The Business Case for Sustainable Procurement
The following is an edited extract from Sustainable Procurement.
In 1970, Nobel Prize-winning economist Milton Friedman stated that “for business there is only one social responsibility – to use its resources and engage in activities designed to increase its profits, so long as it stays within the rules of the game.”
It is hard to disagree with this assertion. Profit growth is king and ever has been, but you ignore the cautionary reference to “the rules of the game” at your peril.
The rules have changed
The rules around the whole area of sustainability have changed drastically and continue to evolve at a dizzying rate.
There was a time when a half page in your annual report, offering a day off to HQ staff provided they got involved in a community project, was all you needed to do to tick the ‘CSR Box’ and point to your ‘green’ credentials on the rare occasion a client or prospect actually enquired about them. These projects would have a positive environmental impact, they would publish the story with plenty of happy shots and, of course, write a cheque to a carbon offset broker for 1000 trees to be planted somewhere you have never heard of.
Thankfully, those dark days are long gone for an ever-increasing number of businesses, though sadly not yet for all.
Is it because a new generation of business leaders and shareholders are demanding that sustainable business practices and philosophies are given prominence on the corporate agenda in a better-late-then-never crusade to help save our planet?
Happily, in some instances this is the case, but generally, a requirement for brands and businesses to do more than just talk the talk of sustainability is being driven by the consumer. And woe betide those that get caught talking but not walking, as they risk falling foul of the fearsome court of public opinion and its attack dog – social media.
The sustainability pivot point
It is safe to say that few would disagree that a commitment to sustainability is a good principle. But, as Bill Bernbach, Creative Director and Founder of global ad agency DDB, said, “a principle isn’t a principle until it costs you money”. Which brings us to the pivot point – unless driven by the beliefs and commitments of its leaders and key stakeholders, or pressured to do so by the requirements of its customers, a business is unlikely to make significant and possibly costly changes.
The trick is to anticipate the approach of a pivot point and get ahead of it. For many businesses that pivot point came and went years ago, and there are commercially gruesome case studies of those brands that failed to either anticipate or react appropriately.
Increasingly, businesses and the brands they own are requiring that suppliers reflect their sustainability values – and not just reflect them, but provide hard, quantifiable proof of actively implementing actions to achieve them.
Sustainability is not just about what a business does within its own philosophy, processes and practices. Sustainability is a lens through which an organization must view all aspects that it manages, controls or influences. This means the whole supply or value chain from the original source of raw materials through transportation, processing, production and manufacturing, onto distribution and finishing with the end user, customer, consumer, patient or citizen.
I call this network of connected entities the Supply Value Chain Network (SVCN). Predictably, the further you move both up and down this chain, the challenge of ensuring and verifying good sustainability practices becomes increasingly difficult.
Sustainability is a gestalt
So, given that credible and proven adoption of sustainability as a core value of a brand or organization is becoming an ever more important requirement, it follows that this must be reflected not only in an organization but in the commercial company it keeps.
True sustainability requires consideration of everything we do and that we instigate action to mitigate areas of detrimental impact. Typically, 50-70 percent of this will require action in the supply base.
Climate change, water scarcity and poor labour conditions in much of the World increase risk. McKinsey reports that the value at stake from sustainability concerns can be as high as 70% of EBITDA.
Many huge global brands have suffered costly reputational damage as a result of CSR and sustainability blunders. Consequences have included short-term sales losses, expensive PR triage, enforced process and practice changes, then further reputation management to publicize the change in their ways. And the unforgiving media will gleefully use past misdemeanours as a stick to beat any brand should they offend again.
Drive innovation and increased profits
Fear of the impact of adverse climate events, the increasing scarcity of essential raw materials or consumer backlash against perceived environmentally hostile practices are not the only factors driving meaningful sustainability at the organizational level. Correctly implemented and exploited practices, supported by innovative change to increase the positive impact on sustainability can, and increasingly do, drive growth and future success.
What the shareholders want
Essentially, the power that shareholders wield is to invest or continue to invest in an organization, so keeping them engaged and happy is right at the top of the boardroom agenda.
Historically, this has been achieved by consistently delivering growth and good financial returns. In turn, attracting investment from banks, pension funds and other financial institutions, investing on behalf of their constituent members and clients. However, increasingly, individual investors are seeking to direct their funds to those more sustainable vehicles, which has consequently caused these organizations to broaden their scope.
The struggle for talent
McKinsey & Co. senior partners Scott Keller and Mary Meaney list attracting and retaining the best talent among the 10 most basic issues facing business leaders.
Sustainability credentials are progressively rising in importance in the decision criteria hierarchy for candidates, and this increases in importance with the younger demographics.
But this does not just help attract the best talent, it also helps them be more productive and stay longer.
Tensie Whelan and Carly Fink writing in the Harvard Business Review reported that morale was 55% better in companies with strong sustainability programs, compared to those with poor ones. Employee loyalty was 38% better and, as we all know, better morale and motivation translate into improved productivity, increased retention rates and reduced absenteeism.
In fact, firms that adopted improved sustainability standards saw a 16% increase in productivity over firms that did not.
Increased sustainability legislation
North America, Europe and Australia are leading the way in enacting enforceable laws.
France’s Corporate Duty of Vigilance requires companies to not only report but actively prevent social and environmental impacts resulting from either their own actions or those of their suppliers.
Notable not only for its protracted title, the German Law Lieferkettensorgfaltspflichtengesetz
obliges German companies (and German registered branches of foreign companies) to ensure that social and environmental standards are observed throughout the entire supply chain.
Make no mistake, this legislation has real teeth, and the rising groundswell of voter opinion will drive more countries to enact this type of law, whilst those that already have will broaden the legislated scope.
It makes good corporate, humanitarian and financial sense to align business philosophy, then embed practices at home and right down the Supply Value Chain Network (SVCN) ahead of the legal imperative to do so.
Simply put – don’t claim it if you don’t do it!
Being outed for baseless sustainability claims causes untold reputational and hard financial damage. Moreover, it lays down a ‘dirty history’ that will be dragged up if ever and whenever you or your supply chain make any sustainability miss-steps in the future.
My personal advice would be to listen to the small voice in your soul that tells you to do the right thing for humanity, the planet, your brand and your stakeholders by fully embracing sustainability at the core of your organization. Then play it out in all possible aspects of your practices and processes, which includes requiring those same principles and practices from your Supply Value Chain Network.
But if you don’t want to listen to the small voice that urges adoption of sustainably responsible business philosophy and practice, allowing you to reap all the reputational, financial and frankly karmic rewards it brings, make sure you pay attention to the huge booming one that warns what can happen to you if you don’t.