often made on unverified business pro-formas, deficient appraisals, or on applicants environmental reports, often compiled on a voluntary basis.

However, the lack of environmental and other sustainability criteria in a loan-vetting process may prevent banks from estimating the full risk premium of investments and expose the bank to further short and long term risk. Therefore, banks might consider starting by reassessing their credit policies and loan screening processes to assure that sustainability is accounted for.

Solutions that Add Value and Real Sustainability

A growing body of quantitative and qualitative data demonstrates the bottom-line benefits of sustainability-focused credit risk management performance in the banking industry are evident in the market place. Some key benefits of such an approach, reported by over 85% of banks surveyed that have implemented similar programs) include:

  • Improved Financial Performance
  • Reduced Operating Costs
  • Enhanced Brand Image and Reputation
  • Increased Loan Originations and Customer Loyalty
  • Increased Ability to Attract and Retain Employees.

To be and to stay on the leading edge of our new financial world, forward- thinking banks must consider developing robust, performance based lending policies and processes to ensure that 1) the organization not only offers competitive products to its customers and gives value back to the community in which loan assets are located, but 2) the organization protects its fiduciary position, environmental and reputational risk from servicing questionable projects.   So far here in the U.S., efforts by established banking institutions in the “deep-sustainability” space is scant, and I can only point to a few real, demonstrable leaders with a firm track record in this area.

My company’s approach to ‘green’ banking focuses not only on helping our clients find the obvious ‘low hanging fruit’ as I noted earlier, but get to the “core” risk management success factors that can make or break a bank:

  • Sustainability focused operations procedures & policies;
  • Value-added bank loan/credit risk management tools and sustainability scoring indices, leading to innovative customer products and enhanced profit streams.
  • Working with compliance and regulatory agencies interacting with financial institutions.

How well banks handle social and environmental risks is increasingly important because, in today’s global economy with unrestricted information flows, such risks can affect a bank’s reputation and long-term business success.  Who knows- with a little guidance, innovation, determination and daring, more U.S. financial institutions may make the FT Sustainability Banking 2011 list.  I’ll be watching where my money goes- will you?