The Growing Trend of Sustainability Scorecards Why It Makes Sense to Get on Board Now

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1 Gain valuable insights on sustainability scorecards from our extensive research on supply chain sustainability.

2 TABLE OF CONTENTS What is a Scorecard? Who is Using Them and Why?... 2 The Stakeholders... 3 a. NGOs... 3 b. Multinational Organizations... 4 c. Trade Associations... 6 d. Federal Government... 7 What are Scope 3 Emissions?... 4 Who is Measuring What? A Look at 24 Organizations... 5 The Buyer s Perspective... 8 The Supplier s Perspective... 8 Both Buyer and Supplier... 9 Three Simple Rules for Suppliers... 9 Summary Supply Chain Scorecard Timeline Renewable Choice :: 1

3 THE GROWING TREND OF SUSTAINABILITY SCORECARDS Sustainability scorecards are a fast rising global trend across the supply chains of many industries. Non-governmental organizations (NGOs), government, trade associations, and multinational corporations shareholders and investors are putting mounting pressure on suppliers to improve overall sustainability efforts, reduce emissions across the supply chain, and disclose this data. Renewable Choice Energy recently conducted an in-depth analysis of 16 scorecard programs. The focus of this paper is specifically on the results of that research (i.e. who is doing scorecards and why), the role the abovementioned influencers play, and best practices for suppliers who want to comply. While it is understood that there are many facets to sustainability scorecards, for the purpose of this paper, we will focus on carbon and energy as the primary indicators that are typically assessed. Sustainability scorecards have become a key to success for suppliers and are here to stay. In fact, they are becoming more prevalent, more complex, and more mainstream the sooner suppliers understand this and get on board, the sooner scorecards will no longer be viewed as a burden but instead as a springboard for success and growth as well as a competitive differentiator. Which Buyer Scorecard Programs were analyzed: 1. Dell 2. Ford 3. Google 4. IBM 5. Kaiser 6. Kohl s 7. Microsoft 8. Nike 9. Nokia 10. Outdoor Industry Association (OIA) 11. Proctor & Gamble 12. Publix 13. Staples 14. Walmart 15. Johnson Controls 16. Federal Government WHAT IS A SCORECARD? WHO IS USING THEM AND WHY? Multinationals and government organizations have been issuing supplier scorecards for years in the areas of quality management and social compliance. In prior decades, social issues such as fair labor practices and community engagement were the focus of supplier scorecards. More recently, pressing issues such as climate change, water scarcity, energy risk, and natural resource management have been incorporated into scorecards and now affect the buying decisions of multinationals and governments with large supply chains. Figure 2 shows a timeline of recent events illustrating the growth of environmental metrics in the scorecards for supply chains of large multinational buyers. Figure 2 can be found on page 11. Buyers want to understand a product s impact throughout its lifecycle. They want to know how a product is made and how much energy is used to create and transport it across the globe. They want to reduce risk, save costs, and eliminate waste in the supply chain. Scorecards are used by buyers to assess a product s and a supplier s carbon footprint by measuring energy use and other emissions. Suppliers want to comply with the scorecard request to stay in the good graces of powerful buyers and to eliminate costly inefficiencies from the supply chain. Renewable Choice :: 2

4 Large buyers (such as Walmart, IKEA, P&G, and Ford) are setting the pace for these scorecards and smaller buyers are eagerly following suit. With new emphasis on measuring supply chain sustainability and risk, scorecards are becoming a key component of corporate social responsibility and proving to be a competitive differentiator. Scorecards come in all shapes and sizes and a variety of industries are now implementing them technology, government, retail, healthcare, telecom, outdoor just to name a few. Most are known simply as scorecards while others are called surveys, assessments, or codes of conduct. The most well-known scorecard program is the Walmart Supplier Sustainability Assessment (SSA), also known as The 15 Questions. The SSA and most other scorecards measure a supplier s efforts in the following categories: water, waste, energy, carbon, packaging, and social performance. The questions on the SSA attempt to measure a supplier s progress in setting reductions targets and disclosing progress. The questions are weighted; some answers are more important than others. Sample questions include: Have you measured your corporate GHG emissions? Have you set publicly available water use reduction targets? If yes, what are those targets? Do you know the location of 100 percent of the facilities that produce your product(s)? Have you opted to report your greenhouse gas emissions to the Carbon Disclosure Project (CDP)? Regardless of where the pressure is coming from, one thing all of these players have in common is that they have a stake in measuring and disclosing energy consumption and emissions throughout the supply chain. THE STAKEHOLDERS Many organizations and individual interests have a stake in supply chain performance. Interested parties include: Government agencies such as the Environmental Protection Agency (EPA) and lawmakers at the local, state or federal level; NGOs with a social or environmental mission, sometimes with political aspirations; Trade associations for businesses within an industry that serve to collaborate and standardize processes and requirements; and Corporate shareholders and investors who are interested in improving the return on their investment and mitigating their risks. Regardless of where the pressure is coming from, one thing all of these players have in common is that they have a stake in measuring and disclosing energy consumption and emissions throughout the supply chain. Increasingly Influential NGOs Many NGOs exist to facilitate and encourage the measurement and reporting of GHG emissions, including the World Resources Institute (WRI), The Sustainability Consortium, The Global Reporting Initiative (GRI), Environmental Defense Fund (EDF), B Lab, and the Carbon Disclosure Project (CDP). The CDP is one example of a powerful NGO driving disclosure of carbon emissions and, more recently, water consumption. The program launched in 2003 as an investor-driven organization with the mission of encouraging the largest publically traded companies in the world to disclose climaterelated risks and opportunities. Today, the CDP maintains the largest database of primary climate change information in the world. Renewable Choice :: 3

5 What are Scope 3 Emissions? In 2007, the CDP expanded its scope beyond corporate emissions with the launch of its Supply Chain Program. The CDP Supply Chain Program provides purchasing organizations with a global standard for supply chain disclosure and expands awareness of the carbon footprint of supply chains (see inset below on Scope 3 emissions). In doing so, the program provides a structured framework to support organizations efforts to manage risk throughout the supply chain. In Renewable Choice Energy s research, 15 of the supplier scorecards reviewed include questions about the CDP. Many supply chain sustainability programs now expect suppliers to report through the CDP. Over 50 multinationals such as Unilever, Pepsico, Colgate-Palmolive, and ConAgra Foods participate in the CDP s supply chain program. According to the recent CDP S&P 500 Report 2011, Strategic Advantage Through Climate Change Action, managing carbon emissions has become fundamental to strong shareholder returns. Other compelling findings that point to the growing importance of this issue include: 87% of S&P 500 respondents reported board or senior executive oversight of their company s climate change programs, up from 68% in With two-thirds of the S&P 500 index participating in the 2011 questionnaire, this translates to at least 58% of the index viewing climate change as a mission-critical issue. 65% of respondents reported that climate change issues are integrated into their overall business strategy, up from 35% in A recent Mercer study cited in the report concluded that the best way for institutional investors to manage portfolio risk associated with climate change may be to shift 40% of their portfolios into climate-sensitive assets with an emphasis on those that can adapt to a lowcarbon environment. GHG emissions can be divided into three scopes or categories 1, 2, and 3. Scope 1 emissions are from sources over which an organization has direct control. Scope 2 includes emissions from purchased sources such as electricity. Scope 3 is a category of emissions that includes all value chain activities up- and down-stream from a company s own operations. Examples of Scope 3 emission sources are purchased goods and services, product transportation, and business travel. For large purchasing organizations such as major retailers and automotive manufacturers, suppliers make up a substantial part of their overall Scope 3 emissions. Multinationals Mitigating Risk Shareholders and investors of multinational corporations are also leaning on suppliers to focus on overall sustainability efforts, reduce carbon emissions across the supply chain, and to disclose this data. Recent research from the nonprofit organization Carbon Trust shows that 56% of multinationals plan to drop suppliers based on low carbon performance. The findings of this report are significant for suppliers and clearly demonstrate the significance and impact that sustainability has in the modern supply chain. Renewable Choice :: 4

6 In the supplier scorecards study conducted by Renewable Choice Energy, the following trends emerged, providing insight into what is being measured and why: Who is measuring what? Carbon is the leading indicator being measured followed by waste, water, and social. Many organizations, such as Dell, incorporate the scorecard into their purchasing process and a supplier s performance can count for as much as 10 to 15% of their overall rating. Most companies are participating in sustainable supply chain management either via partnerships and/or independently created scorecards (half of them created their own). Most buyers begin their programs with their top tier suppliers before including the rest of the supply chain. Some even request that their top tier suppliers require their respective suppliers to engage in this process. The top motivators for supplier scorecard implementation include managing risk, industry leadership, and corporate influence. The most common metrics measured by these companies are energy, carbon, and waste, followed by water, packaging, and social/community. In a broader look at 24 large multinational organizations, Table 1 below shows who is measuring what in the categories of carbon/energy, waste, water, and social performance. Table 1 - Who is measuring what? Renewable Choice :: 5

7 The Growing Influence of Trade Associations Trade associations are playing a growing role in setting the agenda for scorecards in specific industries. These trade associations represent common and competing interests of companies within industry sectors and serve to foster discourse, standardization, education, and support. Buyers benefit as trade associations provide the means to create consensus and level the playing field by creating industry-wide standards. Suppliers benefit by having one standardized framework for an entire industry, making compliance easier. In the automotive industry, companies such as Ford, Chrysler, and Honda are taking the lead in requesting many of their suppliers to measure and disclose carbon emissions and energy information. To support these companies, known collectively as original equipment manufacturers (OEM), the Automotive Industry Action Group (AIAG) has created the Greenhouse Gas Work Group, a team of OEMs, suppliers (TRW, Lear, and Magna), and subject matter experts to build best practices and resources. AIAG also sponsors GHG emissions reporting systems and teaches participants how to use the tools. Having a common system that is accepted by OEMs and the supply base helps eliminate duplicate reporting requirements, supports a common, comparable, and compliant reporting process, and results in cost savings for the member companies. In a much different capacity, the National Ski Area Association (NSAA) is helping ski resorts lead the way in environmental sustainability. Ski resorts operate in delicate natural environments - over 100 ski areas in the U.S. are on National Forest land. Beauty is a part of the ski experience and guests who come to these resorts place a high premium on environmental protection. Geraldine Link, Public Policy Director for the NSAA explains, We ve conducted many surveys of our guests and have learned that they want the most sustainable operation they can get. The NSAA evaluates the ski industry s supply chain via an environmental charter called Sustainable Slopes. The charter provides guidelines for 21 topics including air, water, waste, energy, and transportation. Energy is a very important topic in this industry and if we can reduce our carbon footprint we can save money and help the environment at the same time. This is no longer the exception but the rule, Link explains. Table continued on page 7 Renewable Choice :: 6

8 The Federal Government Enters the Equation In 2009, President Obama signed an executive order calling on federal agencies to establish an integrated strategy towards sustainability in the federal government and to make the reduction of greenhouse gas emissions a priority for federal agencies. Among other initiatives, the order requires agencies to set baselines and targets for scope 1, 2, and 3 GHG emissions. One part of the order recommends that governmental suppliers: Register with an organization to report emissions; Develop and make available a GHG inventory; Use incentives for products manufactured using processes that minimize GHG emissions; and Encourage sustainable practices to reduce GHG emissions. In 2012, The General Service Administration s (GSA) proposed plan of action is to initiate incentive strategies, develop a reporting system through which suppliers voluntarily disclose their Scope 1 or 2 GHG emissions, and train the workforce on policies and incentive programs. Renewable Choice :: 7

9 For government-wide contracting, the GSA currently recommends using EPA s Final Guidance on Environmentally Preferable Purchasing. This entails including environmental considerations as part of the normal purchasing process, comparing environmental impacts when selecting services, and collecting accurate and meaningful information about environmental performance of products and services. FROM A BUYER S PERSPECTIVE Computer manufacturer Dell is considered the leader in technology sector sustainability. In 2010, it was chosen by Newsweek as the top pick for environmentally-focused companies in the U.S. Dell earned a perfect score of 100% for its strong environmental policies, including free recycling of products worldwide and a ban on the export of e-waste to developing countries. Dell has also designed desktops and laptops that consume 25 percent less energy than those built in 2008 and estimates that these improvements have saved its customers more than $5 billion in energy costs. Bruno Sarda, Director of Sustainability Operations at Dell, explains why Dell has placed such an emphasis on the sustainability of its business operations: Today, it is simply an imperative to do business. Investors are demanding it now they will not take you seriously if you cannot speak intelligently to this. Our customers demand a high level of disclosure, especially in the public sector and in the large enterprises. Measuring and disclosing throughout the supply chain is ultimately about risk management and it makes you a much more transparent company. When Dell adds a new supply chain vendor, the vendor must agree to sustainability-oriented contractual obligations and a code of conduct. Top tier suppliers participate in quarterly business reviews and violations of sustainability commitments can lead to financial penalties. Dell requires suppliers to report to the CDP and Sarda is proud to report that Dell has had 100 percent compliance. FROM A SUPPLIER S PERSPECTIVE Pioneer Balloon Company is the largest manufacturer of latex balloons in the world and produces over five billion balloons each year. It employs close to 1,000 people and runs a complex global operation in nine facilities across six countries. As a supplier of latex products to some of the industry s largest buyers such as Walmart, Pioneer took a proactive approach to complete the Walmart SSA and report to the CDP. Gathering the company resources for a project of this complexity was a major effort as it involved 15 people across six countries and seven time zones. However, Pioneer understood that, in a competitive market, it was something they had to do. This reporting is simply the cost of doing business, says Tom Douglas, Corporate Compliance and Safety Manager. It was a complex effort but there is great value in doing it. We have realized efficiencies across our business operations and strive to improve on our baseline every year. Pioneer has proven itself as an industry leader with its proactive approach in reporting to the CDP. Walmart was very impressed with how quickly Pioneer completed the SSA and as a result, Pioneer reports that Walmart has added several new Pioneer products onto the shelves of its stores. Renewable Choice :: 8

10 BOTH BUYER AND SUPPLIER In addition to setting lofty standards for its suppliers, Dell must also comply with the sustainability requests and requirements of its buyers. Sarda explains that Dell does not hold its suppliers to any standards that it is not also willing to follow. When setting up a program for success, Sarda acknowledges that reporting can be difficult and emphasizes the importance of executive support: Disclosing can be hard, complex work but only the first time. Then, subsequently it becomes easier and expected. The key to success is that the program must have the executive support of the CFO, CMO or Ethics officer -- and it must be staffed appropriately in order to succeed. Mark Newton, former Executive Director of Global Sustainability at Dell and now Vice President of Corporate Social Responsibility at Timberland, is an industry veteran with a broad view of corporate strategies for sustainability, the supply chain, transparency, and reporting. From the highest levels of a corporation, organizations are beginning to think holistically and to engage suppliers to be innovative in their efforts, Newton explains. Whether you are a large multi-national organization or a supplier to one, managing carbon emissions is another lever to reduce waste and drive efficiency. Over the past several years Renewable Choice Energy has worked with hundreds of companies on issues related to supply chain sustainability. THREE SIMPLE RULES FOR SUPPLIERS The way a company approaches scorecard requests and the strategy it employs to improve its score has a dramatic impact on the long-term value derived from the exercise. Over the past several years Renewable Choice Energy has worked with hundreds of companies on issues related to supply chain sustainability. Some of these companies use the scorecard request as a jumping off point for complete shifts in organizational culture while others respond reluctantly and purely for the sake of compliance. Through our experience a few best practices have emerged that, when implemented, can help suppliers achieve long-term value and high scores. 1. Understand Your Customers Motivations Large buying organizations implement supply chain sustainability programs because they believe the program will result in some business value such as cost-reduction, improved customer loyalty, or risk mitigation. Companies that work with their customers and industry experts as they respond to scorecard requests will ensure their actions provide value to both buyer and supplier. As Tom Holcomb, Chief Operations Officer of Renewable Choice Energy, points out, Buyers and sustainability directors at even the largest companies in the world are happy to engage with suppliers on sustainability issues. I have seen several suppliers build stronger relationships with their customers simply by asking for help and guidance when responding to scorecard requests. 2. Consider Values Beyond Compliance Suppliers that respond to scorecard requests generally fall somewhere on the sustainability spectrum between leader and reluctant complier. Reluctant compliers generally perform a simple calculation involving customer/buyer pressure and cost when deciding on a desired score and potential outcomes. This approach, while often effective at producing acceptable scores, leaves suppliers with little to no long-term benefit from their time and money. In contrast, the sustainability leader understands that sustainability programs will only succeed if they provide lasting Renewable Choice :: 9

11 value for the company. These companies will analyze requests in the context of their specific business environment to identify actions that can save money while simultaneously improving customer satisfaction. In many instances they will work with their customers to modify requirements that don t provide potential for long-term value. Sustainability leaders might not start out with the highest score on paper, but in the long run they will find the greatest value from their efforts in the form of reduced costs and risks and increased customer spend and loyalty. 3. Build Support From the Top Down Implementing any kind of new business strategy requires strong support from senior leadership, and sustainability is no different. Executives don t need to commit to recreating their business overnight to succeed at sustainability, but they do need to believe in the business case behind it and support its champions over the long-term. Nearly all sustainability projects will require participation from many, if not all, company departments. Lack of support from one key area in a company can cause a highly valued sustainability project to fail before it gets off the ground. Building internal support from senior leadership will ensure teams understand the larger story behind sustainability projects and facilitate efficient project execution. Suppliers that keep these simple rules in mind when responding to sustainability scorecard requests will avoid many potential costly pitfalls associated with a compliance mentality and ultimately find significant value from their sustainability investments. SUMMARY Sustainability scorecards are an integral part of doing business today. Pressure is coming from many directions NGOs, trade associations, government, shareholders and investors and this trend is growing every day. The sooner suppliers understand this and get on board, the sooner scorecards will no longer be viewed as a challenge but instead as a way to differentiate against competitors and add true business value. By following a few best practices, suppliers can be sure they understand the sustainability expectations of their customers and succeed in scorecard compliance. Renewable Choice :: 10

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