W Tanenbaum Making The Supply Chain Sustainable 0210
 

W Tanenbaum Making The Supply Chain Sustainable 0210

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W Tanenbaum Making The Supply Chain Sustainable 0210 W Tanenbaum Making The Supply Chain Sustainable 0210 Presentation Transcript

  • Making the Supply Chain Sustainable William A. Tanenbaum , Kaye Scholer LLP, New York GreenTech, Environment Efficiency, Carbon Trading & Sustainability Chair, Technology, Intellectual Property & Outsourcing Group
  • Making the Supply Chain Sustainable - Past
    • What did it used to be?
      • Corporate “environmental managers” were generally limited to regulatory compliance function
      • Focus was on “keep company out of trouble,” but not involved in broader business affairs
        • Not focus technology leadership (innovation)
        • Not focus on customer needs (revenue, value)
        • Not focus on recycling or product life cycle analysis (LCA) as serving strategic goals of company
      • Maybe some CSR, e.g., managing reputational risks
  • Making the Supply Chain Sustainable -- Intermediate
    • What were the intermediate steps?
      • From negative --avoiding reputational risks from environmental impacts
      • To positive – enhancing brand image and value
      • To additive – expanding due diligence to evaluate whether the perceived premium cost for purchasing a manufacturing plant in the EU was offset by the value of the sellable carbon credits under the ETS
  • Making the Supply Chain Sustainable – Reevaluation
    • Assessing the impact of product design, manufacturing processes, shipping, use of raw materials and the rest of supply chain on the (a) costs and (b) on the environment (and the regulatory and other costs of that)
      • Assessing cost savings missed by not adopting energy efficiency and use of sustainable materials
    • Corporate benefits
  • Corporate Survey Results for Sustainability
    • Benefits of implementing sustainable business practices:
      • Costs savings
      • Competitive advantages
      • Product, service or market innovation
      • Process or business model improvement
      • New source of revenue or cash flow
      • More effective risk management
      • Employee satisfaction, retention
      • Enhanced stakeholder relations
      • Enhanced company and brand image
        • See “Sustainability and Competitive Advantage,” MITSloan Management Review, Fall 2009, Vol. 51, No. 1
  • Financial Impact of Corporate Sustainable Practices
    • Stronger brand results in greater pricing power
    • Cost savings result from greater operational efficiencies, more efficient use of resources, supply chain optimization and lower costs and taxes
    • Market share increases because of increased customer loyalty (in relevant markets)
    • Cost of capital decreases because of lower costs and increased revenue from above factors
      • See MITSloan study, citing Nike study
  • Where Does Supply Chain Sustainability Fit?
    • A company and its supply chain are like an iceberg . . .
    • . . . and the supply chain is the underwater part, because:
      • much of the negative sustainable impact and the greatest opportunity for improvement lies in making the upstream supply chain more sustainable
        • Put another way, a significant portion of emissions come from supply chain
      • and some opportunities are in making downstream business processes more sustainable (shipping, inventory management)
  • From the Supply Chain Customer’s Perspective
    • Need to improve supply chain sustainability in order to reduce the customer’s traditional business costs, carbon costs and future carbon costs, maintain or enhance position in the market
    • Need to require supply chain companies to measure and report environmental impacts
    • Need to use reliable measure metrics
    • Need to verify measurement and reports
  • CDP Supply Chain Report 2010
    • CDP commissioned A.T. Kearney to produce Supply Chain Report 2010 (ww.cdproject.com)
    • Surveyed reports of 710 suppliers
      • 48% were reporting for the first time
      • 60% had a Board member responsible for sustainability
      • 56% had emissions reduction plans
      • 38% committed to objective targets
  • CDP Supply Chain Report 2010 (2)
    • Surveyed members of CDP who are customers in supply chain
    • 6% of those identified as leading companies in the CDP have already “deselected” suppliers for failure to be sustainable
    • 56% expect to deselect failing suppliers
    • Customers are beginning to rewrite contracts to impose sustainability requirements
    • 20% received sustainable reports from suppliers
      • Shows currently difficult to measure sustainability
  • CDP Members’ Plans
    • 89% have strategy for addressing suppliers’ sustainability and emissions practices
    • Plan to increase this issue in supplier management in next year
    • During next 5 years, metrics applicable to sustainability as part of procurement is expected to triple
    • Summary: these companies view sustainability an issue that extends beyond their own facilities to those of supply chain companies
  • From the Supplier’s Perspective
    • Risk of loosing business
    • Risk of harming customer’s reputation
    • Need to comply with requirements
    • Need to measure, report and verify
    • Need to opt out of publication on emerging public databases
    • Problem of complying with conflicting sustainability policies
    • Responsible for supplier’s suppliers?
    • Need to push business model changes into supply chain
      • What is the future of just-in-time?
  • Is the Walmart Sustainability Index a Prototype or De Facto Standard for Supply Chain Contractual Sustainability Requirements?
    • “ With this initiative, we are helping create a more transparent supply chain, driving product innovation and ultimately providing our customers with information they need to assess products’ sustainability.” ( http://walmartstores.com/Sustainability/9292.aspx )
    • Reflects view that being green a result of optimizing the supply chain, not necessarily an end in itself
  • Walmart Step 1
    • Supplier Assessment
      • Supplier’s complete self-assessment survey
        • Energy and climate
        • Material efficiency
        • Natural resources
        • People and community
      • Walmart started by requiring its top tier suppliers to complete survey in October 2009
  • Walmart Step 2
    • Develop an lifecylce analysis database
    • Working with Sustainability Consortium (administered by Arizona State University, University of Arkansas and includes other companies)
      • Goal is to develop standards
      • What is relationship between Consortium and Walmart?
    • Develop global database of product lifecycles “from raw materials to disposal”
  • Walmart Step 3
    • Retail tool
      • Type of product labeling
      • “ provide customers with product information in a simple, convenient and easy to understand manner so they can make choices and consume in more sustainable way”
  • Ratings and Use of Index
    • Suppliers are rated as “Below Target,” “On Target” or “Above Target” in certain categories
    • Tied to other corporate goals:
      • “ Efficient use of raw materials”
        • Reduce produce returns by reducing manufacturing defects
      • “ Community” relations
        • Reduce potential harm to Walmart reputation from suppliers’ employment practices
    • Compliance with index relies on third-party standards and certifications, CDP for example
  • WalMart’s “15 Questions for Suppliers”
    • These questions provide summary and overview of the more complete supplier sustainability assessment requirements
  • What are the IP and Confidentiality Issues in Supply Chain Compliance?
    • What steps should supplier take to prevent unauthorized access or use of sustainability report (including constituent data)
    • Does supplier or customer want to protect IP or confidentiality of metrics, tools or software used to measure, report or verify sustainability?
      • What IP protection is available?
      • Multijurisdictional differences in IP
  • IP and Confidentiality (2)
    • Will use of any of the foregoing infringe another party’s IP?
    • Licenses required?
    • Indemnities required?
    • Scope of use?
    • RFPs and IP and NDAs
    • IP issues involved in collaborative inventions
    • Outsourcing and IP
    • Competitive intelligence issues
  • Now that a Company Knows its Environmental Impact, What Does it Have to Disclose?
    • On January 27, 2010, the U.S. Securities and Exchange Commission (SEC) approved the release of climate change disclosure interpretive guidance .
    • On February 2, SEC released its “Guidance Regarding Disclosures Related to Climate Change.” Also announced that SEC will be focusing on climate change disclosures in reviewing corporate filings
    • Based in part on EPA requirement effective January 1, 2010 that companies meeting GHG thresholds must track them
    • Took note of voluntary disclosures now made to CDP and this might require disclosures under SEC rules
  • SEC Guidance on Climate Change Disclosures
    • Source of reporting obligation is existing obligation to disclose material items under existing Regs S-K and S-X , Rule 48, Exchange Act Rule 12b-20
    • Negative standard adopted: With respect to Management’s Discussion and Analysis section of any filing (“MD&A”), interpretation in SEC guidance is that if a know trend, event or uncertainty (including legislation or regulation) cannot be excluded as not as not reasonably likely to occur, then a company’s management must evaluate it’s consequences on company’s financial condition or results of company operations on the assumption that the event, etc., will come to fruition.
      • Must determine effect of applicable emissions regulations (cap and trade) unless impact would not be material, under SEC standards of materiality
  • SEC Examples
    • Material estimated capital expenditures for environmental control facilities related to impact of legislation of regulation
    • Legal proceedings
    • MD&A related: purchase and sale of carbon credits, facilities improvements to comply with regulations, effect on the demand and supply of goods produced, including reduced demand for goods producing GHGs; effect on supply chain
    • Risk factors: impact on corporate reputation; supply chain disruptions; weather disruptions (e.g., climate change)
  • SEC Examples
    • Material estimated capital expenditures for environmental control facilities related to impact of legislation of regulation
    • Legal proceedings
    • MD&A related: purchase and sale of carbon credits, facilities improvements to comply with regulations, effect on the demand and supply of goods produced, including reduced demand for goods producing GHGs; effect on supply chain
    • Risk factors: impact on corporate reputation; supply chain disruptions; weather disruptions (e.g., climate change)
  • Supply Chain Factors are Notable
    • While evaluation is continuing, because guidance was released only on February 2, 2010, the SEC guidance and private sector sustainability reporting requirements and third-party reporting standards are now intertwined and mutually reinforcing
    • Note that knowledge is apparently the standard even if supplier disclosures compliance (or lack thereof) in confidential manner, or if customer is impacted even if reporting by supplier is not publicly reported
  • Other Disclosures
    • In financial statements, and in financial reserves
    • Outsourcing
    • Contracts
    • RFPs
  • Conclusion
    • Sustainability reporting is coming and is here to stay
    • Transparency and verifiability will lead to convergence of IT with environmental management
    • Companies will need to account for supply chain impacts
    • Sustainability requirements will change contracts, and implicate IP and confidentiality outside historical scope of procurement practices
    • Customers’ and suppliers’ business will be won or lost on sustainability management
    • Sustainability reporting is mainstream business activity
    • Contracts will evolve to allocate ownership of carbon credits
  • Question and Answers
    • William A. Tanenbaum, Kaye Scholer LLP, New York, wtanenbaum@kayescholer.com