Coca-Cola might be proud of its efforts to reduce its water consumption to 2.2 liters of water per liter of beverage. Meanwhile, the sugar beet farmers deep in its European supply chain are guzzling 28 liters per liter of Coke.1 As mentioned at the end of chapter 4, for most companies, the life cycle environmental impacts and risks arise outside the company itself. Significant environmental impacts often take place in the deepest tiers of the supply chain that grow, harvest, or mine raw materials.
Awareness of the key role of suppliers in environmental impacts, efficiencies, and risks have led many companies to examine their upstream supply chain. In general, companies select and manage suppliers based on many criteria including cost, lead time, capacity, financial strength, quality, and reliability. With the rise of the environmental movement, many companies have begun to include sustainability as another factor in procurement decisions and supplier management. Not surprisingly, as with any performance dimension, companies vary widely in the weight they assign to their suppliers’ environmental conduct.
As stated in chapter 1, brand owners seldom have control over, or even knowledge of, the identities of their deep-tier suppliers because many commodities flow through a web of intermediaries, subsuppliers, and brokers. Furthermore, each deep-tier supplier is likely to provide materials to many companies and sometimes to many industries as well, which further dilutes the opportunities for control. Coca-Cola does not have a direct relationship with the growers. In the EU, for instance, the company buys sugar from many different sugar refiners, and those refiners buy beets from thousands of beet growers. Moreover, in different regions, Coca-Cola buys sugar from multiple sugar suppliers using a variety of agricultural supply chains (beet, sugar cane, and corn). Even if the company knows the name of a distant supplier, it typically has no business relationship with that supplier and therefore cannot directly influence its processes.
As noted in chapter 2, Siemens’ wind turbine division buys from more than 400 Tier 1 suppliers who, in turn, buy from more than 3,000 of their own suppliers, who are Tier 2 suppliers to Siemens. This is typical for large manufacturers, which often buy from hundreds to tens of thousands of suppliers across multiple industries, spread around the world. Ford Motor Company has about 1,500 Tier 1 suppliers and tens of thousands of deeper-tier suppliers. Flex, the contract manufacturer, procures 700,000 parts from 14,0002 Tier 1 suppliers.3 And Walmart has more than 60,000 Tier 1 suppliers4 for the diverse merchandise that is displayed on its shelves.
GRI (Global Reporting Initiative) is an independent standard for sustainability reporting.5 GRI defines a company's environmental reporting boundary to include only supply chain partners over whom the company has financial control or influence, chiefly its Tier 1 suppliers. If a company has no influence over an upstream or downstream entity, that entity's impacts are excluded from the company's impact report.6 Control or influence defines a practical boundary, because the company is more likely to obtain data and expect compliance from the entities that it can control or influence.
Nevertheless, the attacks by Greenpeace on Nestlé (see chapter 1) or by Friends of the Earth on Apple, Samsung, and other smartphone makers described in chapter 3 show that these NGOs do not accept lack of influence as an excuse for lack of improvement. And even if that seems unfair, these NGOs’ “no excuses” tactics support their long-term goals. If companies could avoid taking responsibility for sustainability problems in their supply chain by avoiding control or influence, then they might be tempted to “outsource their impacts.” Within the context of an LCA, every source of materials or services, no matter how indirect or outside the company's sphere of influence, is part of a company's broader environmental impact. Given the high costs of a detailed LCA, companies typically prioritize their efforts by looking for indicators of the suppliers and processes with the highest environmental impacts, the so-called hot spots in the upstream supply chain.
HP Inc., for example, considers several types of environmental risk indicators among its suppliers, using four risk categories. The first indicator is geographic location, because countries vary in their level of regulation and strictness of enforcement of environmental laws. Country risk can be estimated, for example, by the Yale Center for Environmental Law & Policy's Environmental Performance Index described in chapter 2. Second, HP considers the intrinsic sustainability risks of the processes performed by the supplier. Suppliers in heavy manufacturing, chemical-intensive conversions, labor-intensive assembly, and recycling are more likely to have higher environmental impacts than those in consulting services and software licensing. Third, the supplier's relationship to HP affects the likely risk: new suppliers, large-volume suppliers, and suppliers of HP-logo branded merchandise are considered riskier. Fourth, the company uses historical information from audits, press articles, external stakeholder (NGO) reports, incidents, and accidents to modulate its assessment of each supplier's risk. Out of 1,000 factories at 600 suppliers, HP identified 300 factories at 160 suppliers as high risk. These suppliers became the focus of the company's social and environmental responsibility (SER) program.7,8
Companies also worry about other kinds of supplier risks arising from events such as natural disasters, supplier bankruptcies, labor strikes, and political instability. A disruption to the supplies of a single part can halt all production at a factory. One of the principal strategies for mitigating these kinds of supplier disruption risks is sourcing from multiple suppliers to ensure a constant supply. Ironically, this actually increases the environmental risks to the company's brand. Each added supplier is one more chance for a “bad apple” that might be caught by NGOs or journalists. In most of these cases, it is the brand holder who will suffer the consequences, not the distant supplier. To balance these risks, companies use multiple sources where warranted and, at the same time, take steps to influence suppliers’ behavior in order to reduce the chance of brand-damaging public-relations nightmares.
The first step toward managing carbon emissions is to measure them, because in business what gets measured gets managed. “The Carbon Disclosure Project [CDP] has played a crucial role in encouraging companies to take the first steps in that measurement and management path,” commented Lord Adair Turner, chairman of the UK Financial Services Authority.9 In its strategic plan, CDP states, “Our theory of change is that measurement, transparency and accountability drive positive change in the world of business and investment.”10
The rise of CDP reflects the concerns of stock market investors about environmental risks to companies’ performance and investors’ desire to make companies assess and disclose those risks. As mentioned in chapter 3, CDP elicited reporting by 4,500 large public companies in 2015,11 and the scope of its disclosure questions has expanded to include carbon emissions, water footprint, response to climate change effects, and forestry issues.
Much of the growth of the CDP coverage came from its supply chain program, under which participating companies began recruiting their suppliers to join the program and to disclose their environmental impacts as well. As of late 2016, the CDP's supply chain program worked with 89 large corporations with $2.7 trillion in combined procurement spending.12 Of the nine new members added to the CDP's supply chain program in 2015, two-thirds—including Lego Group, Kellogg Company, Toyota Motor Corporation, and Volkswagen AG—were asked by their own customers in 2014 to join the program and disclose their environmental impacts.13 They, in turn, intend to hold their own suppliers to similar standards of disclosure.14
Nonetheless, not all suppliers are willing to participate: Nearly half of the participating companies’ 7,879 suppliers failed to respond to their customer's 2015 climate change questionnaire.15 Suppliers may be suspicious of customers who want to examine their (the suppliers’) operations too closely, fearing that the disclosed information will be used to extract price concessions or to disintermediate the supplier.
Disclosed data on suppliers’ environmental impacts can lead companies to make informed, if nonobvious, sourcing decisions in terms of total carbon footprint. For example, if a UK company asks its paper suppliers to disclose their carbon footprints, the company may be surprised to learn that a local supplier of recycled paper has a higher footprint than a Swedish supplier of virgin paper. The two suppliers’ disclosures would reveal that the UK supplier's dependence on the coal-intensive UK power grid gives that supplier a much higher carbon intensity compared to the Swedish supplier that relies more on nuclear and hydroelectric energy to manufacture paper.16,17 Thus, in this case, using the more distant supplier lowers the total carbon footprint, even though it requires more transportation.
Similarly, a Swedish food company might assume that the high carbon footprint of transportation means that local suppliers have a lower footprint than more distant suppliers. But asking suppliers to disclose their footprints might reveal that a local tomato supplier has a worse footprint than a Spanish supplier, because Spanish tomatoes are grown in open fields whereas the local products are grown in fossil-fuel-heated greenhouses,18 leading to more than a tenfold higher energy consumption per kilogram of tomatoes.19
Some companies set incremental goals that favor sourcing from suppliers who disclose their impacts and work to mitigate them. For example, a 2014 CDP report quoted AT&T Inc. as saying: “We set a goal that by the end of 2015 the majority of our supply chain spend with strategic suppliers would be with those suppliers who tracked their own greenhouse gas emissions and have specific greenhouse gas goals.”20 AT&T later reported achieving its goal one year ahead of schedule. Within the broader CDP program, the fraction of suppliers to CDP members who were setting emission targets had grown from 39 percent in 2012 to 44 percent in 2013 and 48 percent in 2014.21
The emphasis on sustainability in a company's procurement and supplier management policies varies among companies and among issues. At L’Oréal, for example, 20 percent of a key supplier's score is based on its performance on climate change impacts.22 At Walmart, 5 percent of its buyers’ performance evaluations are tied to sustainability, thereby giving said buyers some, if limited, incentive to modulate procurement decisions and encourage suppliers to improve sustainability.23 Yet Walmart also has some zero-tolerance thresholds, as mentioned in the Bangladesh story in chapter 2.
More and more companies have supplier “codes of conduct” that include a combination of strict requirements (i.e., “zero tolerance” prohibitions) and softer quantitative expectations (e.g., a numerical scorecard with an expected minimum score). For example, AT&T asks suppliers to fill out a balanced Citizenship and Sustainability Scorecard with a 2017 goal that suppliers will achieve an average score of 80 percent, compared to 74 percent in 2015 and 63 percent in 2014.24
Two slabs of wood may look identical in the natural beauty of their warm golden color and rich wood grain. They may have identical engineering specifications and pass every possible quality assurance test. Yet one piece of wood might have been carefully harvested from a sustainable tree farm and the other might have been illegally ripped from some country's national park lands. To a large extent, sustainability is less about what the product is—which can be tested at the buyer's receiving dock—and more about how the product is made, which can only be managed by monitoring and controlling suppliers’ processes on site. These product provenance properties, known as “hidden credence attributes,” are crucial to eco-segmentation and eco-risk mitigation and play a major role in how companies communicate with consumers and other stakeholders (see chapter 9). To set expectations for suppliers’ behavior, many companies institute a supplier code of conduct, as well as implement audit, enforcement, and incentive mechanisms to increase suppliers' compliance.
Trying to drive the point home, Walmart's CEO Lee Scott surmised during a suppliers’ conference in Beijing that, “A company that cheats on overtime and on the age of its labor, that dumps its scraps and its chemicals in our rivers, that does not pay its taxes or honor its contracts, will ultimately cheat on the quality of its products.”25
IKEA relies on a global network of more than 1,000 suppliers that transform wood, textiles, foam, and metal into the company's signature easy-to-build furniture kits. In its 80-year history of lowering the cost of home furnishings, the company's reputation has been tainted by revelations that it was using political prisoner labor in communist-era East Germany in the 1980s26 and revelations of illegal logging and deforestation in the 1990s.27
In 2000, IKEA implemented a comprehensive supplier code of conduct that it calls the “IKEA Way on Purchasing Home Furnishing Products,” or “IWAY.”28 IWAY specifies additional requirements beyond the terms of the basic supplier contract governing the delivery of certain units of materials within certain quality, time, and cost parameters. These requirements encompass a range of environmental and social dos and don'ts. For example, they strictly prohibit direct discharge of untreated wastewater from production processes such as tanning, dyeing, surface treatment, and printing processes. IWAY environmental standards address outdoor air pollution, outdoor noise pollution, ground and water pollution, ground contamination, energy reduction, chemical handling, hazardous and nonhazardous waste, and the indoor work environment. Naturally, IWAY also includes many social responsibility requirements related to child labor, forced labor, worker wages, working hours, and working conditions.
The company had sought 100 percent compliance within five years (by 2005) but progress lagged. In 2009 the company announced a new strict three-year target that gave all suppliers until 2012 to reach full compliance.29 When the deadline passed, 75 of the company's approximately 1,100 suppliers still fell short of the requirements. Those suppliers were immediately dismissed. “They were close—they were very close. Most of them were on 98, 99 percent fulfillment of the code of conduct, but we said it's only 100 percent that counts,” said Jeanette Skjelmose, sustainability manager for IKEA during an interview for this book. “So, even if they were only missing one question, we said, ‘Sorry. We have to end the contract with you,’” she added with fervor.
New suppliers do get a grace period of one year to reach full compliance but after that period they too are expected to be 100 percent compliant. For example, Xiamen Hung's Enterprise Co., Ltd., a Chinese firm providing “wire, cable, metal, and plastic components,”30 labored for a year and a half to reach 92.6 percent of IKEA's requirements and became a qualified supplier in 2009. Once it had been awarded the business, however, Hung's was expected to meet the full IWAY code within one year of starting the contract. In late 2013, Hung's Enterprise listed 18 business partners on its website; IKEA was not among them.31
IKEA offers some flexibility to existing suppliers, but not much. If a supplier stumbles on an IWAY item, it has two weeks to outline a plan to correct the problem. IKEA requires the plan to include a description of what actions the supplier will undertake, who is responsible, and when the supplier will be in compliance.32 Depending on the violation, the supplier may have up to 90 days to correct it. If the supplier fails to do so, according to Skjelmose, IKEA will phase out the supplier at the end of its contract. However, if the violation involves one of the eight core IWAY requirements33 (which include severe environmental pollution; severe health or safety hazards; child labor; forced and bonded labor; business ethics; working hours; wages; and worker's accident insurance), IKEA gives the supplier also up to 90 days to correct the violation, but during that time the company will not take any delivery from the supplier.34
Kelly Deng, senior auditor for IKEA in China, is on the frontlines of ensuring IWAY is the way that suppliers actually operate. Typically twice a week she and a coworker will surprise one of IKEA's suppliers or subsuppliers with an unannounced on-site audit. They visit the facility and interview workers at random, which is a contractual requirement of IKEA.35 Skjelmose explained: “If they should deny us access, we regard that as a violation of the IWAY norm. We classify that as a work deviation and stop orders from that supplier immediately.” As a result of those strict penalties, Deng added, she is rarely turned away.
If a supplier is trying to hide IWAY violations, Deng knows what to look for, such as seeing a worker hurrying past while holding a stack of papers. Factory managers may sometimes falsify records, she said, and send a worker to smuggle the accurate records out of the building.
IKEA auditors typically spend two days at each site; in extreme cases, the auditors will arrive a day early or stay a day late to “stake-out” the facility and look for violations of IKEA's guidelines on environmental practices, maximum allowed work hours, and minimum rest days.
IKEA's inspections differ from those of many third-party auditors. Auditing firms keep costs low by giving a single auditor as little as one day to inspect a factory that may employ 1,000 or more workers. Sometimes, these auditors have received as little as five days of training compared to the three years of training required to become an inspector for the US Occupational Safety and Health Administration (OSHA). Some auditors merely fill out an inspection checklist that factory managers know about days in advance (enough warning in many cases for factory managers to hide any violations).36
In contrast, IKEA has 80 full-time auditors who do nothing else but audit suppliers and subsuppliers. According to Deng, the typical IKEA auditor has been on the job for five years. Deng herself has more than seven years of auditor experience at IKEA. “We audit all of our suppliers every other year,” said Skjelmose,37 “but in risky region, such as Asia, the audits are more frequent—usually once a year.” The company requires that its suppliers disclose the names, addresses, and GPS coordinates of their subsuppliers’ facilities. “We need to have it because we need to be able to go there unannounced,” she added.
In addition to its own staff, IKEA hires third-party auditors to “verify” and “calibrate” IKEA's own audits. IKEA also formed a special “compliance monitoring group” composed of its most competent senior auditors. These expert auditors sample-audit suppliers’ facilities after the other auditors have completed their jobs to ensure the uniformity of supplier operating standards in all regions. Overall, Skjelmose called it “the police watching the police.”
Although IKEA's advanced auditing system has likely prevented some major social and environmental violations in its supply chain, the company did come under fire in 2012 from the Global Forest Coalition over logging of ancient forests in Russia.38 Similarly, in 2013 IKEA was among a number of European companies found to have horse and pig meat rather than beef in their famous meatballs, as part of the infamous “horsemeat scandal” that engulfed Europe.39 Operating a far-flung empire of more than 1,000 manufacturing suppliers, in addition to the many suppliers of non-direct materials and services, means that IKEA will likely stumble at times. However, Deng asserts that she has seen significant improvement in the environmental and social conditions of the factories she has visited during her tenure as an auditor.
A possibly apocryphal tale tells of an inspector visiting a supplier and finding all the fire extinguishers mounted on vertical sliders on the walls. When the inspector inquired about this strange practice, the supplier replied that one customer demands that the extinguishers be mounted two feet off the floor, a second customer insists on a three-foot height, and a third customer requires a four-foot mounting point. The sliders enable the supplier to quickly shift the extinguishers to the right height for each customer's inspectors.
Proprietary codes, such as IKEA's internally developed IWAY, can work fairly well for the code's creator, as long as the company has sufficient influence over suppliers and the ability to dedicate significant resources for audit and reporting. The ultimate success of a company's code of conduct, however, hinges on the suppliers’ willingness to sign contracts containing that code and to comply with it. Yet, most suppliers sell to many customer companies, and each proprietary code of conduct adds overhead costs and inefficiencies because of the minutiae of implementation, reporting, and audits associated with the many codes. In an industry such as electronics, in which a great many product-manufacturing companies purchase modest amounts of components from a great many parts makers, these suppliers have little incentive to acquiesce to proprietary codes of conduct and significant costs if they must implement multiple codes. In these cases, “Industry collaboration is the most effective way to raise standards,” said Claudia Kruse, senior analyst, governance and socially responsive investing, at F&C Asset Management.40
For example, the Electronic Industry Citizenship Coalition (EICC) was formed in 2004 “to collaboratively implement a common supplier code of conduct for the technology industry.”41 The EICC is made up of “electronic manufacturers, software firms, information and communications technology firms, and manufacturing service providers, including contract labor.”42 The organization has grown to include more than 100 electronics companies with combined annual revenues of about $3 trillion and direct employment of 5.5 million people.43 As of 2015, the EICC supplier code of conduct had evolved to version 5.0 and was available in 13 languages.44
The EICC's Code contains specific guidelines regarding labor, health and safety, environment, ethics, and management systems.45 When EICC-member Flex signs a new supplier, the four-page Flex purchasing contract contains only a short “social responsibility” clause stipulating that the supplier “agrees to comply with the Electronic Industry Code of Conduct.”46 To the extent that a new supplier to Flex also sells components to other EICC members and is already EICC-compliant, compliance with Flex's contract is much easier than if Flex had its own proprietary code of conduct.
In addition to the industry-shared code of conduct, the EICC's Validated Assessment Process (VAP)47 standardizes and pools audit efforts, reducing the costs of audits for both supplier and customer companies. The VAP “provides companies assurance in identifying risks and driving improvements and robust management systems for labor, ethics, health, safety and environmental conditions in the Information Technology supply chain.”48 The EICC program manages audit guidance, auditor training, audit review, and quality control, by which hundreds of auditors from nine firms execute the VAP protocol in more than 20 countries.49 The EICC-ON website platform helps its members manage and share supplier sustainability data, such as audits, self-assessment questionnaires, and suppliers’ corrective actions.50
Industry standards for codes of conduct may increase the number of companies that participate in supply chain sustainability management by standardizing performance metrics and reducing auditing process overhead. Such standards may satisfy corporate eco-risk goals in that the company can cite its compliance with standards to defend against criticism of its sustainability practices. However, environmentalists argue that industry codes may create weak standards relative to what individual companies might create for two reasons. First, if the standard is governed by the members, then sustainability laggards may impede adoption of more advanced practices. Second, if an industry has multiple standards bodies, they might compete for member companies by offering the easiest, least costly, and least rigorous code to implement. NGOs have criticized the EICC, saying, “Industry associations move very cautiously and operate on a lowest common denominator consensus.”51
A weak standard creates a “checkbox mentality” by which both customer and supplier companies might claim to be sustainable without making substantive improvements in practices and impacts. Yet, industry standards have been successful in inducing more companies and more suppliers to consider environmental issues. This situation in which corporations claim progress in environmental sustainability and activists bemoan a lack of progress is sometimes termed “greenwashing” and “blackwashing,” respectively. The former refers to exaggerated corporate claims of sustainability and the latter to exaggerations in activists’ accusations of environmental destruction; both issues are discussed in chapter 9.
Both IKEA and the EICC expect Tier 1 suppliers to push the code of conduct out to Tier 2 and beyond. IKEA expects its Tier 1 suppliers to communicate IWAY to Tier 2 suppliers of production materials and for Tier 2 suppliers to sign a document acknowledging acceptance of the IWAY rules. The EICC explicitly states that suppliers must have “a process to communicate [EICC] Code requirements to [their] suppliers and to monitor supplier compliance to the Code,” thereby giving original equipment manufacturers (OEMs) some assurance regarding the conduct of Tier 2 suppliers, although the EICC does not always audit subsuppliers.52
Interestingly, IKEA does not expect Tier 1 suppliers to push IWAY out to Tier 2 suppliers of overhead items such as electricity, fuel, office materials, indirect materials, and capital equipment.53 These exemptions seem to suggest that IKEA is motivated mainly by eco-risk management concerns and that it believes it is unlikely to be the focus of an attack over issues in those categories of Tier 2 suppliers. In fact, even Tier 1 suppliers of indirect materials seem to operate under a lighter version of IWAY. The reason may possibly be that such suppliers are easier to replace in case they are caught in violations.
Similarly, HP is not trying to impose its code of conduct directly onto deeper tier suppliers. “You need to recognize that the companies supplying your suppliers tend to have limited resources, staff, and money,” advised Bonnie Nixon Gardiner, global program manager for supply chain social and environmental responsibility at HP. “So it is important to work closely with your first-tier suppliers to diffuse best practice information out through the supply chain and support their efforts to audit and improve their suppliers,” she added.54
A large-scale MIT study of 900 factories in 50 countries found that the traditional compliance model, defined by the power relationships of big multinationals over local suppliers, information collected through audits, and penalties for noncompliance, is not very effective.55 Threats and audits tend to induce an adversarial relationship focused on minimum-effort compliance rather than a cooperative relationship of ongoing improvement. As a result of the audit mentality, suppliers may not see a need to “own sustainability,” become proactive, inspect their own operations, disclose sustainability issues, or remediate them voluntarily.56 Suppliers will do the minimum, but no more.
Furthermore, factories in the developing world have become adept at hiding problems or subverting the audit process. For example, a 2006 Bloomberg report details the story of Ningbo Beifa Group, a Chinese supplier of pens and pencils whose largest customer was Walmart. The supplier had failed Walmart's labor inspections three times. If the supplier had failed an upcoming fourth audit, Walmart would have terminated the company's contract, resulting in devastating consequences to the supplier. Rather than correct the problems, the supplier paid $5,000 to Shanghai Corporate Responsibility Management & Consulting, which taught Beifa how to falsify records and coached managers on how to answer the questions of Walmart's inspectors. Beifa passed the fourth audit. Apparently, numerous Chinese factories keep duplicate sets of books to fool auditors and train employees in how to respond to their questions.57
Given the high cost of either losing the business or becoming compliant, noncompliant suppliers may be tempted to bribe the auditor to ignore transgressions. A Chinese supplier representative commented: “The audit companies have the power to hurt the factory, so lots of bribery goes on.”58 Even a company's own audit teams can be corrupted because they typically draw employees from the community where the supplier factory is located. Finally, Asian suppliers’ fear of “losing face” intensifies the pressure to do anything to avoid getting caught.59 As a result, some companies look for positive motivations that encourage suppliers to embrace sustainability.
“While audits and corrective actions are essential, we believe the greatest opportunity for change comes from worker empowerment and education,” said Jeff Williams, Apple's senior vice president of operations.60 The large-scale MIT study mentioned in the previous section demonstrated that cooperation between buyers and suppliers was more effective than audit-and-sanction strategies.61 The same large size and deep pockets of brand-owning companies that make them attractive targets for NGO attacks also enable these companies to lend their resources to improving their suppliers’ sustainability. After reducing their own environmental impacts (see chapter 4), these companies can transfer what they've learned to their suppliers. Such eco-alignment initiatives are intended to encourage the spread of sustainability initiatives upstream and address deep-tier hotspots that are not under the direct control of the company.
Based in part on the findings of the MIT study, Nike launched its Project Rewire in 2009, focusing on incentives in addition to regular compliance audits.62 Suppliers were rewarded based on quality, on-time delivery, cost, and sustainability.63 These four components are weighed equally in a manufacturing index, scoring suppliers as gold, silver, bronze, yellow, or red. As of 2013, 68 percent of Nike's 786 contract manufacturers were rated bronze or higher.64 The highest achieving suppliers receive training on eco-efficiency issues (which lead to both cost reductions and sustainability improvements) such as waste and energy management. The goal is to engage and motivate suppliers to improve their practices on their own, instead of forcing them through penalties for noncompliance.
Cooperation with suppliers moves some of the responsibility for sustainability from the audit process to the supplier and aligns the supplier and customer goals. To align its goals with its suppliers, Levi Strauss & Co. has “a deal” with its suppliers. If the supplier proactively discloses a problem, then Levi Strauss does not count it as a violation and instead collaborates with the supplier to fix the problem.65 However, if a supplier is caught falsifying records, Levi Strauss records that as a so-called zero-tolerance violation. In Levi's case, the penalties for zero-tolerance violations are not as strict as those of some other companies; Levi Strauss only terminates the supplier after two or three such violations.
Codes of conduct and audits can be used to set goals and collect information over time. That information then forms the basis for working with suppliers’ factory managers on how best to tackle problems, transforming the role of inspector from enforcer to advisor.66 Luen Thai Holding, a Levi Strauss supplier in Asia, finds that the Levi Strauss approach works well. However, they note that most of their other customers still use the audit and sanction model, rather than collaborative problem solving.67
In 2009, after Siemens had developed and successfully applied an in-house methodology for saving energy at its 298 factories (see chapter 4), chief sustainability officer Barbara Kux decided to share the energy-efficiency program with suppliers. Siemens estimated that its supply chain had roughly double the carbon footprint of the company itself.68 In preparation for a 2009 sustainability summit, Kux shared all the details of her company's four-step method with the company's top 30 suppliers and suggested that each supplier apply the same approach with its own facilities; six did. In the days before the meeting, one of them was able to use Siemens’ assessment methodology to identify a 12 percent energy savings potential.69
Encouraged by the early results, Siemens opened its energy reduction assessment methodology to all its suppliers through an online portal. “I call it the ‘green Google.’ A supplier can log in from the US or India, and just plug in his data, and then get a preliminary result,” Kux said. The tool shows suppliers that sustainability can be profitable by lowering costs.
Some Siemens’ suppliers saw immediate savings after using the tool and implementing the recommended changes. For example, Leoni AG, a €4.5 billion cable and harnessing firm headquartered in Germany, was able to reduce its CO2 emissions by 800 tons/year through energy savings initiatives recommended by the Siemens tool.70 It also saved more than €250,000 per year in energy costs as a result.71 Overall, 80 percent of involved suppliers uncovered potential energy-efficiency improvements ranging from 9 to 20 percent.72 As of early 2013, Siemens reported that more than 1,000 suppliers had participated in the program, identifying potential energy efficiency improvements averaging 10 percent.73
For Siemens, the benefit of engaging suppliers was threefold. First, Siemens’ products would have a lower carbon footprint as a result of the greater environmental efficiency of both Siemens and its suppliers. Although the carbon savings were modest, they helped burnish Siemens’ environmental record. Second, any reductions in energy consumption led to cost savings throughout the chain. Finally, as a company offering products that support environmental sustainability, such as factory technology, power supplies, facilities systems, and renewable energy systems, Siemens’ suppliers could also then become customers: Siemens products are often recommended as part of its assessment tool.
Whereas Siemens shared its own green manufacturing methodologies with suppliers, Apple developed a range of educational systems to teach the workers and managers of its suppliers about environmental and social responsibility issues. In 2013, Apple developed an environmental health and safety (EHS) academy: an 18-month program, in cooperation with three universities, to train suppliers' managers, addressing a worldwide shortage of qualified EHS professionals. In 2014, Apple reported it had trained more than 2.3 million of its suppliers’ workers on Apple's code of conduct and workers’ rights. Its Supplier Employee Education and Development (SEED) program has expanded to 48 classrooms in 23 facilities—equipped with iMac computers, iPad tablets, educational software, video conferencing systems, and more. Since 2008, more than 1.4 million workers from suppliers have taken courses, free of charge, for personal development, and some workers have even received college degrees through the program.74,75
On water-related issues, Apple takes a more active role in helping suppliers reduce their impact as part of the company's Clean Water Program. “Through a series of regular assessments, Apple helped us to develop strategies for installation of water meters, a water-savings awareness campaign, wastewater reclaiming system, and proper storm water channels. As a result, we've saved 10 percent of our freshwater,” said Colin Li, EHS and sustainability director, BU Mobile Devices & Substrates unit of AT&S of Leoben, Austria.76 Piloted in 2013, Apple reported that the program grew from 13 initial supplier facilities to 265 in 2015.77
The 1972 book Limits to Growth by the Club of Rome78 concluded that if (the then) present growth trends continue, “the limits to growth on this planet will be reached sometime within the next one hundred years. The most probable result will be a rather sudden and uncontrollable decline in both population and industrial capacity.”79 A 2014 Australian study80 concluded that the factors tracked by the book (population growth, industrialization, pollution, food production, and resource depletion) match to actual statistics through 2014 very closely. Although the original book (and the recent study) have been controversial, ultimately, the Earth is a sole-source, base-tier supplier for all products and is typically Tier 1 or 2 “supplier” to industries such as food, apparel, and packaging. The potential environmental risk to business and society is that unsustainable agricultural and industrial practices will lead to a collapse of ecological systems through water scarcity, contamination, species loss, erosion, drought, and damaging weather conditions. This threat motivates companies to improve the environmental practices of suppliers of key agricultural ingredients.
“We are responsible for buying and using almost a quarter of the world's malt and barley,” said John Rogers, global manager of agricultural development at AB InBev.81 The company buys barley from a total of 20,000 growers who collectively cultivate a total of one million hectares.82 “We have a lot of experience and expertise as a result, and we really want to make sure that we are bringing that experience and expertise out to that supply chain, to that grower so that we are creating that value at the farm level,” he added.83
The company uses university researchers and 35 in-house agronomists to both help understand crop yield issues and to educate farmers. The company has created an online system (SmartBarley.com) in which 2,400 participating growers can anonymously compare their performance on 40 agricultural metrics with those of other growers around the world.84 In addition to sustainability, the program focuses on the productivity of irrigation, fertilizers, and other efficiency practices aligning it with the farmers’ economic goals.
In 1895, William and James Lever founded Lever Brothers. Widespread cholera from unsanitary conditions in England motivated the brothers to transform the outdated soap industry by selling affordable, prepackaged soap to the masses.85 The company, now known as Unilever, made its soap from glycerin and vegetable oils and branded it as Sunlight Soap.86 Production expanded quickly,87 and the accessibility of soap to people of all incomes improved hygiene and helped reduce illness throughout Europe.
As Unilever grew, William Lever's philosophy of improving public health defined the company's mission. The “doing well by doing good” motto88 drove Unilever's development of sustainable supply chain practices as the company mushroomed into a diversified global consumer-packaged goods giant. More than a century later, that mission-focused internal culture and the company's ethical roots helped CEO Paul Polman and his chief supply chain officer, Pier Luigi Sigismondi, in their journey toward business-wide environmental sustainability.89 This leadership has been reflected in ambitious commitments across the company's global and complex supply chains. In 2010, Unilever pledged to source all of its agricultural raw material sustainably by 2020. Unilever's tea supply chain illustrates the company's holistic approach to sourcing just one of its many raw materials.
Tea is the world's second most popular beverage (trailing only water);90 the industry employs 13 million people cultivating nearly 5 million hectares of tea plantations in 45 countries.91 Unilever—owner of Lipton, PG Tips, and several other tea brands—leads the tea market with a global market share of 12 percent, which is three times the size of its nearest competitor.92
Unilever buys about 90 percent of its tea globally, either directly from suppliers or via open market auctions. The tea comes from a combination of 750,000 smallholder tea farms and larger tea plantations.93 In 2006, Unilever partnered with the Rainforest Alliance to develop a certification process for tea, and by 2015 the company announced that it had succeeded in sourcing all Lipton tea from Rainforest Alliance-certified growers.94 In addition, it partnered with the Netherlands-based Sustainable Trade Initiative and the Kenya Tea Development Agency, to co-fund field schools to teach farmers a variety of sustainable practices.95 These practices included improving water retention and the quality of the soil by leaving plant clippings in the field, as well as persuading farmers to plant fast-growing eucalyptus trees as a renewable source of fuel for heating and drying tea leaves.96 Unilever's chief sustainability officer Gail Klintworth reported that between 2007 and 2012, the schools trained 450,000 farmers in preparation for Rainforest Alliance certification.97
The improved cultivation practices that Unilever teaches to farmers come from research at its own tea estates in Kenya and Tanzania.98 The company's Kericho, Kenya, estate achieved the highest yield in the world at 3.5 to 4 tons per hectare. Its estate in Tanzania achieved yields of 3 tons per hectare, compared to a countrywide average of 2 tons per hectare.99 Unilever is also pursuing genetic research to cultivate more sustainable tea varieties. “The ability to grow more tea on less land, further reduce the need for agrochemicals while boosting tolerance to drought and climate change is integral to this project,” said Clive Gristwood, senior vice president for research and development of Unilever's Refreshment category.100
“Coffee farmers are critical for us. We don't see them as a commodity, a faceless supply chain; rather they are people that we know, we know their families,” said Kelly Goodejohn, director of ethical sourcing for Starbucks.101 Starbucks’ vision of having “a positive impact on the communities we serve—one person, one cup, and one neighborhood at a time,” goes beyond its customers and extends to the far reaches of its supply chain, to the more than 120,000 farmers growing its coffee.102 Starbucks not only promises to sell its customers the best coffee on the planet, but it also promises that the people who farm, pick, and process that coffee will be treated fairly on farms that have reduced environmental impact.
To ensure that it buys environmentally and socially sustainable coffee, Starbucks partnered with Conservation International103 in 1999 to develop the Coffee and Farmer Equity (C.A.F.E.) program, a set of interlocking environmental, social, and economic guidelines for its coffee supply chain. Starbucks ensures that farmers meet its standards by gathering information on each farmer, including geocoding every plot, the identities of owners and workers, and information about the farming practices, including landscaping and biodiversity.104 To become a Starbucks supplier, farmers and coffee processors must perform a set of mandatory practices, as well as a sufficient number of optional practices that give the farmer a high enough score on the C.A.F.E scorecard. Farmers who achieve even higher scores—by doing more of the optional practices—can become “preferred” and then “strategic” suppliers, which gives them enhanced pricing and contract terms.105 These positive incentives for incremental improvements stand in contrast with mandate-oriented approaches, such as IWAY or the EICC code of conduct. They are more like the Levi's approach or Nike “Rewire” program mentioned earlier in this chapter; these programs also mix mandates and incentives.106
C.A.F.E. is more than just a scorecard; it conveys some 200 specific good practices (which it asks about in surveys), such as buffer zones of at least five meters from bodies of water, bench terraces to reduce erosion on steep slopes, the use of nitrogen-fixing cover crops, and protection for areas of high conservation value. Almost two-thirds of the C.A.F.E. scorecard items relate to environmental issues, while the rest are focused on social responsibility issues, such as working conditions, worker rights, worker benefits, worker wages, and child labor.107
The company employs 25 audit and verification organizations that visit and collect information about each farm.108 SES Global Services, in Oakland, California, manages the quality and the integrity of the verification process. “They act as a second party to us that has oversight over the third parties,” explained Starbucks’ Goodejohn.109 The findings of these audits generally lead to improvement efforts. However, some practices are governed by zero-tolerance mandates, including the use of banned pesticides, cutting down natural forests, and child labor.110 These practices can cause Starbucks to immediately reject shipments and cancel contracts with the offending bean suppliers.111
These audited indicators let Starbucks measure progress toward its goal of 100 percent ethically sourced coffee (the number stood at 95 percent in 2013).112 “Getting farm information from the last 5 percent is challenging because our supply chain constantly shifts,” said Goodejohn, “but it is our commitment to reach the 100 percent goal and we continue to work towards it.” The audits also help ensure the quality of the coffee and thus—like Unilever—align Starbucks’ sustainability goals with its primary product quality goals. In 2015, Starbucks reached its maximum practical goal with 99 percent of its coffee ethically sourced.
Starbucks not only developed and implemented the system in its own operations, but it chose to make its system public for any grower, mill, or coffee company to use. “We've designed the program in a way that it's truly open source. None of the C.A.F.E. practices are secretive or not available. In fact, we purposely didn't want it to be a Starbucks proprietary program, because we felt that it really demonstrated best practices that would benefit farmers,” said Goodejohn. “We wanted this to be open source to others, to other coffee companies.”
After achieving the 99 percent ethically sourced milestone, Starbucks became a founding member, with other industry leaders, of the Sustainable Coffee Challenge, a call to action led by NGO Conservation International to make coffee the world's first sustainable agricultural product in the world.113
In many lands near the Earth's equator, brilliant sunlight and copious rainfall create an exuberant biological riot of thousands of species coexisting in dense and mysterious rainforests. Plants of every shade of green reach for the sky and produce flowers and fruits of every imaginable color. Insects buzz, birds flutter, and animals rustle through the leaf litter or clamber in the high branches of these primeval forests.
Not surprisingly, both people and companies covet these highly productive lands to meet the increasing needs for food, agriproducts, minerals, and jobs for the planet's growing billions of people. Each year, farmers large and small tear down 7.3 million hectares of forest and replace it with regimented rows of oil palms, soy beans, other crops, or pasture.114 The battle between the natural environment and the economic environment is fought by opposing battalions of soldiers comprising environmentalists (mostly through NGOs) on one side and consumers and workers (mostly through companies) on the other.
Palm oil, extracted from the fruits and kernels of the tropical palm oil tree, is a vegetable oil used in everything from sweets and baked goods to soaps and cosmetics to biodiesel.115 Its popularity and consumption surged in 2006 when the US Food and Drug Administration (FDA) began requiring that food labels list artery-clogging trans-fatty acids.116 Palm oil was quickly identified as a leading replacement for trans fats because it was cheaper to produce than substitutes such as soybean oil. It is even environmentally superior on at least one key measure: the amount of newly cleared land needed to create new supplies of vegetable oil. Palm oil requires only one-tenth to one-quarter as much land as other common oil seeds such as soy, sunflower, or rapeseed.117,118
When palm oil demand doubled between 2002 and 2014, suppliers sought large tracts of land in areas with the right climate. That climate exists in a band stretching seven degrees either north or south of the equator, according to Mohd Salem Kailany, senior vice president at Sime Darby Berhad, one of Malaysia's largest palm oil producers.119 Kailany told the story of palm oil during a visit to the MIT Center for Transportation and Logistics in 2014. To meet increasing demand, palm oil farmers started clearing tropical forests, especially in Malaysia and Indonesia, on a massive scale. Those two countries came to supply as much as 85 percent of the world's palm oil. Yet, this same band swaddling the Earth's middle has thousands of unique species of plants and animals, including those very charismatic orangutans.
To clear the forest, farmers cut down all the trees and set them ablaze (a practice known as slash and burn). This process destroys the natural habitat of many tropical species, in addition to causing soil erosion and polluting both the air and the water.120 Of special concern is the burning of carbon-rich forests and peatlands, which releases especially large amounts of GHGs. A joint study by Yale and Stanford universities estimated that palm oil plantation expansion would contribute more than 615 million tons of carbon dioxide to the atmosphere in 2020, an amount greater than all of Canada's 2012 fossil-fuel emissions.121 Overall, deforestation around the world is responsible for an estimated 6 to 17 percent of the entire carbon footprint of the entire human race.122
Greenpeace's attack on Nestlé in 2010 (see chapter 1) was part of a wider Greenpeace palm oil campaign. It targeted many major consumer brands who were buyers of palm oil produced and sold by Golden Agri-Resources (GAR), the palm oil arm of the Indonesian conglomerate Sinar Mas Group.123 Greenpeace also attacked name-brand companies who were using paper from Asia Pulp & Paper (APP), another subsidiary of Sinar Mas linked to deforestation.124 As a result, in less than 12 months, Sinar Mas lost prominent customers including Nestlé, Unilever, Kraft, Burger King, and other Western companies.125
Even so, this loss of customers did not have an overwhelming financial impact on Sinar Mas and did little to satisfy Greenpeace, for two reasons. First, Nestlé represented less than 1 percent of Sinar Mas’ revenue, and although Unilever is the largest single buyer of palm oil in the world, even it represented only 4 percent of the Indonesian conglomerate's revenue.126 Buyers in Asia, especially China and India, where Greenpeace campaigns have limited influence, accounted for 89 percent of Sinar Mas’ sales.
Second, the cancellation of Sinar Mas contracts by Nestlé and others did not mean that Sinar Mas oil stopped flowing to these Western companies. After Nestlé cut off Sinar Mas, Greenpeace mapped Nestlé's supply chain and discovered that Sinar Mas’ palm oil was still finding its way into Nestlé's products through other palm oil suppliers. Palm oil from Sinar Mas plantations was being sold to other processors, refiners, and ingredient makers in the vegetable oil industry. “These cancellations did not really give the rainforests a break, because Nestlé continues to use Sinar Mas palm oil, as well as Sinar Mas pulp and paper products, via other suppliers like Cargill and APP,” Greenpeace wrote.127 Nestlé knew which bulk oil companies it was buying oil from, but it didn't know the plantations where that oil was coming from, according to Scott Poynton of The Forest Trust (TFT) “and they didn't know the practices … going on out in those plantations.”128
Although Sinar Mas could withstand the loss of the customers mentioned above, the public announcements, boycotts, and unfavorable press releases by these major Western companies were an embarrassment. Furthermore, these actions focused government, media, and community attention on the environmental damage caused by palm oil producers. Consequently, Sinar Mas’ palm oil division, GAR, decided to act.
Early in 2011, GAR announced a commitment to a “Forest Conservation Policy,” a first for a palm oil grower. The policy's principles included no development on primary forests, high carbon stock forests, or peat lands, and it agreed to have all its palm oil certified by RSPO (Roundtable on Sustainable Palm Oil) principles and criteria (see the next section).129 To best achieve its conservation goals, GAR worked with Greenpeace and TFT to identify high carbon stock forest areas.130 As a result, Greenpeace commended GAR's reforms as being progressive and leading the way for the palm oil industry.131 Nestle, Unilever, and Burger King returned as customers.
Despite GAR's bold commitments, another Sinar Mas subsidiary, APP, did not follow GAR's example. Three years after GAR made its commitments, APP was accused of illegally logging an endangered rainforest in Riau, Indonesia.132 According to Greenpeace, APP, “which is responsible for widespread deforestation to source paper and packing products, doesn't seem to realize that GAR's initiative is the way forward. Even with the revolt [of APP's practices] going on around the world, their commitments and announcements are not worth the paper they are written on.”133
Nestlé and many others realized that no single company could transform international agricultural practices on its own nor provide transparency across the entire complex supply chain of palm oil and its derivatives. Instead, a coalition of major palm oil suppliers and buyers, along with industry groups and NGOs, gathered to form the Roundtable on Sustainable Palm Oil. The Roundtable was the 2001 brainchild of the World Wildlife Fund (WWF) and was initiated by AAK UK Ltd, a developer of edible oils and fats; Migros, a supermarket chain; and Unilever. In 2013, RSPO members accounted for approximately 40 percent of global palm oil production,134 and several member companies, including Carrefour, Unilever, Walmart, Nestlé, Johnson & Johnson, and P&G, have committed to sourcing only RSPO-certified sustainable palm oil.
To promote sustainable oil palm farming and overcome the problem of the opaque web of market participants, the RSPO developed the “GreenPalm” certificate program.135 GreenPalm issues certificates, one per metric ton, to farms that meet the RSPO's sustainability standards for growing palm oil fruit. Companies interested in sustainable palm oil bid for GreenPalm certificates to cover part, and sometimes all, of the company's open market palm oil purchases. The money paid by the company for the certificates goes to the certificate-receiving farms, thereby covering the farmers’ costs of using only sustainable practices and creating a financial incentive for other farms to utilize or convert to sustainable production.
In buying GreenPalm certificates, however, a company is not buying a particular ton of sustainable palm oil directly from a particular sustainable farm. Although GreenPalm guarantees that a ton of sustainable palm oil will be added to the global supply, the program does not create a separate supply chain to ensure that the specific palm oil received by a company came from sustainable sources. Thus, the GreenPalm approach restricts the claims that consumer brand companies can make about the oil in their products. However, the RSPO also offers certification for companies for using only sustainably produced palm oil; such certification requires identity-preserved or segregated supply chains, which can substantially increase costs.136 GreenPalm exemplifies what is known as a “book and claim” system,137 which is also used for purchasing renewable energy without the costs of a separate power grid to connect wind or solar farms to energy buyers.138 It can also be viewed as an offset system, similar to carbon credits, but for palm oil.
As with the EICC and offset practices, NGOs criticize the RSPO for not pushing far enough. Following a 2013 RSPO review of their principles and criteria and a proposed update of those standards, the WWF stated that “… because the review failed to accept strong, tough, and clear performance standards … it is, unfortunately, no longer possible for producers or users of palm oil to ensure that they are acting responsibly by producing or using Certified Sustainable Palm Oil.”139 WWF wanted the program to become more stringent on issues such as regulating GHG emissions and pesticide use at RSPO-certified farms. “Industry associations can only move as quickly as their least nimble members,” bemoaned one NGO.140
In response, other initiatives have been formed to strengthen existing standards. For example, the Palm Oil Innovation Group, with members that include New Britain Palm Oil, WWF, and Greenpeace, aims to set ambitious standards, beyond the RSPO, in order to achieve higher levels of traceability and confidence in the sustainability of sources.
At the same time, the Indonesian government, in trying to balance environmental and economic concerns—especially for small palm oil farmers—created its own certification program: the Indonesian Sustainable Palm Oil (ISPO). Unlike the RSPO, which is voluntary and not widely adopted by Indonesian palm oil producers, ISPO rules are mandatory for these producers. However, the ISPO standards are even less stringent than the RSPO standards, and the compliance monitoring and enforcement mechanisms may not be rigorous.141
Still, the RSPO's certification isn't as toothless as some NGOs claim. When the RSPO suspended the sustainability certificates for the IOI Group, a large Malaysian palm oil producer and trader accused of failing to prevent its subsidiaries’ involvement in deforestation in Indonesia, many companies suspended trading with the company. These companies included reputation-sensitive consumer brands such as Unilever, Nestlé, Kellogg, and Mars. Also included were other palm oil intermediaries such as Archer Daniels Midland, Louis Dreyfus Company, and even GAR. The news knocked 15 percent off IOI's share price and put the company under threat of a credit rating downgrade. “What we've seen is a strong and rapid response from the buying community and the financial community,” said a GAR spokesperson.142
Overall, the RSPO remains the most widely recognized palm oil sustainability effort and gives companies, as well as NGOs, a venue for coordinating industry-wide initiatives and managing a viable financial mechanism to encourage sustainable palm oil production. Even the WWF recommended ratifying the updated RSPO standards, despite the NGO's own criticisms of that update.143
Agricultural commodities in particular face significant environmental challenges on both the consumer and sourcing sides of the supply chain. On the consumer “in me, on me, around me” scale (see chapter 1) the products are often “in me” goods—the foods that people eat and care most about. At the same time, tea, coffee, palm oil, and other agricultural products have opaque upstream supply chains full of intermediaries and are too often marred by poor social and environmental practices. Moreover, agricultural products are often sourced from hundreds of thousands of smallholder farms, which is in contrast to many industrial sectors, such as mining or oil exploration, in which large, well-established firms provide the bulk of the supply.
A key factor in how companies handle these deep-tier environmental challenges arises from the primacy of the ingredients in the company's products. Coffee beans and tea leaves are the prime ingredients in the respective beverages made by Starbucks and Unilever. And, as with AB InBev's relationship with barley farmers, these brand-owning companies are major buyers—and sometimes the sole buyers—of the respective commodities from their suppliers. Thus, they may develop a strong relationship with the deep-tier growers of their product's primary ingredient for reasons of not just sustainability, but also product quality and productivity. The suppliers, in turn, are listening. The outcome of Starbucks’ and Unilever's efforts has not only been environmental and social improvement but also increased yield for farmers and higher quality coffee beans and tea leaves.
In contrast to coffee and tea, palm oil is arguably a minor ingredient for companies such as Nestlé and Unilever; it is but one of many possible vegetable oils that they might use in their products. Furthermore, Nestlé and Unilever are minor customers to large palm oil refiners such as Sinar Mas. That difference between primary ingredient supply chains and minor ingredient supply chains gives Nestlé and Unilever less leverage to control the environmental impact of oil palm growers. Unilever may have a strong desire for more sustainable palm oil, but the company admits “our progress has been slower than we hoped and highlights that this journey to drive traceability and transformation is not an easy one.”144
As challenging as controlling the environmental impacts of the upstream supply chain might seem, controlling the downstream supply chain is even more challenging. The moment a product leaves a company's four walls, the company may have little say over how business customers, distributors, retailers, and consumers handle it, use it, or dispose of it. Nevertheless, the total environmental impact of a product encompasses these downstream phases of the life cycle as well. Mitigating the downstream impacts during the use phase of a product can be particularly challenging. It involves some combination of product redesign (chapter 8), convincing customers to change their purchasing and use habits (chapter 9), and creating reverse supply chains for handling reuse, recycling, or disposal (chapter 7).