Drawing better straws? Pricing sustainability into supply chains

How to achieve sustainability in supply chains. In the words of the late Irish comedian Dave Allen, the old joke when asking for directions in his native land, the answer comes, “I wouldn’t start from here if I were you.” Companies do have to work from where we are, and we are starting from here. What does good look like? That was one of the questions asked at the inaugural Future Planet 10xImpact sustainable supply chain gathering attended by TXF in London. The focus was on how corporates can lead and collaborate on concrete, commercial action, particularly with sustainable procurement that has positive impact. This may appear a little left field for financing international trade, but sometimes it’s good to take a lateral step or two.

Effectively pricing the nastier outcomes on the planet of global supply chains – what economists call (negative) externalities – has never been easy. Banks were signing up to ‘sustainable development’ charters as long ago as 1992 (back when I was editing the short-lived Environment Risk magazine, and at the time of the Rio Summit, long before Paris Accords). Positive externalities (think bees and pollination) are equally tough to measure. Perverse incentives continue to dominate, though. Andy Middleton, CEO of consultants TYF, quoted figures from a decade ago estimating those externalities to be $7.3 trillion, 13% of global GDP. 

I’ve written about conceptualising trillions before, but it’s a lot. Middleton points out that industrial society never set out to measure the conditions for life to thrive, but could do the less bad things really well. Natural supply systems, such as fungi, replenish and rebalance nutrients from their food sources. Middleton says most industrial supply chains are parasitic in nature. He focused on reimagining supply chains if they had been designed with positive outcomes in mind, in order to become regenerative (biomimicry, as if nature had done it).

If that seems out of the ordinary, there are companies that are trying to improve their impact. Three company case studies at the event were particularly eye catching. 

Secondary markets for recycling plastics

The Body Shop is back in the sustainability business again, after its 2006-2017 hiatus [logical souls can infer], and is now a Certified B Corporation, resuming the zeal of founder Anita Roddick to become what is now known as a ‘regenerative business’. To do this, and secure quality secondary recycled plastic bottles to meet its commitments, the company identified a gap in the supply chain, Connor Deacon, community trade specialist at The Body Shop, says. 

The drive for sustainable packaging is creating collaboration with the ‘unusual suspects’. The Body Shop set up a recycling initiative in India. The country has a plentiful supply of virgin plastic with more than 150,000 tonnes of plastic dumped in the country daily, 40% of which doesn’t get collected. The idea was to work with 2500 disadvantaged waste pickers (there are more than 1.5 million waste pickers in India) on its ‘plastics for change’ project. The plastics still have to be shipped back to Europe to be cleaned and processed, but these are small steps in the right direction, and collaboration with other corporates is on the agenda to improve the secondary market. As Deacon notes, if it is not commercial, it is not sustainable. 

Changing incentives for dairy farmers

Nestle buys one percent of the world’s agricultural output, a striking statistic shared by Robin Sundaram, the company’s sustainable sourcing lead. He outlined a project undertaken in conjunction with 3Keel LLP and Scottish dairy farms with a landscape-based approach that connects all the stakeholders/issues in the farms’ environs [utilities companies, house builders among others] and provides simple incentives that help the dairy farmers enrich local landscapes and help stop flooding (cover crop planting, stone wall/hedgerow repairs, natural forest protection, for instance). There’s no onerous form filling for the farmers – just photographs taken before, during and after. 

Milk from those Scottish cows makes my KitKats (and so I now have a better excuse to virtue signal while eating chocolate). The project will likely be broadened to other UK crop farmers. As one participant says, a ‘top down’ telling people what to do is not supplier engagement, so projects like this one are engaging suppliers in a sustainable way. 

Collective priorities at Coca Cola

Yui Kamikawe, senior manager, global sustainability, The Coca Cola Company, notes the importance of “flipping priorities to collective priorities so objectives can be aligned with other companies and local communities.” Coca Cola is undertaking a study that looks at sustainability impacts holistically. “We have expanded the scope from just looking at the company’s impact on the climate, to looking at how the climate is impacting the company,” Kamikawe says. 

He highlights the importance of collective improvements, working with local communities and other local companies and multinationals to improve climate outcomes. “We’re tying the climate narrative to the need to make broader supply chain changes. Every risk in the company was owned by different functions – for instance in Atlanta [headquarters] the insurance team didn’t consider climate impacts, but these needed to be connected to bring into risk assessments,” Kamikawe says. These collective improvements are now seen as ‘areas of common interest and action’ and include municipalities, regulators, utilities and companies in the supply chain. 

Stress testing different probabilities of environmental outcomes of climate change is not something that’s easily do-able. Nonetheless, Coca Cola is bringing an element of pricing these risks into its overall ERM strategy over the next few years. 

Weighing the pig – too much irrelevant disclosure?

There is a balance to be struck. Fixating on measuring – with an analogy provided by Oliver Hurrey, founder of consultancy, Galvanised – has tended to be like weighing, rather than fattening, the proverbial pig [challenging at a largely vegetarian event]. Standards and ‘environmental audits’ proliferate. Louise Nicholls, managing director of Suseco (whose previous roles include corporate head of human rights, food sustainability (Plan A) and food packaging at Marks and Spencer), presented a summary of conversations with more than 50 responsible sourcing leaders who were finding the need to collect, measure and report data a distraction to doing more amid a proliferation of initiatives, platforms and collaborations. 

Many companies are firmly embarked on their sustainable procurement and supplier engagement programmes. James Barsimantov, COO and co-founder of SupplyShift aims to help reduce the missing link of visibility of suppliers’ data and improve responsibility through a cloud based network that collects and analyses supplier and supply chain data.

For certain, measuring risk is going to have to get better in order for it to be priced properly. 

Accounting for the climate

Separately, corporate treasurers will be noting that at the end of November the International Accounting Standards Board which issues International Financial Reporting Standards (IFRS) put out a guidance on how companies should incorporate material climate risk into their financial statements. IASB board member Nick Anderson’s work, which draws on the Australian Accounting Standards Board (AASB) and Audit and Assurance Board (AUASB) as well as the IASB’s own analysis, notes, “Climate change is a topic on which investors and other stakeholders increasingly ask the IASB, why this is not mentioned explicitly in IFRS Standards. [The overview is] intended to help investors understand what already exists in the current requirements and guidance on the application of materiality, and how it relates to climate and other emerging risks. While climate change risks and other emerging risks are not covered explicitly by IFRS Standards, the Standards do address issues that relate to them.”

Anderson makes the further observation – and this goes beyond financial accounts – that there are considerable implications in the real world beyond accounting for financing the supply chain. 

“However, rather than using judgement to decide what information to provide in financial statements, sometimes the disclosure requirements in IFRS Standards are used as if they were items on a checklist,” Anderson notes. “Using the requirements in this way contributes to what many have described as a disclosure problem—namely, too much irrelevant information and not enough relevant information in financial statements.” Anderson guides companies how to use the [2017] Practice Statement when they make materiality judgements relating to disclosures about climate-related and other emerging risks.

Building sustainability into SCF

Orbian has been working with Professor Dr David Wuttke at EBS University to show evidence that companies with sustainability commitments (signing up to UN Sustainable Development Goals (SDGs)) are also using supply chain finance programmes. Companies can choose to use their SCF programmes to add targets/incentives to smaller suppliers. Orbian also demonstrated one such programme built with Keurig Dr Pepper in which the beverage company ‘democratised’ and incentivised smaller suppliers to join its SCF programme if they fulfilled certain sustainability (child labour and carbon) targets. 

Some banks boast the capacity to set pricing on SCF programmes that can be targeted individually for each supplier should the corporate client want to incentivise ESG/SDG targets along the way. 

Even so, sustainability-linked SCF is still largely focused on programmes supported by development banks.  

Levi Strauss has long had a risk sharing collaboration with the IFC to improve sustainability along its apparel supply chains. It’s SCF programme launched in 2014 offers lower interest rates to suppliers that have better employee conditions and environmental performance. Separately, in June 2019, after having met its carbon reduction targets ahead of schedule, the company announced more ambitious targets for 2025 with a $2.3 million cooperation agreement to cut greenhouse gas emissions and its water use. 

Puma also runs a SCF programme (inaugurated in 2016) in conjunction with the IFC (in higher risk countries such as Vietnam, Bangladesh and Pakistan) and BNP Paribas (in developed markets), which provides lower financing costs to suppliers in programme that meet sustainability scores developed by the company itself. 

At the Future Planet 10xImpact event, there was a definite feeling of humility [and cautious optimism] about what still needs to be done. For sure, though, it’s not going to be a case of ‘build it, they will come’. 

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