From the President: The Case for Supply Chain Sustainability Investments

Recently members of NativeEnergy’s leadership team were in Berkeley, CA to convene a gathering of thought leaders from various organizations around a broad range of sustainability topics.  The event was a working session attended by food and beverage companies, retailers, consumer goods manufacturers and others.  The goal wasn’t to tout the successes of various sustainability programs.  Rather, the group came together to discuss their aspirations around sustainability, gaps in existing initiatives, and barriers that are preventing businesses from achieving their goals.  As we dove into the discussion, it was clear that while each segment has its own unique set of concerns, some issues are universal.

Over the last few years, supply chain sustainability has emerged as a crucial concern for business leaders.  Significant greenhouse gas emissions, threats to production, and vulnerable supply communities, reside upstream from a business’s operations.  While quantifying these externalities is still a bumpy road, many organizations are making progress in articulating the value of a sustainable supply chain and navigating supply chain sustainability initiatives.

More and more, suppliers need to demonstrate social and environmental responsibility, monitor their operations, and provide information to their partners.  Wal-Mart made this clear to its suppliers several years ago, catalyzing sustainability advances.

Our clients are deeply committed to creating programs for sensitive suppliers to make them more resilient and prosperous.  These companies encourage, support, and, at time, demand change in the way their suppliers operate.  Lowering emissions, reducing risk, increasing efficiency and creating opportunities, are goals that have moved to the forefront of their sustainability programs.

A company’s ability to influence its suppliers varies based on the relationship between the company and the supplier.  Some initiatives with strong financial returns for both parties will promote change in a supplier’s operations.  However, in our experiences with clients, the scenario is more complex.  The buyer may not have a significant power advantage over a supplier, the value of sustainability programs is not the same between organizations, and companies don’t necessarily have the knowledge needed to work with supply chain communities.  To address these sustainability issues, companies must make investments in their supply chain.  How does a company justify investments that fall beyond its four walls?

Sustainability initiatives are increasingly being scrutinized by financial officers to show a return on investment (ROI). For some internal operational changes, like the installation of efficient lights, it is easy to show quick financial returns. For supply chain initiatives, like investing to promote family health and productivity on smallholder farms in developing countries, ROI analysis can be challenging to apply. Financial payback may occur over a long period of time, be difficult to calculate, or not accrue directly to the company.  This can be a tough sell in a market focused on current quarter’s earnings.

Sifting through these questions of sustainability reinforced our view that companies need to think of sustainability initiatives as long-term investments that will both create strategic value for the company and benefit its suppliers and their communities.   Through a disciplined approach, justification for these “impact investments” must consider the strategic importance of the initiative and how it can drive future corporate value through reliable supply, options for new growth opportunities, and positive stakeholder relations.

In my example, investment in local smallholder farms not only helps them survive and remain a resilient source of supply, but can provide knowledge and local relationships to the company to manage and adapt its supply chain.  While difficult to drive to specific returns, it’s not a stretch to understand that such initiatives will deliver long-term payback and strengthen all three legs of the sustainability stool—business, environment, and community.

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