Supply chain roundtable: Going 'beyond audit' to drive sustainability action

4 April 2018, source edie newsroom

Sustainability and procurement professionals from some of the world's largest businesses recently came together for an exclusive roundtable hosted by edie and DNV GL to discuss the strategic steps required to take supply chain sustainability onto the next level.

Up to 80% of a company’s climate impact can derive from the supply chain – a tangled and often hidden web that can span the globe. Trapped within this web are a myriad of critical environmental and social issues – from deforestation to toxic chemicals to human rights abuses, and everything in between.

Given the size of these challenges, it is obvious that isolated progress will only take corporates so far, and – as climate change, resource scarcity and social sustainability issues continue to rise rapidly up the corporate agenda – it is crucial that every business looks to move its supply chain strategy beyond ‘risk-management’ to one which brings rewards for the triple-bottom-line.

At a recent edie roundtable event in London, hosted by DNV GL, nine supply chain sustainability experts discussed what must change to move beyond supply chain auditing to deliver a sustainable, resilient supply chain of the future.

Overseen by the roundtable chair the University of Surrey’s lecturer in sustainable supply chain management Roseanna Cole, one of the biggest challenges in realising this future was made clear by the experts from the outset: supply chains are very often shaped by local behaviours. Businesses may be able to replicate carbon reductions or energy saving measures across global estates, but when it comes to supply chain sustainability, different companies can be faced with different pressures and challenges in different locations.

For Nestlé’s responsible sourcing programme lead in the UK and Ireland Robin Sundaram, one of the key focus points for the food manufacturer is impact assessments for its UK farmer suppliers. This ranges from developing more sustainable farming methods to teaching individual farmers to use their own produce in a healthier and more sustainable way – something which is becoming increasingly important as global warming increases.

“Climate change is getting worse,” Sundaram said. “It will create far bigger impacts on the resilience of our supply chain. At the moment, we're coping, but the realisation will hit soon that we need to speed up our actions.

“We do a lot of auditing, but what does that actually deliver for our farmers? Instead, we're moving towards impact assessments for our farmers to help them with their day-to-day lives.”

Globally, Nestlé is the world’s largest food and drinks firm, accounting for around 1% of all agricultural outputs. By focusing on impact assessments, the company hopes to proactively engage with UK farmers to create mutual benefits that enhance the environment.

Nestlé recently launched a new case study alongside the Natural Capital Impact Group (NCIG) which explains how investment into areas like milk supply – critical for products such as Kit Kats – can alleviate concerns over soil degradation. The key to these impact assessments, Nestlé says, is that they open up a dialogue between the company and its suppliers, rather than a top-down issuing of orders. Farmers are empowered to choose from a variety of practical, sustainable solutions.

Procurement gap

The relationship between incumbents and suppliers is something that the John Lewis Partnership is also keen to explore further. The retailer uses natural resources for 380,000 different product lines that it sells, and controls are already in place to ensure that these are sourced in a way that protects the livelihoods of people in its supply chain while enhancing local ecosystems.

The John Lewis Partnership has a goal in place to secure 100% of own-brand timber and paper products from responsible and sustainable sources by 2021, and the company’s senior manager for CSR, Todd Bradley-Cole, believes that supply chain resilience should be built on “pre-competitive conversations” across other industries.

“For me, this is about getting under the skin of the relationship of the supplier and understanding them,” Bradley-Cole said. “But, it is also about sharing it with other industries... it’s pre-competitive conversations and getting clarity on what we're doing and how we're doing it.”

One area of improvement cited by Bradley-Cole and other roundtable participants was the need for these conversations to be more inclusive to cover professionals from the procurement team.

More than three-quarters of supplier respondents to a recent CDP and McKinsey survey identified inherent climate change risks to their business, and more than half (52%) reported that they have integrated climate change into their corporate strategy. But growth in climate understanding among suppliers can still count for little if the procurement departments interacting with them don’t have sustainability as a metric to measure performance against.

“[Procurement] rarely stops during the process to examine sustainability and environmental implications and articulate it in a way that others can understand and get excited about,” Bradley-Cole added. “There’s a communications gap between those that are good at doing the project and actually selling the value of sustainability through the rest of the business and out to customers.”

Indeed, attempting to bridge departmental divides and place sustainability across other areas could create tensions over behaviour change. Some colleagues, for a variety of reasons, can be less inclined to pick up new responsibilities, making any attempts to immerse them in desired sourcing practices troublesome.

Tarmac, a CRH company, covers more than 100,000 acres of land across 400 UK locations. The construction firm has championed natural capital and life-cycle approaches to its various products and services.

Alongside robust implementation of ISO 14001 environmental management systems and a company-specific Carbon Calculator, Tarmac has engaged its procurement team to focus on certain aspects of the sustainability strategy, rather than attempting to push all aims down into the supply chain.

“At the procurement level, we get them to pick a couple of sustainability aspects, what's important to them, and just do something,” Tarmac’s responsible sourcing manager Richard Frost told fellow roundtable participants. “It only has to be small, incremental things. The procurement team work on numerous projects a year – they can all deliver a dividend for sustainability – and if we capture that we can showcase the massive amount of opportunity in the supply chain.”

Despite the proactive engagement with the procurement team, Frost acknowledged that in the current climate, “audit is the only answer”. He noted that current auditing processes serve to highlight that a company has done nothing wrong, rather than emphasising what it’s done well.

Large-scale collaborative movements, such as the Bangladesh Accord in the fashion industry, highlight the reliance that businesses have on the auditing process in alleviating risk, although the ISO 20400: Sustainable Procurement Standard is a welcome step in driving transparency and linking procurement and sustainability departments.

Of course, auditing serves its purpose because it is a very well tried and tested method. Supply chains often stretch out across continents and implementing change across them takes time, a concept that clashes with the fast-pace desires of some stakeholders and business departments.

The roundtable’s sponsor DNV GL is currently exploring how technologies like blockchain can improve transparency and speed up transaction in supply chains. The company’s head of assessment services Dr Paul McNeillis noted that going beyond compliance in the world of supply chains often requires a long-term mindset shift.

“Other stakeholders are travelling at a different speed and in a different world. Long-term systemic work still needs to capture the imagination of these people.”

SDG alignment

As the roundtable conversation progressed, it became apparent that moving sustainability into the supply chain requires a shift away from simply using auditing as a risk management tool to creating a framework that fully acknowledges the role sustainability can have in future-proofing raw materials and contracting relationships.

Sitting at the top of this preferable new frontier, roundtable members agreed, should be the Sustainable Development Goals (SDGs). Beyond auditing, which encourages companies to explain how actions aren’t detrimental to societal and environmental needs, the SDGs create a complete framework to track and communicate positive contributions across all areas of sustainable development.

For Asia Pulp & Paper (APP), the SDGs have acted as a communications vehicle that has helped transform the company from a laggard to a leader regarding deforestation – the pulp and paper manufacturer featured as a best-practice case study for the SDGs in 2016 report by DNV GL, with the study praising APP for its progress against Goal 15: Life on Land.

APP invested upwards of $120m in sustainability in the three years after it launched its Forest Conservation Policy (FCP) in 2013, which included a bold pledge to cease all natural forest clearance. The company has not been shy to wrestle with supply chain issues across its 2.6 million hectare-estate – it has successfully identified and resolved numerous instances of unauthorised encroachment, illegal logging and forest fires, to name a few examples.

For the past seven years, APP has had approximately 100 auditors on the ground covering various audits such as ISO 26000, GRI or PEFC. According to the group’s European director for sustainability and stakeholder outreach Liz Wilks, a realisation that stakeholders are demanding more than compliance is shaping a new and more holistic approach to supply management; one which sees the SDGs sit firmly at the heart of every decision.

“We still do the ‘bread and butter’ auditing,” Wilks said. “But the challenges we've historically faced, such as NGO pressures, mean we've now brought them into the loop to help provide solutions. Together, we're redefining what these subjects mean. Integrated forestry farming and restoration isn't just about audit, it’s about redefining criteria internationally and our contributions to making an impact.

“Moving forward, [the] SDGs are going to be critical. It’s not just about us as a company but redefining the landscape we operate in together with the partners in these landscapes – communities, agriculture, government and brands – who we will work with. In an ideal world, we need to start with SDGs as material impacts depend on the company.”

Community engagement

Much like Nestlé, APP is demonstrating a clear willingness to move ‘beyond audit’ – and the reason for doing so is framing big global issues as a business opportunity to strengthen ties with local suppliers. Both socially and environmentally, communities from Indonesia will have different needs than dairy farmers in the UK, for example, but the SDGs create a universal language that stresses the need for sustainability to be embedded across supply chains and communities.

This sentiment was echoed at the roundtable by Anglian Water’s head of sustainability Andy Brown. Anglian Water’s ‘Love every drop’ sustainability strategy has been integrated as part of an annual reporting process and progress to date has seen the water firm reduce operational carbon emissions by 10% and cut its carbon footprint from its construction projects by 50%, from 2010 to 2015.

Aiming to reach carbon neutrality by 2050, Anglian Water’s success was built on an understanding that the projects the company were constructing would impact communities. With this in mind, the company has built up a strong supplier base that aims to embed sustainability as a long-lasting pillar into projects and operations.

“We've got stringent targets that we absolutely cannot deliver unless our supply chain is part of that,” Brown said. “We've worked on it with top tier suppliers to create an alliance programme which has allowed us to do more innovative things to help them deliver the goals we set ourselves.”

Brown noted that many of the projects that Anglian Water works on have lifetimes of between 25 to 50 years. With climate change and population growth set to exacerbate over the next decade, Brown and the Anglian Water board quickly realised that the company simply “wouldn’t survive” if it didn’t start to step up work with suppliers to embed carbon cutting techniques into projects. 

Anglian Water has committed to spending £65m by 2020 to improve regional capabilities to combat both drought and flooding. While this had led to new practices being implemented by suppliers, Brown was able to create a “hook” for engagement by noting that the company and its suppliers saved money while delivering the 50% cut in carbon from construction projects.

Value propositions

Also present at the roundtable was Ferrovial – another construction firm looking to take its supply chain sustainability strategy onto the next level. The company follows the principle of “no net loss” of biodiversity as a guideline to mitigate negative construction impacts and the firm’s engagement approach with both suppliers and stakeholders is similar to that of Anglian Water.

There is an art to communicating sustainability outwards from an internal department and Ferrovial’s procurement director Alan Harris championed the importance of offering “value propositions” when engaging with suppliers.

“A big focus for us is on upskilling businesses that are new entrants to the UK, or SMEs in the UK that need a helping hand to steer them in the right direction and give them the credentials to go one step further, to help themselves and others in the construction industry,” Harris said.

“We can focus their minds on value propositions rather than money. What we're looking to achieve is a demonstration of value. Construction is competitive, and we have a focus on differentiating ourselves from the competition; innovation and sustainability are differentiators. What we leave behind is not just a structure or a building, it’s a legacy.”

A 2018 study from sustainability consultancy Carbon Clear annual revealed that the number of FTSE 100 companies actively reporting climate change as a risk rose by 13 from last year, while the number of firms assessing supply chain risks doubled, suggesting that more companies are attempting to incentivise action amongst suppliers.

Of course, incentivising suppliers runs its own risks. Rolls-Royce is one of the UK companies recognised for its track record on engaging with suppliers to boost green procurement practices but the aircraft engine manufacturer’s sustainability manager of engineering and design, Andrew Clifton, explains the challenges of actively collaborating with suppliers.

“Going beyond audit is about capability,” Clifton said. “We're heavily dependent on our supply chain and the dependency means we rely on them to work autonomously, to understand and know what they are doing and how that impacts and influences out environmental and sustainability goals.

“We’re seeing requirements emerging for companies to demonstrate compliance or appreciation on less tangible aspects of sustainability…there’s also a gap between innovation and collaboration and we can’t always give them the investment they need.”

Reliance on relationships

A reliance of select suppliers is also being felt by Interface, a company which has incentivised its supply chain to act on sustainability by providing them with the resources to do so. The US-based carpet tile manufacturer’s Net-Works programme matches a societal and environmental need to reuse discarded fishing nets in some of the world’s poorest coastal communities with a goal to source 100% recycled materials.

The scheme works by supplying the suppliers and giving them the nets to be recycled and reused. But, as Interface’s innovation partner Jon Khoo explains, it is important not to put all the company’s eggs into one supplier’s basket.

“We need to have a roadmap where we can be very adaptable,” Khoo said. “We have a very close relationship with some of our suppliers, but this can be viewed as a bad thing in terms of resilience – things change, and things alter.

“We do have a lot of people to turn to should any relationships go sour. We've realised the volatility and how things can change very quickly. Working with suppliers is a balance to ensure we don't put all our eggs in one basket. We need the right playbook for that going forward.”

It’s an interesting balancing act: If companies are going to move beyond compliance and actively engage with suppliers to help deliver sustainability goals, it is important not to become too dependent on a select few. As the roundtable discussion concluded, sustainability within supply chains is as much about resilience as it is about environmental prosperity. And a more proactive approach to supply chain management may uncover both sustainability challenges and opportunities that auditing cannot identify alone.

Matt Mace