How To Improve Environmental Performance Of A Supply Chain

Using supply chains to reduce environmental impact Final report:

i Introduction to IMPEL The European Union Network for the Implementation and Enforcement of Environmental Law (IMPEL) is an international non-profit association of the environmental authorities of the EU Member States, acceding and candidate countries of the European Union and EEA countries. The association is registered in Belgium and its legal seat is in Bruxelles, Belgium. IMPEL was set up in 1992 as an informal Network of European regulators and authorities concerned with the implementation and enforcement of environmental law. The Network s objective is to create the necessary impetus in the European Community to make progress on ensuring a more effective application of environmental legislation. The core of the IMPEL activities concerns awareness raising, capacity building and exchange of information and experiences on implementation, enforcement and international enforcement collaboration as well as promoting and supporting the practicability and enforceability of European environmental legislation. During the previous years IMPEL has developed into a considerable, widely known organisation, being mentioned in a number of EU legislative and policy documents, e.g. the 6th Environment Action Programme and the Recommendation on Minimum Criteria for Environmental Inspections. The expertise and experience of the participants within IMPEL make the network uniquely qualified to work on both technical and regulatory aspects of EU environmental legislation. Information on the IMPEL Network is also available through its website at: www.impel.eu

ii Title report: Number report: 2013/14 Project manager: Imogen Rattle (Environment Agency, England) Authors: Araceli de Carlos (AMEC) Colin Carter (AMEC) Report adopted at IMPEL General Assembly: 7-8 May 2014, Brussels, Belgium Number of pages: Report: 34 Annexes: 19 Project team Environment Agency, England Project Manager - Imogen Rattle IHK (Magdeburg chamber of commerce), Germany - Wolfgang Mihlan/ Katharina Prinz Environment and Transport Inspectorate, Ministry of Infrastructure and the Environment, The Netherlands - Henk Ruessink Municipality of Hässleholm, Sweden - Sven-Inge Svensson Regional Agency for Environmental Protection of Sardinia, Italy - Romano Ruggeri Executive summary: This report presents the findings of the IMPEL project Using supply chains to reduce environmental impact. The project aims at better understanding the steps the private sector is taking to manage the environmental impacts of supply chains and at exploring the ways that activities making up Green Supply Chain Management (GSCM) might be organised so as to contribute to better environmental outcomes and more effective regulation. The chemical industry was chosen to provide an illustration at a sectoral level. The report focuses on the range of activities within GSCM, which is defined for the purpose of this project as the methods used by companies to manage their relationships with suppliers in an environmentally responsible way. The project was steered by a core team of practising environmental regulators from across Europe and led by the Environment Agency of England. The work included a survey of IMPEL members and other environmental regulators and a literature review of papers and reports from academia and other public sources. The discussion of project team members from a workshop held in October 2013 is also reported together with three case studies of private companies within the chemical sector demonstrating their approach to GSCM. Evidence reviewed and presented in section 3 of the report indicates that companies are increasingly adopting practices which incorporate environmental aspects, in addition to economic conditions, in the selection and management of suppliers so as to protect their reputation, to aid with their own compliance and to meet customer expectations, amongst other reasons. Practices include the establishment of environmental requirements and expectations in Codes of Conduct, monitoring and auditing activities to check compliance with such requirements and the development of remediation strategies and capacity building to address any non-compliance issues or poor environmental performance. As a consequence GSCM is becoming an integral part of a business culture that seeks to reduce environmental impact. However, while the literature review reveals that GSCM has drawn significant attention in the business field, it has been studied to a lesser extent in the public policy and regulatory literature. This project is therefore a first step to better understanding which aspects of GSCM might have relevance to regulators and provides a preliminary and high level discussion on whether and how inspectorates

iii might recognise and take account of GSCM to improve compliance. Findings from the survey and literature review show that knowledge in this area among regulators is at a preliminary stage and that GSCM as a stand-alone element has not largely been utilised to date for public supervision and enforcement purposes. Yet, there is an overall recognition by participants in this project that GSCM could be considered by regulators, provided that there is a strong evidence base for its benefits and an appropriate level of confidence based upon a defined framework and reliable standards. In particular, GSCM may fit within existing procedures for prioritising and executing inspections, and may also have a role in communication and promotion activities. Under the appropriate conditions, an incentive system to encourage the adoption of GSCM could lead in the longterm to improved environmental performance in the supply chain. The main conclusion of this project is that GSCM has the potential to contribute to compliance promotion and more effective regulation. However, the understanding of the implications and benefits of this phenomenon for regulators are at an early stage and there are several aspects and limitations that need to be further explored. Therefore, proposals to analyse this subject and its relevant mechanisms in a more thorough way are included in the last section of the report. These include a clarification of the GCSCM definition, more extensive research on the benefits of such practices from a regulatory perspective and an analysis of the legal concerns related to the ownership and sharing of information that is exchanged between suppliers and its customers. The project also recommends assessing the potential connection and practical integration of GSCM with other IMPEL projects. Disclaimer: This report is the result of a project within the IMPEL network. The content does not necessarily represent the view of the national administrations or the European Commission.

iv Contents Summary 1 1. Introduction 4 1.1 Background 4 1.2 Project Scope and Objectives 4 1.3 Structure of the Report 5 2. Project Design 6 2.1 Project Participants 6 2.2 Sector focus on the Chemical Industry 6 2.3 Project Activities 6 3. Supply Chain Management Practices to Improve Environmental Performance 9 3.1 Core Concepts 9 3.2 Companies Reasons for Implementing GSCM 11 3.2.1 Overview 11 3.2.2 Compliance benefits from GSCM 13 3.2.3 Regulatory and market drivers in the chemical sector 13 3.3 Industry Implementation of GSCM 14 3.4 Examples of Corporate Practice for GSCM 16 3.4.1 Case study A: The individual action taken by Bona, Sweden 17 3.4.2 Case study B: Collective company action case through the Together for Sustainability Initiative (TfS) 18 3.4.3 Case study C: Collective company action case through the Pharmaceutical Supply Chain Initiative (PSCI) 21 4. Findings and Discussion: Potential Implications for Regulators 23 4.1 Overview 23 4.2 Summary of Main Findings and Discussion 23 4.2.1 Are regulators familiar with the concept of GSCM and the action of industry in this area? 23

v 4.2.2 Do public inspection authorities recognise and take into account the use of environmental supply chain management practices? If so, how they do that? 24 4.2.3 What are the potential benefits of GSCM? Can it contribute to improve compliance with environmental regulation, including the consideration of SMEs? 25 4.2.4 Where and how it could be appropriate and feasible to consider GSCM within the enforcement and inspection process? 26 4.2.5 What are the limitations to the consideration of GSCM by regulators? 29 4.2.6 How can the benefits of GSCM, once recognised, be promoted by regulators? 30 5. Conclusions and Recommendations 31 6. References and Authors 33 Table 2.1 Objectives versus Activity matrix 8 Figure 2.1 The project team at the Workshop in Brussels 7 Figure 3.1 Simplified diagram of paint supply chain 10 Figure 3.2 Building the Case for Supply Chain Sustainability 12 Figure 3.3 Motivations for engaging with sustainable supply chain management 12 Figure 3.3 Tools for engaging with suppliers on sustainability 15 Figure 3.4 TfS initiative diagram 19 Figure 4.1 GSCM and execution of inspections 28 Appendix A Terms of Reference Appendix B Literature Review: Sources of information Appendix C Questionnaire Appendix D Main Findings of the Questionnaire Appendix E Workshop Agenda Appendix F Workshop Conclusions

1 Summary This report presents the findings of the IMPEL project Using supply chains to reduce environmental impact. The project aims at better understanding the steps the private sector is taking to manage the environmental impacts of supply chains and at exploring the ways that activities making up Green Supply Chain Management (GSCM) might be organised so as to contribute to better environmental outcomes and more effective regulation. The chemical industry was chosen to provide a sectoral level illustration. The report focuses on the range of activities within GSCM, which is defined for the purpose of this project as the methods used by companies to manage their relationships with suppliers in an environmentally responsible way. The project was steered by a core team of practising environmental regulators from across Europe and was led by the Environment Agency of England. The work included a survey of IMPEL members and other environmental regulators and a literature review of papers and reports from academia and other public sources. The discussion of project team members from a workshop held in October 2013 is also reported together with three case studies of private companies within the chemical sector demonstrating their approach to GSCM. Evidence reviewed and presented in section 3 of the report indicates that companies are increasingly adopting practices which incorporate environmental aspects, in addition to economic conditions, in the selection and management of suppliers so as to protect their reputation, to aid with their own compliance and to meet customer expectations, amongst other reasons. Practices include the establishment of environmental requirements and expectations in Codes of Conduct, monitoring and auditing activities to check compliance with such requirements and the development of remediation strategies and capacity building to address any non-compliance issues or poor environmental performance. As a consequence GSCM is becoming an integral part of a business culture that seeks to reduce environmental impact. However, while the literature review reveals that GSCM has drawn significant attention in the business field, it has been studied to a lesser extent in the public policy and regulatory literature. This project is therefore a first step to better understanding which aspects of GSCM might have relevance to regulators and provides a preliminary and high level discussion on whether and how inspectorates might recognise and take account of GSCM to improve compliance. A summary of findings is presented below using the questions used in the survey and workshop to illustrate the important themes: Do public inspection authorities recognise and take into account the use of environmental supply chain management practices? If so, how they do that? Regulators knowledge of regulated companies approach to managing their suppliers environmental impacts is relatively limited. Overall, it seems that limited attention has been paid to the use of GSCM systems as a stand-alone element for the purpose of regulatory compliance promotion, verification or enforcement. This might be due to regulators (and other public supervisors) tending to perceive the regulated company as an isolated element, instead of considering it as part of a supply chain network, where interdependent companies can influence each other s environmental reputation and performance.

2 Nevertheless, in practice, some IMPEL countries appear to consider GSCM as part of more general and wider policies and practices, such as the adoption of Compliance/Environmental Management Systems (EMS). What are the potential benefits of GSCM? Overall, there is an interest in GSCM amongst regulators and a general agreement that it may provide potential benefits. It may: o Act as a means of driving environmental compliance along the supply chain and is seen as way of increasing the regulator s length of arm. o Help raise awareness and understanding of regulation, particularly for SMEs. o Promote compliance and good practice along supply chains, which can expand across different industries and national borders (snowball effect). Where and how it could be appropriate and feasible to consider GSCM within the enforcement and inspection process? How can regulators promote this? There is an overall recognition by participants in this project that the inspection process could allow consideration of GSCM at some stages, provided that its benefits are recognised and that there is an appropriate level of confidence in such systems. In particular, current procedures for prioritising and executing inspections, as well as communication and promotion activities may already allow consideration of some aspects of GSCM. Under the appropriate conditions, an incentive system (e.g. lower inspection frequency, fee reduction to encourage the adoption of GSCM could lead in the long-term to improved environmental performance in the supply chain. What are the limitations to the consideration of GSCM by regulators? Relevant limitations are the lack of knowledge of GSCM practices and its benefits among regulators as well as lack of internationally recognised standards in this area such as the standard ISO 14001 that could provide a defined and formalised set of criteria to assess and verify the actual performance of a company. Other aspects such as the fact that GSCM approaches might be missing entirely in SME to SME relations, uncertainty around the legal implications of using information exchanged as part of GSCM systems between suppliers and customers, and the international dimension of supply chains were also highlighted. The main conclusion of this project is that GSCM has the potential to contribute to compliance promotion and more effective regulation. However, the understanding of the implications and benefits of this phenomenon for regulators are at an early stage and there are several aspects and limitations that need to be further explored. Therefore, proposals to analyse this subject and its relevant mechanisms are: Clarification of the GSCM definition and differentiation from related concepts; More extensive research on the benefits of such practices from a regulatory perspective; An analysis of the legal concerns related to the ownership and sharing of information; An investigation of how the relationship between companies and their customers may drive GSCM;

3 An assessment of any disbenefits of GSCM for companies and regulators and An assessment of the potential integration of GSCM with other IMPEL projects.

4 1. Introduction 1.1 Background There is increasing interest in European Union member states in using complementary interventions alongside traditional methods such as environmental inspections to improve implementation of and compliance with environmental legislation. This has been previously identified in work commissioned by IMPEL on obtaining more sustainable environmental outcomes. In 2011 IMPEL carried out a project to explore the use and effectiveness of complementary approaches to inspections for ensuring compliance 1. This project identified the most commonly used approaches in IMPEL member states and recommended that there should be more practitioner-orientated projects on how to apply specific approaches. One of the approaches identified was the use of environmental inspection by customers as part of their supply chain management. Companies are increasingly imposing environmental requirements on their suppliers to protect their reputation, to aid with their own compliance and to meet customer expectations, amongst other reasons. Suppliers compliance with these requirements is then checked through monitoring/auditing practices operated by buyers. These practices act as an additional enforcement mechanism for requirements that are already part of a wider environmental regulatory regime and may also be used to drive the beyond compliance behaviour adopted as policy by some companies in order to reflect customer attitudes and preferences. Clearly, supply chain requirements can play an important role in improving environmental performance. In particular, they appear to work well for large national or international companies who have the will and resources to drive good performance along the supply chain. In these situations, companies can be seen as operating in the role of private coregulators. The 2011 report concluded that the active promotion of supply chain management by regulators to encourage customer companies to demand environmental compliance from their upstream suppliers was a topic that should be further explored by IMPEL. 1.2 Project Scope and Objectives This project falls within Cluster i: Improving Implementation of EU Environmental Law (Permitting, Inspection, Enforcement and Smarter Regulation) and supports the Choosing Appropriate Interventions IMPEL project (2011) which aims at understanding how the environmental compliance and performance of regulated industries can be improved. As defined in the terms of reference (see Annex A) the scope of this project was to: Explore methods and tools used by industry to reduce the environmental impact of their activities through their supply chains; 1 http://impel.eu/projects/exploring-the-use-and-effectiveness-of-complementary-approaches-to-inspection-for-ensuringcompliance/

5 Seek to better understand how inspectorates can work with regulated industries and improve recognition and account taken by Environmental inspectorates of supply chains to improve compliance; and Share experiences on approaches used and explore how to motivate regulated industry to improve their environmental compliance and performance. The term Green Supply Chain Management (GSCM) was recognised as a useful concept by the project team. It is defined for the purpose of this project as the methods used by companies to manage their relationships with suppliers in an environmentally responsible way. In practice, this means the consideration of environmental aspects as well as economic conditions in the selection of suppliers and the management of subsequent relationships. The study aims therefore to explore the potential of GSCM for contributing to better environmental outcomes and more effective enforcement in regulated industries. 1.3 Structure of the Report This report is structured as follows: Section 2 explains the design and methodology of the project. Section 3 describes the general background and conceptual basis of the subject. The most common methods and tools used by industry, as well as practical examples of GSCM adoption are also described in this chapter. Section 4 analyses the potential implications of GSCM for regulators. It describes and discusses the outcomes/findings of the literature review, case studies, questionnaire and workshop respectively. Section 5 brings forward main conclusions and recommendations.

6 2. Project Design The project design follows the terms of reference in Annex A which identify a specific set of activities and a focus on a particular industry sector. The methodology of the project and the project team are described below. 2.1 Project Participants The project team includes representatives from five IMPEL Member Countries: Italy, Sweden, the Netherlands, Germany and the UK. The core team included representatives from the following organisations: Environment Agency, England Project Manager; IHK (Magdeburg chamber of commerce), Germany; Ministry of Infrastructure and the Environment, The Netherlands; Municipality of Hässleholm, Sweden; and Regional Agency for Environmental Protection of Sardinia (ARPAS), Italy. The project was supported by the consultant AMEC Environment & Infrastructure. 2.2 Sector focus on the Chemical Industry This project recognises the importance for regulators of better understanding the sectors that they regulate and their interaction in order to improve compliance and reduce environmental risk and impact. In view of this, the Terms of Reference proposed that this project should focus on a particular sector as an illustrative example. The chemicals sector was selected. This is a highly regulated sector with a large body of legislative and regulatory instruments covering issues related to health, safety and the environment. In particular, the Regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals (hereinafter, REACH) 2 covers over 30,000 chemicals and provides a huge challenge to both regulators and industry, due to its complexity, transnational nature and broad scope. It affects a large number of companies of all sizes involved in the manufacture, import, trade or use of chemicals in the EU. Approaches based on GSCM understanding may provide a practical and innovative tool that contributes to regulatory compliance and drives substitution of hazardous substances. 2.3 Project Activities In accordance with the Terms of Reference, information relevant to the project was collected in the following ways: 2 European Parliament and Council Regulation (EC) No 1907/2006 (Corrigendum 29 May 2007). http://ec.europa.eu/enterprise/sectors/chemicals/reach/index_en.htm

7 A literature review of GSCM practices, based on desktop research and discussion with the project team. The main sources of information identified are presented in Annex B. A questionnaire was developed and sent to permitting and/or inspection authorities with responsibilities covering the chemicals sector. The purpose was to collect information about whether public inspection authorities recognise and take into account the use of environmental supply chain management practices in the chemical sector and if so, in what ways. It also aimed to gather views on how inspectorates can work with the elements of supply chain management practices (e.g. supplier s environmental performance assessments) to improve compliance, while recognising practical issues such as the concerns of small and medium enterprises (SMEs) 3. The questionnaire and its findings are included in Annexes C and D. A two-day workshop to exchange information and experiences, to discuss the answers to the questionnaire and identify potential case studies. The workshop was attended by all project team members and was held in Brussels on October 22 and 23 2014. There was an interactive programme on both days. For the agenda and conclusions see Annexes E and F. Figure 2.1 The project team at the Workshop in Brussels Case studies from companies operating in IMPEL Member States to improve regulators understanding of companies current practices and explore whether there is potential to consider these within their remit. The aim was to obtain detailed information from a selection of companies about a range of issues, including their approach to sustainability and supply chain management, the importance of such environmental criteria in procurement decision making, their long-term objectives, the management of compliance issues and their views on the potential role of GSCM within the inspection process. These are presented in Section 3.4 of the report. 3 Extract of Article 2 of the Annex of Recommendation 2003/361/EC: The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million euro.

8 The following table shows how these activities relate to the project objectives (see section 1): Table 2.1 Objectives versus Activity matrix Objectives Explore methods and tools used by industry Understand how inspectorates can work with regulated industries in this field Share experiences and approaches used Literature review Activity matrix Questionnaire Workshop Case-studies

9 3. Supply Chain Management Practices to Improve Environmental Performance This section explains the core concepts used in this project and provides the background to their development. It describes the more common practices used by industry and companies reasons for implementing GSCM. Specific examples are also included. 3.1 Core Concepts Companies recognise their suppliers as a key factor in the success of their business. Traditionally, the selection of suppliers has been based on cost, quality and delivery criteria and the management of the business relationship was focused on achieving an improved cost position and competitive advantage. However, growing environmental awareness and increased demand for products that are socially and environmentally responsible have resulted in legislative and consumer-driven pressure on industry to consider environmental and social performance criteria in addition to economic when making procurement decisions: the so-called pillars of sustainable development. As a result, companies are increasingly adopting practices to incorporate environmental aspects, in addition to economic conditions, in the selection of a supplier and the management of a supplier relationship. The implementation of such practices in a structured and systematic manner is defined in this project as Green Supply Chain Management, abbreviated as GSCM. While it is beyond the scope of this project to provide a complete overview of the theoretical background, the following aspects are of importance: a) Supply Chain: there is no commonly accepted definition of the term supply chain : it can be approached in several ways. Overall, it can be understood as a network of facilities and distribution channels that include all activities associated with the transformation of natural resources, raw materials and components into a finished product delivered to the end customer (OECD, 2002). A chain suggests that companies are linked in a straight line in which production, distribution and sales of goods occur. In fact, supply chains and the business relationship between the various components can be complex with multiple tiers of suppliers, agents and subcontractors, linking across multiple countries and varying greatly from industry to industry and company to company (OECD, 2002). A single supply chain for a given sector, such as chemicals, can thus be a difficult concept to define: it will vary according to the individual chemical or product. In general a typical chemical supply chain can be defined as the sequence that comprises all steps from the manufacture of commodity or bulk chemicals or substances to the distribution or supply of articles/ products containing the chemical to end-users (both retail to domestic consumers and wholesale to business end-users) (Entec, 2007). For example, a paint supply chain consists of chemical substance manufacturers, paint producers or formulators, and ultimately, application of the paint, which can be done by other manufacturers (outside the pure chemical supply chain) such as motor vehicle manufacturers. See figure 3.1 below for a simplified view of the links in the paint supply chain. In general the chemical industry is only involved during the initial stages of the chemical supply chain, with their output

10 products being sold to a wider variety of industries and downstream users before reaching the end consumer. Figure 3.1 Simplified diagram of paint supply chain Mining/ Fossil/ Agriculture based companies Extraction and supply of raw materials Chemical manufacturers Basic/ intermediate materials (solvents, pigments) Chemical Industry Paint Formulators Mixing & addition of chemicals to create Paint or coating product Packaging materials Distribution Professional uses Article manufacturers (e.g. car painting) End consumer (Source: AMEC) b) Sustainable, Responsible and Green Supply Chain management: The literature review identifies a wide range of terms that can be related to the concept of greening the supply chain such as Sustainable (green) Supply Chain Management, Responsible Supply Chain, Responsible Sourcing or Sustainable (green) Procurement/Purchasing. The meaning given to these terms is similar, in that they refer to the inclusion of environmental and/or social concerns in a company s management of its supply chain and therefore some sources use them interchangeably. Generally they are used in connection with broader policy concepts such as Corporate Social Responsibility (CSR) or Sustainable Consumption and Production (SCP). Within the context of this project, the term GSCM which focuses on the practices that relate to the inclusion of environmental concerns in a company s management of its suppliers 4, seems the most appropriate. In contrast, the concept of sustainable/responsible supply chain management has a broader scope and integrates a wider range of issues, such as child labour, working conditions, bribery and corruption, which fall beyond the role of environmental regulators. This project focuses on GSCM, but in doing so can play a 4 Although the objective of this study is to focus on management of the supply chain partners, it is important to note that there are various other actions that could be undertaken by companies to improve their supply chains from an environmental perspective. These could be related to aspects such as logistics and distribution of products or disposal processes.

11 significant role in achieving social, environmental and economic benefits and thereby contribute to sustainable development incentives more generally. 3.2 Companies Reasons for Implementing GSCM 3.2.1 Overview The environmental impacts that occur throughout a product life cycle may arise due to otherwise unrelated steps in a supply chain and addressing the challenges may therefore require actions beyond the boundaries of a single company. Companies are becoming aware that their performance and reputation in environmental terms not only depends on their own operations but also to some extent on the operations of its supply chain partners, principally its suppliers of goods and services. Usually, the end consumer has a general perception of companies and their activity and does not distinguish the links that make up its supply chain. This is especially significant in the case of multinational or brand-owning companies which are likely to come under more pressure and scrutiny from external stakeholders, such as end consumers and NGOs. Upstream suppliers poor environmental performance can thus have a negative reputational and economic impact (e.g. interruption of supplies) on buying firms downstream leading to the possibility that firms might be held responsible for their suppliers environmental impacts or misconduct. On the other hand, companies can benefit from doing business with suppliers who embrace and show commitment to high environmental standards of business conduct such as socalled beyond compliance behaviour. The drivers and potential benefits of GSCM are extensively documented in the academic literature as well as in numerous reports on environmental supply chain management. The United Nations Global Compact Framework (2010) 5 identifies compliance with laws and regulations among the primary reasons for sustainable supply chain management. In addition, it notes that companies are increasingly taking actions because of society s and other stakeholders expectations and because there are business benefits to doing so related to managing risks (e.g. supply interruption, reputational), realising efficiencies (e.g. reducing cost of material inputs) and creating sustainable products (e.g. fostering innovation through supplier collaboration). Other companies may be driven by their corporate values and culture to address sustainability issues (i.e. moral obligation) and their adherence to international standards for sustainable business conduct such as the United Nations Global Compact (UNGC), the OECD Guidelines for Multinational Enterprises (MNEs) 6 or the Global Reporting Initiative (GRI) 7 which encourage their signatory companies to engage with their suppliers and to develop more sustainable supply chain practices. 5 http://www.unglobalcompact.org/issues/supply_chain 6 http://www.oecd.org/daf/inv/mne/10thoecdroundtableoncorporateresponsibilityupdatingtheguidelinesformultinationalenterprises.htm 7 https://www.globalreporting.org/information/news-and-press-center/pages/streamlining-sustainability-increased-focuson-supply-chain-management-and-disclosure.aspx

12 Figure 3.2 Building the Case for Supply Chain Sustainability Source: BSR, 2010 The study developed by the Network for Business Sustainability, NBS, (2011) titled Managing Sustainable Global Supply Chains provides a robust overview of the main drivers of supply chain management. Through a systematic literature review of about 200 articles it concludes that the main motivators for engagement are a desire to maintain customers or to attract new customers, the desire to manage supply chain risks, and the goal of complying with regulation and legislation. Other business motivations, such as the desire to reduce costs or improve efficiency, are also mentioned, although these appear less frequently in the review as shown in figure below. Figure 3.3 Motivations for engaging with sustainable supply chain management Source: NBS, 2011 This NBS study notes, however, that evidence of the benefits of such practices is quite limited, with only 38 of the articles analysed (19%) directly addressing the payoffs or implications of implementing such practices, mostly in qualitative terms. Based on this, it cites a range of potential beneficial outcomes directly experienced by the participating firms including enhanced

13 employee attraction and motivation, reduced employee turnover, the elimination of reputational risks, customer attraction, and greater likelihood of compliance with government regulation and legislation. Evidence of the benefits of such practices to wider society is much more limited but it seems to support the idea that GSCM contributes to better environmental outcomes. According to a study by Italian researchers (Testa, F. and Iraldo, F., 2010) it appears that GSCM as a managerial tool is effective at improving environmental performance with regards to the most common environmental aspects of an organisation 8, mainly natural resource use (energy and water), waste generation and wastewater emission. The study applies a statistical survey approach using data from over 4,000 manufacturing facilities in seven developed countries and concludes that Making specific requests to suppliers to assure a given performance and involving them in GSCM initiatives can enable a company to better manage its own environmental performance. 3.2.2 Compliance benefits from GSCM From the literature review in this study, it appears legal and regulatory drivers are particularly important factors influencing the uptake of GSCM practices. At a minimum, suppliers are expected to be in compliance with all relevant laws and regulations. There are clear practical benefits from focusing on suppliers broader environmental performance including their regulatory compliance programmes and associated management systems. In the first instance, it reduces the risk of business interruption due enforcement action. More widely, it helps companies downstream protect themselves from economic impacts such as supply interruption as well as risks to their reputation. It also contributes to ensuring that suppliers understand legal and regulatory requirements and might therefore more confidently adapt to and foresee changes in environmental regulations, thus reducing the potential liability of their customers. Good knowledge of the scope and environmental impacts of their upstream supply chains and their potential exposures helps companies position themselves to respond to regulatory action (BSR, 2011). As noted previously, companies perceive that GSCM contributes to a greater likelihood of compliance with government regulation and legislation (NBS, 2011). 3.2.3 Regulatory and market drivers in the chemical sector Regulatory drivers are of particular relevance for businesses that operate in highly regulated or scrutinised sectors as they are more dependent than other sectors on government policy or regulation. In the chemical industry, increased awareness of the environmental and health impacts resulting from the use of chemicals, has resulted in a range of regulatory requirements such as restrictions on use of certain hazardous substances, control of releases and emissions, as well as waste disposal/recovery requirements, energy efficiency and even information exchange duties along the supply chain. In particular, the REACH and Classification, Labeling and Packaging (CLP) Regulations are having a major impact on the chemicals industry by requiring the registration of substances manufactured or imported at a level of more than one tonne per year and obliging the passing up and down the supply chain of information about substances and mixtures and their safe use. REACH is technically complex and broad and covers about 30,000 substances, of which around 20,000 are supplied in quantities between 1-10 tonnes per year 9. This presents compliance 8 http://ec.europa.eu/environment/integration/research/newsalert/pdf/202na6.pdf 9 http://archive.defra.gov.uk/environment/quality/chemicals/reach/documents/reach-summary.pdf

14 difficulties, particularly for SMEs due to lack of resources and understanding, for example in supporting the adequate transmission of information along the supply chain. In this context companies may use GSCM practices to provide technical advice to their small suppliers and ensure that they comply and can adapt to anticipated changes in regulations (e.g. restriction of substances under REACH procedures). Alongsideregulatory drivers, there are many other business and market factors influencing the move towards improved environmental performance along the chemical supply chain. Although chemical firms do not usually sell directly to consumers, consumer driven pressures to improve environmental performance can percolate along the supply chain and chemical companies can be required by their customers to meet certain standards. In addition, increased energy prices and non-renewable feedstock availability issues are driving forward a search for alternative greener raw materials, as well as new manufacturing processes requiring less material and energy inputs. Sustainability is also seen as an opportunity for innovation and competiveness in a global market where Europe is facing fierce competition from emerging economies (European Commission, 2009). Companies can thus collaborate with suppliers to add new features and performance characteristics to existing chemicals/formulations/products and even to generate alternatives for hazardous chemicals. 3.3 Industry Implementation of GSCM GSCM takes a number of forms, ranging from relatively simple approaches to relatively complex/partnership approaches. Each of these is implemented using a variety of tools and has different effects on the environmental performance of suppliers. According to the framework developed by the United Nations Global Compact (2010), there are four primary approaches to GSCM: setting expectations, monitoring and audits, remediation and capability building, and partnership. A broad level of engagement is applicable when the buyer sets expectations for the supplier s conduct, usually through the establishment of a Code of Conduct which guides suppliers on how the buyer views responsible business conduct and what will be expected in the course of the relationship (OECD, 2010). Usually, codes of conduct and company policies include legal compliance as an obligation and state as a minimum level of performance acceptable compliance with host country law (OECD, 2002). As shown in figure below, compliance with such expectations can be checked through monitoring and auditing activities and any non-compliance issues can be addressed through remediation strategies and capacity building, which can include a number of activities such as working with suppliers to create a corrective action plan or defining a roadmap for gradually increasing standards and expectations. At the other end of the spectrum, a deep level of engagement is achieved through partnership approaches which emphasise the development of supplier management systems and create shared incentives across the chain (OECD, 2010).

15 Figure 3.3 Tools for engaging with suppliers on sustainability Source: AMEC based on UN Global Compact, 2010 While this framework is focused predominantly on the relationship with particular suppliers, a further GSCM practice is identified in the literature which is more related to the traditional concept of green procurement. This is the establishment of product standards which are understood as having a low level of engagement and no explicit expectation for suppliers environmental behaviour. Product standards aim to ensure that goods comply with certain restrictions as well as implementing information requirements such as disclosure through labelling and eco-labelling. Standards are suggested as means of achieving more efficient company operations throughout the supply chain by contributing to broader sustainability objectives for greener products including less waste, reduced energy and water requirements and reduced disposal costs. They can also provide a basis for environmental innovation throughout the supply chain. However, the implementation of standards does not usually involve suppliers direct engagement and has limited influence in encouraging a better integration of sustainability within a supply chain focus for overall business strategy. Each of the approaches which focus on companies in the supply chain can be implemented using a variety of tools which can include screening techniques for suppliers, supplier questionnaires, lifecycle analysis, risk assessments, or proactive use of environmental reports. The GSCM approaches and tools employed, as well as the scope of their application through different tiers of suppliers varies greatly, and they usually depend on how companies perceive supply chain risks/opportunities and on their type of business relationships. To determine the scope of the programme and the approaches to apply to each supplier, companies usually begin by mapping and segmenting their supply base based on level of risk to their business. As such they set expectations and monitoring requirements for a broad base of suppliers but limit the application of auditing, capacity building and partnership strategies to those considered more strategic. These boundaries can change over time as companies become more skilled and experienced in managing supply chain sustainability more effectively.

16 The strategies on supplier environmental performance can be seen as a continuum from low influence (traditional command-and control supplier relations) to high influence (partnerships/ collaborative relations). The collaborative approach requires much more effort by all stakeholders involved but it can contribute to long-term sustainable value shared across the different players in the supply chain. In this sense, several sources point out the need to move beyond self-interested company reactive strategies towards greater collaboration and partnering strategies with suppliers (UN Global Compact et al, 2008). It is noted that the approach to sustainable GSCM is reliant on the context and operational circumstances of the company (Walker and Jones, 2012). The OECD (2002) also highlights that the role and capacity of a company in promoting and monitoring observance of corporate responsibility objectives throughout supply chains will depend on the industry in which it operates, the quantity of suppliers, the structure and complexity of the supply chain, and the market position of the enterprise 10. In this sense, there will be cases where the adoption of GSCM practices will be limited or not possible due to the complexity of the supply chain, the nature of the supply chain relationship (e.g. short term), or a limited ability to influence suppliers behaviour. 3.4 Examples of Corporate Practice for GSCM GSCM is an area that has been of increasing corporate interest over the last decade and more organisations, especially larger corporations are exploring integration of environmental aspects into core operational and financial procedures. For example, one study of 74 firms across eight retail and industry sectors 11 found that over half impose environmental requirements on suppliers, representing more than 78 percent of total sales of the top firms in the sectors (Vandenbergh, M., 2007). In addition, as Fiorino and Bhan (2012) recognise, although supply chain policies often began as single-firm initiatives, they have become the subject of collective action by groups of firms, as illustrated in some of the case studies presented below. New benchmarking, dissemination and guidance tools are becoming available to support companies in their efforts. The United Nations Global Compact framework has provided a platform 12 for the exchange of information, identifying and promoting existing initiatives and business practices and exploring critical issues and developing guidance on how to integrate the Ten Principles into supply chain management systems. It has also created the Global Compact s Advisory Group on Supply Chain Sustainability. At EU level, some Member States such as Denmark are issuing guidance 13 and the European Commission has recently launched a web 10 This process is also influenced by the type of supply management model in place, which can have varying levels of visibility and control over direct and sub-tier supply chain relationships. For MNEs, the OECD (2010) identifies four main approaches ranging from a Transactional model characterised by the lack of contact with suppliers due to products (generally commodities) being sold through auctions, wholesalers, etc. to a Strategic Management model where MNEs source from and strategically manage direct, first-tier suppliers and often second-tier suppliers through practices such as providing training, or assigning MNE staff to provide on-site support. Intermediate situations are the External Management model and the Supplier Selection model. 11 Sectors covered by this study include aluminium production, automobile and electronics manufacturing, industrial machinery and equipment manufacturing, timber and wood production, discount and variety retail, home improvement and hardware retail, and office products retail and distribution. 12 http://www.unglobalcompact.org/issues/supply_chain 13 Danish Environmental protection Agency, 2010, Environmental Supply Chain Management - a guide to Danish Companies http://www.mst.dk/nr/rdonlyres/f7f0bfee-f077-40e8-ab55- FEA540FF2ABB/119991/EnvironmentalSupplyChainManagementWEB_final.pdf

17 based portal 14 on responsible supply chain management providing a menu of useful tools, information and reference materials (e.g. supplier trainings, codes of conduct and audit related documents) to support practitioners in developing their own approach. Practical examples of companies actions and on best practice in general are available through these websites and similar initiatives. The following three case studies focus on companies in the chemicals sector and illustrate both individual and collective incentives. More detail and additional sources of information are provided in Annex G. 3.4.1 Case study A: The individual action taken by Bona, Sweden Bona 15 provides an example of a GSCM approach taken by a private company. Established in 1919, Bona is a chemical company producing systems and products for wooden floors, such as adhesives, finishes and cleaning products, and proprietary of polymer dispersions. Bona have a local presence in more than 70 countries worldwide through subsidiaries and distributors. A telephone interview took place on 27 November 2013 with Arne Wallin, Manager of Environmental and Regulatory Affairs at Bona and President of the Swedish Organisation of Environmental Managers. Bona s approach to approach to GSCM is as follows: A questionnaire is sent to their suppliers on a periodic basis (approximately every 3-4 years). The questionnaire includes questions on environmental aspects such as storage and transport of chemicals and content of hazardous substances. Companies are also requested to indicate whether they have a certified environmental management system (ISO 14001, EMAS 16 ), an environmental policy and a code of conduct, and to provide supporting evidence. The questionnaire has also recently incorporated social and wider sustainability considerations, including aspects such as child labour and corruption control. The new version of the questionnaire has been submitted in 2013 to most of their supplier base (approximately 80% of purchases by value) and they are now in the process of reviewing their responses. Once the responses from the questionnaire have been processed, the company decides which suppliers might need a closer look, including a possible visit and audit. Generally companies that do not have an Environmental Management System in place (as standards such as ISO 14001 would require) are prioritised, but special attention is also placed on trading companies where imported chemicals are stored. Even if the sites of these trading companies are covered by an Environmental Management System and appropriate storage of chemicals is ensured, Bona is interested in exploring how much trading companies care about the performance of their own suppliers and the source of their imports (which are mainly from outside the EU, from countries such as China) in order to ensure that their secondary suppliers are reliable and can provide their products in line with their quality and environmental standards. If further attention is considered appropriate, visits can be planned at the production, storage or corporate facilities of Bona s suppliers. In some cases this may involve 14 http://www.csr-supplychain.gr/en/welcome-p123.html 15 http://www.bona.com/en-gb/ 16 Regulation (EC) No 1221/2009 of the European Parliament and of the Council of 25 November 2009 on the voluntary participation by organisations in a Community eco-management and audit scheme (EMAS III)

18 travelling to other countries, depending on the nationality of their supplier. During the course of the visit they inspect the sites, request relevant documentation, seek knowledge of compliance with applicable legal requirements and assess their performance as compared to good practice and Bona s own standards. If areas of improvement or non-compliance issues are detected, Bona will generally try to provide technical assistance and support to the supplier. In other cases or when supplier is not willing to improve, they may just decide to stop buying from that supplier. However, they note that there are situations where they are the small player and their level of influence is thus limited, especially with regards to large chemical corporations or in cases where they cannot supply a particular raw material from elsewhere. Overall, Mr. Wallin highlights that GSCM is a valuable tool for Bona The major benefit is it limits their risk from a reputational and compliance point of view, but they also recognise that it provides important environmental and safety gains. By adopting these practices and buying from trustworthy suppliers, they are getting better and safer materials, with reduced hazardous content. The risk of purchasing non-compliant materials is thus minimised. Mr. Wallin considers that better understanding amongst regulators of what companies do in this area is a win-win situation, especially in the context of inspection action. He believes that increased discussion and cooperation between private companies and the public supervision authorities on this subject would be beneficial. In this context, it is relevant to refer to the Swedish Environmental Code (1999) 17 which encourages an inspection approach that not only focuses on checking that the company follows the rules and regulations in their permit but also discusses in what way they can improve their performance regarding the general rules of consideration established by the Code. These are a set of rules that comprise several fundamental principles and that apply to all operators of activities that can impact on the environment, including the handling of chemical products. Companies and supervision authorities can together better identify ways for improving environmental performance (i.e. reducing the use of hazardous substances) by looking at GSCM systems or to other environmental measures such as waste management plans or energy efficiency programs. 3.4.2 Case study B: Collective company action case through the Together for Sustainability Initiative (TfS) The TfS initiative 18 was founded in 2011 by the Chief Procurement Officers of six multinational companies: BASF, Bayer, Evonik Industries, Henkel, LANXESS and Solvay to increase transparency and harmonise requirements with regard to sustainability sourcing standards in the supply chains of the chemical sector. 17 http://www.naturvardsverket.se/en/legislation/the-environmental-code/. The Environmental Code came into force on 1 January 1999 and is directly linked to the promotion of sustainable development. The Code is applicable to all activities or measures that are of significance for this purpose to be achieved. It contains a number of general binding rules of consideration that express, the burden of proof principle, demand for knowledge principle; the precautionary principle; the polluter pays principle; the product choice principle and principles regarding resource management, recycling and suitable localisation of activities and measures. The rules have a preventive effect since they make binding demands on anyone running a business or an operation or taking action to learn about the environmental effects of such activities. Supervisory and licensing authorities have the power to base their decisions on these general rules. 18 This case study is solely based on publicly available information at http://www.tfs-initiative.com/ and http://www.tfsinitiative.com/download/tfs_faqs_en.pdf

19 According to the initiative sustainable sourcing means considering environmental, social, and ethical aspects as well as economic conditions when selecting a supplier or evaluating a supplier relationship. TfS aims at developing and implementing a global supplier engagement programme that assesses and improves sustainability sourcing practices, including environmental aspects. The initiative has the following objectives: Join forces to create standards for sustainable supply chains; Share sustainability assessments and audit results; Raise awareness and initiate continuous improvements; Exchange and promote best practices; and Use resources more efficiently and follow the principle of: An audit for one is an audit for all. The initiative aims to recognise and address the common difficulty that purchasing companies face in monitoring their supplier base and tracking their supply chain. A key objective for TfS is the establishment of a common set of criteria for companies to use in their purchasing decisions. It aims to avoid company-specific sustainability questionnaires and so reduce multiple auditing with the associated resources and costs. The TfS approach consists of two elements: the assessment and the audit carried out by independent experts both for TfS members and suppliers. The two processes of the TfS procedure can be applied separately or combined depending on the specific case as shown in diagram below: Figure 3.4 TfS initiative diagram Source: Together for Sustainability Initiative, 2013

20 It is important to note that the TfS programme is neither a certification scheme nor a simple comply-or-fail exercise. Instead, it offers instruments for buyers and suppliers to assess sustainability performance and identify opportunities for improvement. As such, suppliers who do not meet all assessment or audit criteria are expected to set-up a corrective action plan (CAP) to document targets and performance improvements over time. A description of the two elements of the initiative is presented below: 1) Assessments: TfS has selected a rating company in sustainable supply management (EcoVadis), as its partner to carry out the assessments and supplier sustainability scorecards. These are shared on a web-based collaborative platform. All TfS members have undergone the rating procedure themselves and provide a TfS assessment result for customers. Box 1 TfS Assessment Methodology The assessment is comprised of 4 steps: 1) Registration: If one or more TfS members request a TfS assessment, the supplier will register online. 2) Data collection: the supplier has to fill out an online sustainability questionnaire customised to the company s sector, size, and countries of operation and upload all requested supporting documents. 3) Analysis: EcoVadis experts analyse answers, supporting documents and other evidence of the supplier (including including assessments by NGOs, trade unions, and other stakeholders as well as media). Within 4 to 6 weeks, the analysis results are combined on a dedicated scorecard with ratings on 4 themes (Environment, Social, Ethics and Supply Chain), and a detail of the supplier s strengths and opportunities for improvement. 4) Results: The supplier as well as the TfS member companies can access the personalised scorecard online. If other clients of the supplier wish to access the evaluation results, supplier's authorisation will be required before the information is shared. Documents provided for the evaluation will stay confidential and will only be used as a support to conduct the evaluation, unless specifically authorised by the supplier. The supplier can manage and reuse the information with new customers. TfS suppliers are required to pay a fee which covers access to online monitoring services and possibility to share the online profile for their own purposes (e.g. requests from customer's not members of the TfS). http://www.tfs-initiative.com/download/tfs_faqs_en.pdf 2) Audits: Audits by independent audit firms are carried to measure the supplier's sustainability performance against a pre-defined set of audit criteria tailored to the requirements of the chemical industry. Audits comprise on-site examination covering, for example, production facilities, warehouses and office buildings. Box 2 TfS Audit Process 1) Each TfS member determines individually whether an audit is required or not and will contact a supplier if a sustainability audit is expected. Suppliers are asked to discuss and agree on the necessity of an audit with the associated TfS member and can select and contact an audit firm from a list of pre-approved auditors. A representative of the customer may wish to attend the audit. The audit must be conducted by pre-approved audit firms. The preapproval process shall ensure the audit firm has in place adequate quality management, training procedures and skilled auditors. The list of pre-approved audit firms is published on the TfS webpage. The audit costs depend on various factors, e.g. country, supplier factory size, travel expenses.

21 2) There will only be announced audits, which can take about one to three days. The supplier's sustainability performance is verified against a defined set of audit criteria on management, environment, health & safety, labor & human rights, and governance issues. Environment criteria include: environmental compliance, waste, emissions to air and climate change, water and wastewater, energy, nuisance (noise & odour), land use & biodiversity, soil and groundwater, hazardous chemicals. 3) A CAP must be set-up at the end of the audit and the audit report should be submitted to the supplier by the auditor ten days after the audit. The supplier then has ten working days to review the report, after which the audit company will send it to the TfS office. 4) The audit reports are uploaded to a web-based platform accessible by all TfS members. The data sharing will take place in accordance with the signed Data Sharing Agreement, which has to be completed, signed by two representatives of the supplier organisation, and returned to the audit firm prior to the audit. This agreement specifies the sharing of the audit report and CAP with all TfS member companies. It is the responsibility of the supplier to develop the CAP based on the findings documented in the audit report. Suppliers are expected to remediate all audit findings as soon as possible. The closure of major and critical findings is validated with a follow-up audit or desk review. The follow-up audit or desk review take place within twelve months unless defined differently in the CAP. http://www.tfs-initiative.com/download/tfs_faqs_en.pdf The TfS initiative has concluded the pilot phase, where TfS members have initiated about 2,000 assessments and audits 19. In the next phase of implementation (up to 2015) TfS aims to extend its activities to further procurement markets and to continue growing by adding new members. Beyond 2015 a growth phase is planned with the aim of developing TfS to become an Industry Standard. 3.4.3 Case study C: Collective company action case through the Pharmaceutical Supply Chain Initiative (PSCI) The Pharmaceutical Supply Chain Initiative (PSCI) is a programme initiated by a group of major pharmaceutical companies 20 with the objective of achieving better social, economic and environmental outcomes for all those involved in the pharmaceutical supply chain. This vision is detailed in the PSCI Principles covering ethics, labor, health and safety, environment and related management systems. The Principles may be voluntarily supported by any business in the pharmaceutical industry. Box 3 PSCI Environmental Principles PSCI Principles: Environment Suppliers shall operate in an environmentally responsible and efficient manner to minimize adverse impacts on the environment. Suppliers are encouraged to conserve natural resources, to avoid the use of hazardous materials where possible and to engage in activities that reuse and recycle. The environmental elements include: 1. Environmental Authorisations: Suppliers shall comply with all applicable environmental regulations. All required environmental permits, licenses, information registrations and restrictions shall be obtained and their operational and reporting requirements followed. 2. Waste and Emissions: Suppliers shall have systems in place to ensure the safe handling, movement, storage, recycling, reuse, or management of waste, air emissions and wastewater discharges. Any waste, wastewater or emissions with the 19 http://www.tfs-initiative.com/download/tfs_press_release_20131007.pdf 20 PSCI Members: AstraZeneca, Bayer, Biogen Idec, Bristol-Myers Squibb, Covidien, GlaxoSmithKline, Johnson & Johnson, Eli Lilly, Merck US, Novartis, Novo Nordisk, Pfizer, Roche, and Sanofi. PSCI membership may evolve year over year. A current membership list can always be found online at: http://www.pharmaceuticalsupplychain.org/

22 potential to adversely impact human or environmental health shall be appropriately managed, controlled and treated prior to release into the environment. 3. Spills and Releases: Suppliers shall have systems in place to prevent and mitigate accidental spills and releases to the environment. The aim of the initiative is to reduce the burden placed on suppliers by multiple information requests and on-site audits of sustainability performance. In order to reduce this burden, the PSCI has created standardised protocols and tools for assessing suppliers alignment with the PSCI Principles which are now being tested with a selected group of suppliers. Specifically, suppliers are asked to complete a Self Assessment Questionnaire (SAQ) 21, and agree to an on-site audit 19 which will be undertaken by qualified third party audit companies and auditors approved by PSCI 22. The supplier is asked to sign in advance a Data Sharing Agreement to give permission to share their responses and results with PSCI members. The supplier has to agree to share the SAQ with all PSCI members but can decide who has access to the audit report. They may also choose to share data with additional companies. The work of the PSCI is being facilitated by BSR (Business for Social Responsibility) as a management platform. 21 The SAQ and a document detailing the methodology on how PSCI audits will be conducted and managed are available online at http://www.pharmaceuticalsupplychain.org/ 22 PSCI will accept audits by audit firms that are accredited under SA8000 and are listed in IFIA or equivalents like IEMA. A PSCI supplier audit team will generally consist of two auditors - one for social and one for HSE unless one person can clearly demonstrate adequate skills in both areas.

23 4. Findings and Discussion: Potential Implications for Regulators 4.1 Overview The evidence in previous sections of this report indicates that some companies are already voluntarily managing environmental aspects of their relationships with their suppliers and are implicitly supporting a business culture that reduces environmental impact. The question in this section is whether such voluntary GSCM initiatives can also play a role in encouraging compliance with environmental laws and regulations and, in simple terms: what might GSCM mean for regulators? The literature review has highlighted the following main aspects of GSCM, mainly based on information reported by large or brand-owning corporations: Companies are increasingly requesting information about, and influencing their suppliers compliance with, environmental laws. Companies are also providing compliance and technical assistance to their suppliers. Companies may drive beyond compliance environmental behaviour at their suppliers by requiring them to meet additional environmental requirements. These aspects show that GSCM practices adopted by the private sector may have relevance as they are aligned with broader regulatory and enforcement objectives. However, while the literature review has revealed that GSCM has drawn significant attention in the business field, it has been studied to a lesser extent in the public policy/regulatory literature. There is limited information on whether public inspection authorities recognise and take into account the use of environmental supply chain management practices and, if so, how. In order to collect this information and gather the views of regulators and private companies on this subject, the project team undertook a range of activities, which included a survey sent to regulators with responsibilities in the chemical sector in all IMPEL Member States, a two day workshop attended by all members of the project team and several case study analyses where we contacted private companies. Further detail and the outcome of these activities are included in the Annexes and in section 3.4 which summarises the case studies. A summary of findings and the discussion at the workshop is presented in the following section. It includes summaries of the answers to the survey questionnaire. 4.2 Summary of Main Findings and Discussion 4.2.1 Are regulators familiar with the concept of GSCM and the action of industry in this area? Based on the results of the questionnaire and discussion at workshop, there seems to be an overall lack of familiarity amongst regulators regarding the concept of GSCM especially as compared to the knowledge and practices developed by the leading industrial companies. Regulators knowledge on what regulated companies do to manage their suppliers

24 environmental impacts or to address potential non-compliance issues identified amongst their suppliers is also relatively limited. The lack of familiarity regarding GSCM might be due to regulators (and other supervisors from the public sector) tending to perceive the regulated company as an isolated element, instead of considering it as part of a supply chain network, where interdependent companies can influence each other s environmental reputation and performance. In this sense, regulator s core competences regarding businesses are to issue permits and licenses to individual companies for a given production site or facility, and to do compliance checks based on those. Their focus and instruments are therefore less oriented towards supply chains. For example, when selecting regulated companies for proactive inspection this is usually justified on factors inherent to the company (e.g. the degree of hazard or risk, compliance history), whereas supply chain criteria, such as its relative significance or position in a supply chain, and the potential ability the company may have to influence the activities of a range of other duty holders seems to be less considered. 4.2.2 Do public inspection authorities recognise and take into account the use of environmental supply chain management practices? If so, how they do that? Based on the responses received to the questionnaire and the literature and evidence reviewed, there are no obvious examples of integration of GSCM within regulatory action in IMPEL countries. Overall, it seems that there has not been very much attention paid to the use of GSCM systems as a stand-alone element for the purpose of regulatory compliance promotion, verification or enforcement. However, in practice, some IMPEL countries appear to take account of GSCM considerations within more general and wider policies and practices, such as the adoption of Compliance/Environmental Management Systems. As described in the IMPEL Project Compliance assurance through company compliance management systems (2012) 23, in certain parts of the EU public supervisors adjust their judgement and approach to a regulated company according to whether it has a compliance management system in place 24, especially when it is certified in accordance with internationally recognised standards or schemes such as ISO 14001 or EMAS Regulation 25. For example, in Italy, EMAS or ISO 14001 registered companies have a number of advantages, including an increase in the period of environmental permits and a simplified renewal procedure. Similarly, in Bavaria (Germany), companies receive discount on fees for inspections if they are EMAS registered. In England, the Environment Agency s operator risk appraisal tool takes into account of the presence or absence of an Environmental Management System (EMS) when assessing the risk of which a permitted site poses to the environment. Well managed, low hazard activities which present a lower risk are also charged less than higher risk activities. Both ISO 14001 and EMAS include requirements regarding the environmental management of suppliers. For example ISO 14001 requests the communication of all relevant procedures and 23 http://impel.eu/wp-content/uploads/2012/06/final-report_compliance-assurance-through-company-cms_2012-05- 03.pdf 24 These are defined as internal control systems which explicitly aim at and contain specific provisions for assuring compliance of the company with all relevant permit and other legal requirements. 25 Regulation (EC) No 1221/2009 of the European Parliament and of the Council of 25 November 2009 on the voluntary participation by organisations in a Community eco-management and audit scheme (EMAS III)

25 the promotion of awareness among suppliers. However, companies can go beyond what is strictly required under these standards and adopt more ambitious GSCM systems to embed environmental procurement principles and practices across an organisation and its supply chains. Yet the evidence reviewed suggests that GSCM is not being recognised as independent compared to EMS or similar initiatives by regulators. 4.2.3 What are the potential benefits of GSCM? Can it contribute to improve compliance with environmental regulation, including the consideration of SMEs? Overall, the project identified that there is an interest in GSCM amongst regulators and a general agreement that it may provide potential benefits. With the understanding thatgovernments and companies have distinct roles and responsibilities that should not be mixed, GSCM may: a) Act as a means of driving environmental compliance along the supply chain and so provide a way of increasing the regulator s length of arm. Purchasers are seeking suppliers compliance with applicable environmental laws to manage their own liability and avoid risks such as negative publicity. Supplier s codes of conduct usually require legal compliance with host country law as minimum level of acceptable performance (OECD, 2010). In addition, companies may conduct periodic performance assessments/audits as part of regular commercial and technical supplier visits and may address non-compliance through corrective plans or remediation actions. Within this role, companies may extend government s capacity to promote compliance with environmental regulations and may support the enforcement and intervention actions of authorities. In addition, by managing their supplier s compliance, purchasers are likely to be better prepared to comply with regulation and avoid liability, reputational and supply interruption issues (e.g. minimise the risk of purchasing materials containing banned chemical substances). This may enable public supervisors to focus more attention and resources on companies with poor compliance performance. b) Can help to raise awareness and understanding of complex regulation. Companies have a business incentive to improve supplier performance and compliance and therefore engage in activities (e.g. corrective and improvement plans, training programmes, guidance, best practice sharing), which can drive knowledge along the supply chain and make suppliers aware of their obligations and responsibilities. In particular, 55% of the respondents to the questionnaire agree that GSCM can have value by targeting enforcement at smaller companies that do not have a high public profile and are therefore less covered by inspections or compliance promotion activities. Due to the complexity of the chemicals sector, SMEs may lack the resources and knowledge to understand and fully comply with the large body of applicable legislation. Also, REACH regulation is highly technical and complex and covers a large number of SMEs. According to a recent report issued by the European Chemicals Agency (ECHA), almost two thirds (67%) of the companies surveyed were in violation of one or more provisions of REACH or the CLP regulations. The results conclude that there are signs that it is difficult for SMEs to comply with some REACH obligations mainly due to the lack of resources and information

26 and recommends that communication within companies and within the supply chain should be improved 26. Similarly, European companies which are part of complex and global supply chains can provide support to their non-eu suppliers, who may be less familiar with applicable EU regulation and less well served by their local inspection activities or assistance programmes. c) Snowball effect: GSCM promotes compliance and good practice along supply chains, which can expand across different industries and national borders. It thus has a role in implementing harmonisation (e.g. minimum environmental requirements) and can provide a benchmark for minimum behaviour. As part of their commitments to Corporate Social Responsibility policies and standards (i.e. the OECD Guidelines for Multinational Enterprises or the UN Global Compact) and in response to other sustainability drivers (i.e. reputation, customer attraction, innovation) companies may require their suppliers to meet certain environmental requirements that go beyond what it is strictly required, including the adoption of environmental management systems (e.g. EMAS), eco-labelling of products, energy efficiency, or reduced GHG emissions. Overall, the discussion highlighted that GSCM can play a role in promoting compliance with environmental regulations and in achieving better environmental outcomes. However the strength of the evidence of this statement is quite limited. Although drivers of GSCM are extensively documented in the academic literature with regards to business practice (see section 3.1), evidence of the benefits of such practices is much more limited, especially from a regulatory perspective. It is recognised here that the extent and effectiveness of GSCM practices in ensuring self-compliance and in driving better regulation along the supply chain is currently unclear. Also it is important to recognise that GSCM promotes compliance but does not enforce. As highlighted by Fiorino and Bhan (2012), the authority of private firms derives from their market position and power not from the coercive powers of the state. Therefore suppliers have the option to avoid requirements placed on them by purchasers by ending (or not beginning) a relationship; this is rarely the case when obligations are set by a public body. In addition, public sanctions are applied under prescribed legal processes and include fines, negative publicity, and even criminal prosecution. In contrast, if a supplier is identified as being non-compliant under a GSCM regime instituted by a private company, applications of sanctions are largely discretionary even though in some instances losing the customer may be more debilitating than the public sector sanctions. 4.2.4 Where and how it could be appropriate and feasible to consider GSCM within the enforcement and inspection process? The discussion between regulators at the workshop indicated that GSCM fits within the new regulatory paradigm, moving away from pure command and control solutions towards a more integrated approach. There is an overall recognition that the inspection process could allow consideration of GSCM at some stages, provided that its benefits are recognised and that there is an appropriate level of confidence in such systems, and their assessment and verification processes. 26 http://echa.europa.eu/documents/10162/13577/forum_report_ref2_en.pdf

27 In order to assess the stages of the inspection process at which it could be possible to integrate GSCM, reference is made to the IMPEL Project (2007) Doing the right things II which provides step-by-step guidance for the planning of environmental inspections. Based on this process, there is recognition that existing procedures for prioritising and executing inspections may already allow consideration of GSCM. In addition, communication and promotion activities are a fundamental element of the enforcement process where GSCM could have a role. The ways GSCM could be included within the existing inspection process are presented below: a) Setting priorities for inspection: Priorities for carrying out inspections are currently set using the outcome of a risk assessment, which could be a list or an overview of all the identified/selected installations and activities and their respective risks. The risk criteria used for prioritisation and their assigned weights are defined by each inspection authority and may require gathering information on aspects such as the compliance rating or history of the facility, the implementation of a (certified) EMS or the public perception of the facility. In a similar way to these aspects, project team members agree that there could be scope to include GSCM questions or elements in the risk assessment process of sites for inspection. As an example, reference was made to the Dutch province of Noord-Brabant, which has defined four levels of compliance management with differentiation of preventive inspection (both in quality and in quality) and less stringent penalties. As indicated in the IMPEL project Compliance assurance through company compliance management systems (2012), whereas in level one a company does not have a management system in operation, in level four the company has in place a proven management system which has shown good results for several years and which is specifically aimed at assuring compliance. The study notes that the competent authority within the province holds the opinion that companies with a good record in compliance management deserve more trust. In order to assess and verify this, an audit is performed by specially trained and educated inspectors. The audit, which includes physical and documentary checks, uses a checklist 27 with forty-nine questions and verification items, but none of these refer specifically to supplier management. In this context, the potential for inclusion of additional items focusing on GSCM could be further explored. For example, one of the items asks if there is an accepted written code of conduct which clarifies how the private body expresses the vision on legal compliance in the behaviour of employees and management. Companies might also be requested to provide information on whether there is a code of conduct for suppliers. The issue at discussion here is whether companies with a good record in compliance management not only of their own operations but also of those of their suppliers deserve more trust. Could supervision be less frequent when this is the case? Could this enable inspectors to focus on companies with poor compliance? As indicated previously, more evidence and research is needed in this area but it could be reasonable to consider that if a regulated company is managing regulatory compliance across its supply chain by using an effective dedicated management system, the risk of non-compliance might be lower (e.g. reduced risk of receiving non-compliant materials from its suppliers). In addition, regulators may consider the impact on the compliance behaviour of the supplying companies which are subject to GSCM requirements by their customers. This 27 http://www.brabant.nl/dossiers/dossiers-op-thema/veiligheid-en-handhaving/handhaving/- /media/5c04e3e037ab48988af10d0c5800686c.pdf

28 could be particularly relevant in the case of SMEs supplying to corporations with ambitious systems to control supplier s compliance. GSCM may provide more confidence that these SMEs are closer to compliance. Finally, GSCM could be a tool for identifying cases for reactive inspection, based on noncompliance issues detected by customers among their suppliers through their GSCM processes. However, further research is needed on the legal implications of using information exchanged between suppliers, particularly if disclosed under a Data Sharing Agreement, b) Executing inspections: It has been recognised that GSCM may be a subject that benefits from inspectors trained in smart questioning during the execution phase. As such, inspectors could take into account whether a company has been already subject to monitoring and auditing practices by its customers, which may include the requirement to fulfill performance assessments or questionnaires and auditing. Outputs of this process could provide an important source of information on the environmental performance of the company and may avoid duplicating effort. For example, this could involve taking into account the fact that the company has already established a corrective action plan to address non-compliance in response to a customer requirement. Figure 4.1 GSCM and execution of inspections (Source: AMEC) c) Compliance promotion and communication Monitoring and inspection activities should be complemented with appropriate compliance promotion and communication, especially in the context of REACH and CLP, where the number of regulated targets exceeds the resources available for enforcement (ECHA, 2011). Compliance promotion should try to stimulate target groups to achieve better compliance and cooperation between them, and can include actions for the provision of education, legal and technical assistance, building public support and building expertise and administrative/managerial capacity within the regulated community (ECHA, 2011). Industry and representative trade bodies can support the regulator s role in providing information and assistance on environmental obligations (e.g. REACH), especially to SMEs (i.e. training courses). Therefore, regulators could liaise with industry and take into account actions already being developed by companies as part of their GSCM practices.