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Green for go

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  • 1. Green for go Supply chain sustainability
  • 2. There is no doubt that the growing urgency around green issues will mean that they are set to rise ever higher on the business agenda. The impact of this will be felt across the board, with increasing pressure on the supply chain and procurement arenas to respond and introduce new measures accordingly. 2 Green for go Supply chain sustainability
  • 3. Sustainability — an inescapable truth From fair trade to climate change, sustainability and How does your organization view the impact of sustainability, corporate social responsibility have risen inexorably green and carbon related issues on its supply chain and sourcing in the following areas? in the public and corporate minds over the last decade. While governments, businesses and consumers are 71% 21% 8% vying to outdo each other’s green claims, the scientific Reputation/brand community is issuing increasingly stark warnings about 50% 31% 19% Cost savings the urgency and depth of cuts required to avoid the 29% 29% 43% most dangerous impacts of climate change. Increase in cost base 63% 29% 9% Growth With growing legislation, dwindling resources and increasingly 43% 25% 31% vocal consumers, sustainability will only continue to grow Regulatory compliance in importance as an opportunity for forward thinking firms Opportunity No impact Risk and a threat to their competitors that fail to act. In conjunction with the Economist Intelligence Unit, our survey of executives from $1bn-plus corporations indicates a high level of awareness of sustainability, with an appreciation of the Similarly, regulatory compliance was reported as both an opportunities it offers within the supply chain, coupled with opportunity and a threat, indicating there will be individual concerns over the cost and complexity of addressing it. winners and losers, dependent on firms’ preparedness to stay ahead of new legislation. Reputation, cost reduction and revenue growth were the top three widespread opportunities cited by more than half of respondents. An increased cost base was also highlighted as the greatest risk, suggesting that anticipated operational and energy savings would be offset by increased capital costs and price increases from suppliers. While companies acknowledge the importance of green issues, many are confused about how to act. Only 12% of firms rated it among their top three supply chain priorities. Green for go Supply chain sustainability 3
  • 4. The impact of sustainability Mixed messages Managing uncertainty Despite this widespread recognition of sustainability as a significant First and foremost, climate change is a political problem. While the opportunity and threat, only 12% of firms rated it among their scientific consensus is now beyond doubt and technical solutions three supply chain priorities for the next two years. are well understood, significant uncertainty remains over the scope, severity and timing of new legislation that will drive business This may be indicative of the mixed messages businesses are and consumer behavior. receiving from governments, regulators and consumers — the three key stakeholders indicated by respondents. While concrete To avoid the worst impacts of climate change, this regulatory legislation lags behind government rhetoric on emissions reduction uncertainty must be limited to the short term. As the UN has targets, a significant gulf exists between consumers’ green claims emphasized, the global economy has less than a decade and their actual purchasing behavior. to transition to a low carbon path to enable global emissions to fall 60% by 2050. In the UK, the Climate Change Bill will set a legally binding target Who or what do you believe will be the main drivers behind for emissions cuts by 2050. The current target of a 60% cut is implementing sustainable, green and carbon related strategies likely to be raised to 80%, setting the benchmark for industrialized in your supply chain? economies and laying the foundation for legislative reform. Consumers/customers 57% Across the EU, businesses are already subject to an expanding range of environmental legislation, including carbon cap and trade 50% Regulators schemes, energy efficiency standards, recycling targets and limits Governments 36% on hazardous chemicals. Competitors 25% In the US, climate change legislation is more firmly on the political agenda and Australia has ratified the Kyoto protocol. This new 24% Investor community consensus amongst industrialized economies will leave a handful Shareholders 20% of contrarian states in increasing isolation and set the foundation to credibly engage the new economies of India and China. 19% Media It is not a question of ‘if’ but ‘when’ new legislation will bite 15% Non-government organizations — and the when is likely to be within the next five years. 13% Suppliers Select up to three. 4 Green for go Supply chain sustainability
  • 5. The business case for sustainability Regardless of the pace of legislative reform, Although currently difficult to achieve, it is imperative that there is already a strong business case for international corporations take steps to measure their supply chain emissions to give themselves an accurate predictor of their future sustainability. Energy and materials intensive costs and liabilities. supply chains typically account for 75% of a firm’s emissions — where there is carbon there is cost. In some cases, footprinting can yield surprising results. For example, importing produce by air freight from Africa may Coupled with varying environmental and labor appear to be alarmingly carbon intensive, yet when compared standards across global suppliers, particularly with importing the same produce from closer, heated greenhouses, in the developing world, supply chains can make it is actually a greener practice. Being aware of the energy or break corporate reputations. sources of your suppliers is another important step. The true environmental cost of manufacturing goods in China should recognize the dual impacts of high-carbon power generation on Cost savings: operational and energy efficiency top of emissions from transportation. Efficiency and sustainability are two sides of the same coin. So far, only 35% of respondents have embarked on carbon foot Soaring energy and raw materials prices and the spectre of printing of any description, although a further 50% have imminent recession only serve to strengthen the business case. plans to do so. There is a strong possibility that carbon will become a parallel currency to money in the future. Already the norm for energy intensive companies under the EU Emissions Trading Scheme, Which of the following initiatives have you implemented or are more businesses will need to operate within a carbon cap, or else planning to implement within your organization? pay for the excess they produce. As schemes such as the UK’s Carbon Reduction Commitment capture new sectors, carbon Labor standard 63% 27% 10% intensive suppliers will become an expensive burden. improvements 58% 33% 9% Waste/packaging Significant opportunities exist throughout the supply chain: minimization 56% 31% 13% • Planning: Demand management and improved forecasting Phasing out of hazardous materials should reduce over-purchasing, over-production and waste 56% 28% 16% • Manufacturing: Lean process improvement should lessen Community projects 55% 32% 13% over-processing, energy intensive storage and waste Estate/plant energy efficiency improvements • Distribution: Adopted by 54% of respondents — network 54% 38% 8% re-design, smart routing, backhauling, fill optimization Logistics optimization 52% 39% 9% and mode switching — are all likely to lower freight miles Supplier qualification • IT: Video-conferencing and remote servicing can reduce Sustainability 51% 37% 12% business travel program Chain of custody/ 48% 36% 16% • Estates: Investments in building air tightness, insulation product traceability and energy efficient heating, cooling, lighting, plant and 40% 47% 13% equipment has been made by 55% of firms. Renewable energy 35% 50% 15% Carbon footprinting 30% 52% 18% Carbon offsetting Have implemented Planning to implement Not planning to implement Green for go Supply chain sustainability 5
  • 6. Revenue opportunities: energy and carbon trading Revenue opportunities: new product development To combat rising energy prices and reduce in-house emissions, and green marketing 40% of firms have invested in on-site renewable energy Burgeoning energy efficiency legislation promises to phase generation — particularly those with significant land bank or out energy-profligate products such as incandescent lighting, waste resources. Onshore wind on telecoms sites and biomass gas-guzzling vehicles and inefficient housing. Combined Heat and Power (CHP) at food factories are two such At the same time, consumer campaigns and a plethora of product examples from the UK. This offers greater control over energy labels aim to increase demand for more sustainable products and costs, enhances corporate reputations and promises profits from services — a trend mirrored by sustainable procurement initiatives the sale of surplus renewable electricity. across the public sector. Similarly, an increasing number of firms are creating revenues Whether through incremental efficiency improvements, disruptive from carbon trading. Under the EU Emissions Trading Scheme, new technologies or service innovation, an increasing number participating firms must operate within an annual emissions cap. of businesses are competing to launch sustainable products and Those which have made emissions reductions through energy services to increase their market share. All these contrasting efficiency and renewables projects can sell surplus allowances to approaches can be seen in the automotive industry: others unable to meet their targets. As well as a strong financial • Incremental engine, drive train, weight and aerodynamics incentive, this ensures carbon savings are delivered in the most improvements to efficient diesel cars cost effective manner. • Innovative new hybrid, electrical and hydrogen technologies Outside Europe, the Clean Development Mechanism provides • Shared car pool services to supplement public transport finance for greenhouse gas reduction projects in the developing for unavoidable car journeys world in return for Certified Emissions Reduction permits. Currently purchased by governments to help meet their • Offsetting programs for vehicle purchases. commitments under the Kyoto protocol, these can also be included as a source of allowances under the EU scheme. Multinational While many firms limit innovation to isolated flagship products, businesses can use this mechanism to finance energy efficiency benefiting their reputations by association, the real challenge and renewables projects for their developing world sites is to mainstream them across existing product ranges. and suppliers. As the flip side of carbon trading, offsetting should be treated with caution, used as a last resort when all other emissions reductions opportunities have been exhausted. Without these measures, 63% of respondents see offsetting can be seen as an excuse for inaction. Unlike operational and energy efficiency, offsetting is a cost rather than a saving sustainability as an opportunity to your business and at its most extreme, it is environmentally for revenue growth. inefficient. For example, funding a community energy project in a developing country could take decades to offset the emissions from a year’s business travel. 6 Green for go Supply chain sustainability
  • 7. Managing risk Because legislation varies so greatly by market, companies should As well as future proofing products and supply chains against be wary of accusations of double standards within their global regulatory risks, many supply chains have already been affected operations. For example, if a company tells its European customers by physical and economic impacts of the changing climate and that it uses only sustainable timber products, it should avoid growing demand from Asia. These include global shortages of unsustainable timber in overseas markets. water, grain, timber and metals. Improving all forms of resource A side-affect of globalization has been for some businesses to shift efficiency lessens exposure to these risks. operations to locations with weaker environmental protection. Annual insurance losses have climbed due to extreme weather These lower standards have resulted in costly product recalls events such as floods and hurricanes, which have also caused of contaminated goods, damage to workers’ health and pollution major production losses in the oil and farming industries. of public drinking water with electrical waste. Investments in new buildings and infrastructure also have to Companies need to beware of such practices, partly because be mindful of operating in a warming climate. of reputational risk, but also because local standards are likely to rise sharply in the coming years as the dangers of climate Safeguarding reputation change become more evident, fuel costs rise, pollution is taken Just as corporations are now sourcing their materials from new more seriously and governments act more robustly on the and distant locations, consumers in the Internet age can not only issues. If a business does not apply the highest standards, compare prices and get instant product comparisons and reviews, it will store up problems, requiring severe and painful short they can also find information on a company’s reputation and its term cuts in future. commitment to corporate social responsibility. Managing reputational risk through the supply chain is becoming ever more important, whether guarding against accusations of exploiting child labor, pollution incidents or selling unhealthy products. 71% view reputation As supply chains have grown more lengthy and complex, it has and brand as the area become harder for businesses to maintain the same oversight and control that they have traditionally enjoyed. If you outsource where sustainability, manufacture to a low-income economy and visit the facilities, green and carbon issues can you be sure that the spotless and well-maintained building that you see is typical, or is there a child labor sweatshop across will provide opportunity. town? As the top initiative reported in our survey, 63% of firms had introduced labor standards to their supply chains. Green for go Supply chain sustainability 7
  • 8. Living up to promises From viewing sustainability as a buzzword to be used 44% of respondents in marketing materials, companies are now obliged to live up to their word. said they were confident they can deal with In retail in particular, a genuine desire to act on climate change has sustainability issues. been fueled by consumer pressure and PR spin — resulting in some very challenging and public commitments. The complexity and enormity of carbon labeling tens of thousands of products means some businesses risk over-promising and under-delivering. Before going public with their good intentions, firms should create a challenging but deliverable carbon reduction portfolio, underpinned by sound business cases. Our survey found that 44% of respondents said they were confident they can deal with sustainability issues. Yet this is matched by an alarming amount of inactivity on the part of many large global companies, who have yet to realize the full potential of the savings and benefits that can be achieved by integrating sustainability issues into their supply chain management. 8 Green for go Supply chain sustainability
  • 9. Survey details For this survey, The Economist Intelligence Unit What is your primary industry? surveyed 257 C-suite and board level executives 14% Financial services on its panel. 12% Consumer goods 12% Manufacturing The cohort included a significant number of CFOs. Respondents 11% were drawn equally from North America (30%), Europe (34%) IT and technology and Asia (33%) with the remainder from the rest of the world. Energy and natural resources 8% All executives polled worked for businesses with a turnover in Healthcare, pharmaceuticals 7% excess of US$1 billion and businesses were cross-industry. The and biotechnology interviews were carried out during September and October 2007. Telecommunications 6% 5% Chemicals What is your title? 5% Professional services 4% Logistics and distribution 12% Board member 3% Construction and real estate 11% CEO/President/Managing director 3% Automotive 31% CFO/Treasurer/Controller 3% Retailing 9% CIO/Technology director 2% Transportation, travel and tourism 38% 2% Other C-Level executive Agriculture and agribusiness 2% Entertainment, media and publishing 1% Government/Public sector Green for go Supply chain sustainability 9
  • 10. About Ernst & Young’s Services At Ernst & Young our services focus on our For enquiries about our Performance Improvement services individual client’s specific business needs and issues, in the following countries and regions, please do not hesitate to contact our global team: because we recognize that every need and issue is unique to that business. Norman Lonergan Global Advisory Services +44 20 7951 6479 Adrian Edwards Global Supply Chain +44 20 7951 5807 & Operations We draw on our considerable knowledge and strength in assurance, Robert Patton Americas +1 404 817 5579 tax, transactions, risk and performance improvement and we work with you to address — for example — audit, managing business Markus Heinen Central Europe +49 6196 996 26526 risks, your strategic direction, performance management, Donato Iacovone Continental Western Europe +39 6 67535711 process efficiency, people and organizational design, as well as IT. Mark Doll Far East +86 21 2228 2680 Since we know that you want your needs addressed, change to happen, to see improvement and to have that improvement Michio Shibuya Japan +81 3 3503 1122 sustained, we can call upon the experience and wide business Steve Varley Northern Europe, +44 20 7951 6174 and sector understanding of our 130,000 people to work with Middle East, India and Africa you to achieve that. Doug Simpson Oceania +61 2 9248 4923 It is not a question of ‘if’ but ‘when’ new legislation will bite — and the when is likely to be within the next five years. 10 Green for go Supply chain sustainability
  • 11. Ernst & Young Assurance | Tax | Transactions | Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 130,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve potential. For more information, please visit www.ey.com Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. About Ernst & Young’s Business Advisory Services Businesses must continuously improve their performance and sustain that improvement in a rapidly changing business environment. Our business advisory professionals bring experience of working with major organizations to help you deliver measurable and sustainable improvement in the performance of your business. We assemble the right multidisciplinary teams, use consistent and proven global methodologies and tools and draw on the full breadth of Ernst & Young’s global reach, capabilities and experience. And we work to give you the benefit of our broad sector experience, our deep subject matter knowledge and the latest insights from our work worldwide. It’s how Ernst & Young makes a difference. www.ey.com © 2008 EYGM Limited. All Rights Reserved. EYG no. AU0116 In line with Ernst & Young’s commitment to minimise its impact on the environment, this document has been printed on paper with a high recycled content. This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.