A recent Economist Intelligence report entitled Doing Good: Business and the Sustainability Challenge identified the supply chain as being an area of particular weakness for companies seeking to improve their sustainability performance.
The problem is one that has plagued companies for decades . it is very difficult to obtain clear visibility into practices carried out by external companies, and responsibility for environmental performance in these outsourcing relationships is often blurred. For example, a company might consider that, because it has outsourced logistics or manufacturing, the partner company should be responsible for ensuring that environmental problems do not arise, and for dealing with the fall-out should an accident occur. In theory, that may be true but, from a reputational perspective, the media, pressure groups and customers will be unlikely to draw a distinction between activities conducted by a supplier and the parent company.
Businesses increasingly realise this and are making greater efforts to scrutinise the environmental performance of their suppliers and partners. But many companies are still at the early stages of their journey to improve visibility into the supply chain and there continue to be weaknesses that have yet to be addressed.
One of the difficulties is ownership of supply chain risks that are related to the environment. Just as responsibility for environmental risk is often decentralised, so too supply chain risk suffers from a similar problem. The complex, highly distributed nature of supply chains and partner networks fosters a decentralised approach . even if this is inappropriate.
As with environmental risk, then, companies should pay careful attention to lines of responsibility and accountability for supply chain issues. Asked how successfully they manage aspects of environmental risk related to their supply chain, respondents tend to perform most successfully at those aspects that are either regulated or for which they will be seen to have clear responsibility if things go wrong. For example, just over half think that they are successful at managing issues related to water pollution, the transportation of hazardous waste or chemicals, or the potential use of toxic and hazardous substances in manufacturing.
In most countries, all three activities are closely regulated and hence it is compulsory for companies to pay attention to these areas. Moreover, an accident related to a spill of hazardous substances, water pollution or the use of toxic chemicals in manufacturing is specific and can be directly traced back to the company that is responsible. An oil tanker that runs aground, the use of lead paint in products, or the pollution of a town.s water supply by a factory are all directly attributable to the offender. As a result, these are areas that companies need to monitor extremely carefully, as the reputational implications of such environmental risks are substantial.
The areas where companies say that they perform less well are those that might be considered general, and for which no direct responsibility can be assumed by an individual company. The biggest weakness, according to respondents, is the management of disruption to the supply chain from extreme weather events. Not only are these events external and unpredictable, they affect all companies in the vicinity and, usually, no company can be singled out for handling the crisis poorly.
Equally, just one-third of respondents say that they manage emissions from transportation successfully. Again, this is a general issue—while collectively, emissions might cause major problems in terms of pollution and climate change, no single company can be identified as a major culprit. There is therefore less incentive to make improvements to performance in terms of emissions—doing so tends to be done either to improve the efficiency of operations or to demonstrate corporate social responsibility to customers.
In the absence of strong incentives to improve performance, areas that depend on collective responsibility are best addressed by regulation. Without the obligation of compliance, the potential for .free riders. to take advantage of the actions of others is too great.
This is not to say, however, that companies are not thinking about these general problems. Asked about the initiatives they were taking to improve the management of environmental risk in the supply chain, respondents cite the use of more fuel-efficient vehicles as their number one priority (although it is notable that, in all cases, only a small minority of respondents was undertaking any of these initiatives). This finding suggests that some companies have recognised that fuel efficiency in the supply chain is an area that needs improvement—and that it is one where modifications can have a positive impact on the bottom line.
