Environmental Responsibility: Are Corporations Buying It?
Environmentally responsible purchasing. The phrase more likely evokes images of a consumer buying Tom’s of Maine toothpaste in a co-op than the purchasing department of a major company. Yet a small but growing number of major companies are taking steps to green their purchasing, in part as a result of pressure by socially responsible investors. Such practices are generally most advanced in the automotive and electronics sectors, but are not limited to these sectors or even to manufacturing companies: service sector companies from Bank of America to Kinko’s to United Parcel Service have also made efforts to address environmental issues with their suppliers.
Corporate green purchasing initiatives encompass a broad range of activities, such as screening suppliers for environmental performance, working collaboratively with suppliers on green design initiatives, and providing training or mentoring to build suppliers’ environmental management capacity. There are now a small but growing number of corporate procurement departments that have staff with “environment” in their job title, and British auto maker Land Rover even has a “Purchasing Environmental Champion.” Other companies have integrated environmental functions into traditional sourcing roles, such as purchasing managers and quality assurance staff.
There are signs that some suppliers are starting to get the message. Last year, a study by Business for Social Responsibility found that among 25 suppliers across different industry sectors, virtually all had received requests from their corporate customers to address environmental issues. Suppliers said they were able to meet many of these requests and improved environmental performance as a result.
Yet there are also important questions about how seriously companies are implementing their green purchasing policies. BSR’s study found that suppliers generally seemed to feel that companies could do a lot more to “walk their talk” on green purchasing. In the study, several suppliers expressed frustration with customers who have issued environmental policies or articulated environmental expectations which suppliers do not see reflected in actual purchasing decisions. These suppliers noted that price continues to be the major driver behind their customers’ purchasing decisions, and they saw environmental issues as playing an incidental role.
Green Purchasing and SRI
The growth in green purchasing programs is particularly good news for socially responsible investors, because well-designed programs can offer not only environmental gains, but also financial benefits to shareholders. Indeed, many companies have found that working with suppliers on environmental issues not only generates significant environmental benefits, but significant business benefits as well. Some of these include: * Reducing risks of supply chain interruptions or delays resulting from compliance problems at a critical supplier.* Protecting the company’s reputation and brand image from damaging public controversies over supplier practices. * Reducing costs through initiatives that decrease the amount of energy and materials used throughout the supply chain. * Providing opportunities with strategic partnerships to enhance quality, increase innovation, or boost productivity.
As one example, furniture manufacturer Herman Miller, Inc. has boosted productivity and reduced costs by working with its suppliers to receive shipments in reusable packaging. Paul Murray, Herman Miller’s Manager of Environmental Affairs, called the initiative, “A win for the environment, a win financially, and a win for productivity.”
Trillium Asset Management has engaged in a number of dialogues with companies to promote environmentally responsible purchasing. As a few examples, we continue to monitor The Home Depot’s August 1999 pledge to stop sourcing products made from old growth timber. The Home Depot’s timber sourcing policy followed an intense public campaign, which included a shareholder proposal filed by Trillium Asset Management. For the second consecutive year, we co-sponsored a proposal requesting that Coca Cola Company increase its purchases of recycled plastic for bottle manufacturing and set specific recycling rates for bottles and cans. Recently, Trillium Asset Management has also been encouraging Staples to address forest protection issues with suppliers of the paper it sells. (For more information, see our June 2002 Advocacy article on Staples.)
Types of Green Purchasing Programs
As noted above, companies have developed a broad range of environmental initiatives related to their purchasing. The scope, scale, and type of these initiatives vary significantly. We highlight below some of the strategies used by companies that have achieved notable environmental and economic gains by working with their suppliers. Hewlett-Packard, one of the early actors in this field, has posted their supply-chain related environmental policies on the HP web site.
Written policies and communication materials. An increasing number of companies are establishing policies relating to suppliers’ environmental performance. Companies are communicating their environmental expectations to suppliers through letters, brochures, articles in supplier newsletters, and on Internet and Intranet sites that suppliers use. The most effective of these communications express the company’s own environmental goals, and clearly articulate the firm’s expectations for suppliers’ environmental performance. In addition, some companies have also prepared background information and suggest resources to help educate suppliers about environmental issues.
Some companies have issued standards that control the use of certain materials like toxic chemicals or that prescribe product design parameters such as recyclability. These standards generally become part of the companies purchasing specifications and are enforced through the procurement process. A small number of companies have requirements to ensure that their suppliers have an environmental management system in place. For instance, Ford and General Motors require that their direct suppliers have an environmental management system in place that conforms to an international standard called ISO 14001. Other companies encourage suppliers to meet the ISO 14001 environmental management standard although they don’t require it.
Environmental provisions are often included in codes of conduct apparel, footwear, and toy companies have developed addressing labor practices and workplace conditions in their contractors’ factories. To monitor vendors’ compliance, companies have relied on their own internal staff, external for-profit auditors, and in some cases have partnered with non-profits to conduct audits. Where codes of conduct include environmental provisions, most just require compliance with local environmental laws, which may be quite weak. However, some codes do encourage suppliers to move beyond compliance to more proactive environmental responsibility. Although environmental problems still abound in factories throughout the developing world, some companies have been able to encourage better environmental performance with their code provisions, particularly when they back up their codes with environmental workshops or technical assistance to their suppliers.
Questionnaires and audits. Questionnaires are probably the most commonly used tool within the field of supply chain environmental management, largely because they are relatively inexpensive and simple to prepare (although they may be extremely resource intensive for suppliers to complete accurately). Some suppliers find themselves responding to a growing number of environmentally related questionnaires that their corporate customers are using to screen new suppliers and to evaluate existing suppliers. To reduce duplication of effort, some industry groups, particularly in the electronics sector, have developed standard environmental questionnaires that their members use with suppliers. Other companies have revamped their supplier questionnaires to focus only on the most relevant information to reduce the time and resources required to complete the questionnaire.
In some cases, companies also conduct site visits or environmental audits of critical suppliers or those in environmentally sensitive businesses, such as hazardous waste disposal. Because suppliers may be reluctant to be audited, some companies have adopted a collaborative tone for these audits, presenting them as opportunities for joint learning that will strengthen relationships. In addition, a number of companies have incorporated environmental components into their existing program of quality audits or supplier certification processes to reduce supplier resistance to outside environmental audits. When a problem is discovered, most companies work with suppliers on continuous improvement plans that will improve performance over time. Nonetheless, leadership companies do not shy away from ending relationships with suppliers who fail to meet environmental expectations.
Supplier meetings. Many companies have found supplier meetings can be a very effective tool for addressing environmental issues with suppliers. These meetings provide a useful forum for communicating expectations and sharing information. Companies have generally found that the most effective supplier meetings are collaborative and provide opportunities for the buyer and supplier to engage in joint problem solving to meet environmental and business goals. Companies have structured these meetings in a number of ways. Some hold one-on-one meetings with suppliers, while others have convened environmental summits with as many as 100 key suppliers. The frequency of these meetings also varies. Some hold such meetings as one-time events, others annually, and some companies such as Ford Motor Company and General Motors have created supplier environmental advisory teams that meet on an ongoing basis to work on collaborative projects.
Training and technical assistance. Similarly, companies have instituted a range of training and technical assistance initiatives to enhance suppliers’ environmental management capabilities. One company conducted pollution prevention opportunity assessments for several of its overseas suppliers. Several apparel and footwear companies have held a series of workshops in Asia to help suppliers develop environmental, health, and safety management systems. Again, many company practitioners have found that they can learn from their suppliers as well as teach them, and the most effective training systems are collaborative and encourage two-way information sharing. One large manufacturing company holds biennial supplier technical exchange meetings. At these exchanges, the company and its key suppliers share information and work together to address common environmental challenges, such as life-cycle assessment. Several firms are also beginning to recognize the need to conduct training of their internal procurement staff on design for environment and other opportunities for working with suppliers on environmental initiatives.
Collaborative research and development. Continuing the theme of collaboration, involving suppliers in the design process can generate significant environmental and business benefits. In some cases, companies have involved suppliers in design initiatives that have developed more innovative, higher quality, and cleaner products. In other cases, companies have helped their suppliers redesign the materials or packaging they supply them. The most effective initiatives provide opportunities for collaboration and joint problem solving. A number of staff from large companies noted that their collaborative efforts with supply chain partners have yielded important lessons for both sides. Several noted that they learned useful best practices from their suppliers, including some that are much smaller than them.
Restructuring relationships. The most innovative companies are restructuring relationships with customers and suppliers to realize both environmental and economic gains. Through the non-profit Chemical Strategies Partnership, several companies are piloting a new service-based model for procuring chemicals. Instead of buying chemicals from vendors, they are buying the services those chemicals provide. For example, an electronics manufacturer might pay a vendor for the number of circuit boards cleaned rather than the gallons of solvent used. This new relationship provides incentives for eliminating or more efficiently using chemicals, providing both environmental benefits and cost reductions.
Looking downstream at customers, a number of companies are leasing rather than selling products to customers and recovering these products for remanufacturing or recycling. This model provides companies opportunities for greater customer retention and the opportunity to lower manufacturing costs by recovering valuable components. Implementing this model requires a company to develop a system of “reverse logistics” for recovering used products from customers and routing it to the appropriate facility for remanufacturing. Some companies in areas such as photocopiers have generated significant profits and business value through successful reverse logistics and remanufacturing systems. However, developing cost-effective and environmentally beneficial reverse logistics systems does raise logistical and organizational challenges for companies. It also requires careful consideration of lifecycle impacts throughout the expanded reverse logistics chain, including the environmental impacts of transporting used components for remanufacturing.
Many key purchasing and environmental affairs staff in both suppliers and customer companies expect the field of supply chain environmental management to continue to develop. Some predict greater collaboration between multiple tiers of suppliers on environmental issues in the future, in part to respond to growing regulations in Europe and elsewhere that impose take-back requirements on used products and restrict toxic materials in products and packaging.
The Internet and other communications technology will also likely have significant impacts on supply chain management, with both positive and negative outcomes for the environment. On the positive side, electronic procurement systems can make it easier to track restricted materials and more easily identify and source environmentally preferable products. On the other hand, the growth of web-based business-to-business supplier exchanges may reduce companies’ familiarity with their suppliers’ social and environmental performance and make it difficult for suppliers to compete on any parameter other than price. In addition, many suppliers also observed greater trends towards outsourcing and global supply bases, which make it more important-but more difficult-for customers to understand the environmental impacts across their supply chains.
Environmental and social activists and socially responsible investors are likely to continue ramping up pressure on companies to address environmental problems in their supply chains. Trillium Asset Management will closely watch the developing field of environmentally responsible corporate purchasing and advocate that companies pursue green purchasing opportunities that yield benefits both for the environment and for shareholders.