By David Bloomgarden and Michael Hofmann
Adidas, one of the world’s top two sportswear manufacturers, recently ended its business relationship with 13 of its Asian suppliers as a result of their severe or repeated noncompliance with labor, health, and safety workplace standards at their factories. This is one example of large multinational corporations working harder to demonstrate to their ever-more-demanding stakeholders that they operate sustainably. As a result, companies’ sustainability strategies are increasingly directly relevant to their operations—and are resulting in positive financial returns. An analysis of S&P 500 companies confirmed that businesses that have built sustainability into their core strategies achieve financial profitability that is significantly higher than that of their laggard peers—by between 18% and 67%.
So what aspects should multinational corporations focus on to address increasing stakeholder pressures and improve their operational sustainability? One important area is the management of natural resources and environmental impacts, both in the corporations’ own operations and also in their “value chains”—the whole series of corporate activities that create and build value at every step. Small and medium-sized enterprises, which make up a substantial part of these value chains, are a major source of both natural resource consumption (inputs into production processes, such as water usage), as well as environmental impacts (outputs from production processes, such as greenhouse gas emissions).
Management of natural resources and environmental impacts in value chains
A study scheduled for publication this fall—by the Multilateral Investment Fund (MIF) and natural capital strategic consultants Trucost—identified the economic sectors in Latin America and the Caribbean whose inputs (use of natural resources) and outputs (impacts on the environment) from production processes are the most significant. The study’s findings include the following:
– food products is by far the most important sector, both in terms of revenue ($101 billion), as well as the value chain’s share of total environmental impact (a remarkable 97%)
– the revenue of the other relevant regional sectors that were studied spanned from $8 billion for personal products to $59 billion for retail
– the value chain’s share of environmental impact—as compared with the corporation’s share—ranged from just over 50% (for the commodity chemicals sector) to more than 90%. For instance, in the case of the soft drinks sector, the value chains are responsible for 94% of the environmental impact, and the corporations are responsible for only 6%.
Water and energy hold the most potential for improvement
For the sectors studied, water consumption and greenhouse gas emissions were identified as the most significant environmental inputs and outputs, respectively. What can be done to improve the environmental management of value chains? On the one hand, smaller businesses need to adopt technologies that reduce both water usage and emissions from fossil fuels. These businesses also need to train their staff in best practices in water and energy management. There are several types of tools that can be helpful to multinational companies and their value chains with this process:
– the ”String” tool helps companies collect information about their full value chain for each product
– the Global Reporting Initiative (GRI) is the world’s most widely used tool for reporting of organizational sustainability—both for corporations and for small businesses
– once the value chain is understood and its reporting standards are agreed upon, corporations can work with their small business suppliers to take corrective steps. For example, the food products sector can use sustainable certification labels such as RSPO (Roundtable on Sustainable Palm Oil) or RSB (Roundtable on Sustainable Biomaterials).
A separate issue is how smaller businesses can be motivated to actually implement these changes. The study identified a number of possible incentives, including:
-corporations can use environmental preferred purchasing programs that seek to procure goods and services that minimize their environmental impact. This can apply to all stages of a value chain, from acquisition of raw materials, to manufacturing, distribution, or disposal.
– corporations can establish a supplier code of conduct that requires their suppliers to comply with the highest standards of social and environmental responsibility and ethical conduct, covering issues ranging from safe and fair labor practices, to non-corrupt business practices.
– governments can implement policies that reward businesses for being green.
Very encouragingly, several companies in Latin America and the Caribbean are actively implementing and promoting some of these tools and mechanisms. For instance, Brazilian personal products company Natura integrates its suppliers into all of its sustainability activities, from mapping its water footprint, to purchasing raw materials from RSPO-certified supplier plantations. Furthermore, retail giant Wal-Mart Stores Inc.—acting through its Walmex operational arm in Mexico and Central America—has established codes of conducts for its suppliers, offered training programs for smaller businesses, and disclosed the carbon emissions from both its own and its suppliers’ operations.
A version of this post originally appeared on the Multilateral Investment Fund Trends blog.
About the Authors
David Bloomgarden is the Acting Chief of the Access to Basic Services and Green Growth Unit and the Topic Lead of the Public-Private Partnerships program. Before, David was Deputy Director of the Office of Multilateral Development Banks in the U.S. Treasury Department’s International Office.
Michael Hofmann is a green-growth expert at the Multilateral Investment Fund who works at the intersection of the public and private sectors on the issues of innovative climate change and corporate sustainability business models, value chains, regulatory mechanisms, and financial instruments.