Companies are increasingly discovering that environmental and energy-related supply chain risks are both significant and material to their short and long term operational prosperity. With such issues now an everyday topic of conversation, the need to ensure environmental supplier compliance is becoming a central part of business strategy.
What is it?
An environmental issue refers to any activity that creates a detrimental impact on the biophysical surroundings such as waterways, land and the atmosphere. For businesses the key areas include carbon emissions, waste generation, water consumption and ecosystem disturbance. Any supplier that is underperforming in any one of these areas and does not have the relevant certifications or management systems in place poses a serious risk to their buying organisations.
What are the issues?
Companies that are associated with environmentally intensive actions can experience a number of issues that can have a severe impact on their business. With environmental related legal requirements becoming stricter and more complex, organisations can be fined or penalised for not complying. For example, if qualifying companies do not adhere to the recently introduced ESOS Regulation, there is an immediate £5000 penalty; with an additional £50 per day until compliance. There are also indirect costs to be aware of including a significantly impacted brand reputation and loss of investment.
On top of all of this, there are a host of physical risks associated with a damaged environment and human-driven climate change that can impact business operations. These include water and food scarcity, loss of raw materials, increased frequency of natural disasters, rising sea levels and increased global temperatures.
The environment has long been a consideration for companies so why the increased focus now?
It is widely accepted that organisations need to minimise the impact they have on the environment, not only to preserve it for future generations but to also ensure the long term prosperity of the business itself. Although the majority are implementing initiatives to reduce their own impact, companies now need to increase the scope of their efforts to include supply chain impacts as well.
One of the primary reasons for this is the increased focus being placed on supply chains by non-financial frameworks and stock exchange requirements. For example, GRI’s latest Sustainability Reporting Guidelines, G4, include a much greater focus on the management of environmental related supplier performance which covers screening, impacts and mitigation actions. The same can be said for other frameworks such as CDP and the GHG Protocol, as well as for requirements of stock exchanges such as FTSE4Good and JSE SRI.
In addition to this, changing public expectations have resulted in supply chain environmental information being a key factor in the consumer decision making process. Such a change has been driven by an increased acceptance of environmental issues and awareness of the need to reduce the impacts, leading to high demands around the life cycle of a product or service.
What information should suppliers be disclosing?
In order to minimise the risks that supplier environmental performance presents, buying organisations need to be asking the right questions of their suppliers around areas such as environmental management systems, carbon emissions, carbon offsets, certifications, environmental reporting, water consumption and waste generation. However, what constitutes the ‘right questions’ will vary greatly depending on the type of buyer as well as the type of supplier. For example, some organisations have a greater impact on their buyer’s product carbon footprint, whereas others have a greater impact on natural capital accounting. This, as well as factors such as corporate commitment to sustainability and reporting maturity, will influence the type of performance information that buyers request and suppliers disclose. Determining this correctly will generate benefits for all involved, with buyers able to make informed decisions based on the information received and suppliers strengthening their position due to an increased reputation and customer confidence.
The business case for ensuring compliance
Both buyers and suppliers will experience a host of business benefits from being transparent and ensuring environmental compliance:
o Minimised direct and indirect costs
o Increased resilience to climate change
o Align suppliers with environmental strategies
o Enhanced brand image
o Greater understanding of own environmental performance
o Strengthened reputation
o Improved service / product offering
o New business and investment opportunities
o Increased buyer confidence