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How full product transparency will revitalise the bureaucratic approach to managing sustainability in the supply chain
The conventional approach to exercising corporate responsibility in a company’s supply chain is to draft a company supplier standard and then audit for compliance using that document. The process often begins with a questionnaire and is followed by audit visits to suppliers judged to be the highest risk. The better programmes also include an offer of ‘capacity building’ for suppliers – in other words, they provide training and support to help them raise and maintain their standards.
Positive and usually well-intentioned as this course of action is, the impact is inherently limited by the narrow scope of the dialogue and the teacher–student nature of the relationship. It might work well when addressing very problematic issues (such as child labour), but telling suppliers what they shouldn’t be doing misses an opportunity to foster their talent for commercial advantage and innovation.
The flaws of the 700-question supply chain questionnaire
The questions below are from a real example of a supplier questionnaire I was asked to fill in by a corporate customer. Let’s look at how little each question actually drives real environmental performance:
1. Does your organisation have an environmental policy in place?
Any company can write up a policy in a couple of hours, but this doesn’t mean the policy is being implemented or monitored. Policies by themselves don’t drive performance, so the creation of an environmental policy will not necessarily have any impact on the products you are buying from your suppliers. For non-sophisticated audiences, it looks so good to say that 80% of your suppliers have an environmental policy. But in reality it means next to nothing.
2. Does your organisation have an environmental management system (EMS) in place?
ISO 14001 and EMAS are management systems, not performance systems. They just require an organisation to have a policy, comply with legislation, determine its impacts, and have targets. There is no link with performance. The other issue is the scope of these management systems. In general, they have a purely internal focus – they don’t include the raw materials used to make products, nor do they look at the use phase impacts of those products. If your suppliers have an EMS in place, this provides little assurance that the products they are supplying have less impact on the environment than any others.
3. Has your organisation identified the specific environmental impacts associated with the products, services or works it provides and taken steps to minimise them?
The supplier can just answer ‘Yes, we have identified them’. But how do you know that the issues it has identified are the biggest and most important ones? The supplier can also respond with any amount of corporate spin – cherry-picking some initiatives from the fringes and thereby allowing itself to look good.
4. Does your organisation observe legislation with regards to environmental issues?
Shouldn’t this be taken for granted?
5. Does your organisation communicate its environmental policy to its suppliers?
What demonstrable impact can be gained from sending a piece of paper full of generalities to suppliers? It would be far better to ask suppliers for radical innovations on the issues you want to improve.
6. Does your organisation check the environmental policy and performance of its staff?
Even if your supplier does this, how much of a difference will it have on the products you are buying?
How far have we come when thinking about sustainability strategically?
It used to be about finding one or two feel-good activities like recycling the paper in the office. Then reporting a biased account of a few issues with some cherry picked case studies. Then it became the time of the public commitments: carbon neutrality, zero waste factories. Now we are entering into the territory of product sustainability, since most of the impacts of products are outside companies’ boundaries, in many cases 90%.
The key lies in product re-design.
You can redesign a car or a vacuum cleaner so that it uses less energy, and you can redesign cement or carpet so that it uses less embodied energy. Both are design challenges. Now if you come up with a product with super low impact, you still need to convince your customers to switch to that product.
In many cases, a technical product innovation does not solve the problem if it does not get accompanied with a commercial strategy for wide adoption of the new green product. Similarly, companies can identify the products with the highest impact products and try to either come with alternative products that provide the same function or convincing customers to buy products with less footprint. In both scenarios, they will be commercial opportunities for those companies that crack this code.
Managing portfolios will become a huge issue on the sustainability agenda.
Many companies will deny this at first and a few leaders will look for opportunities but Government interventions will push for greener (genuinely greener) products. So if you are a retailer this will be your biggest issue. And yes, it will be difficult to face but it is likely to be your biggest issue by far. So understanding the footprint of your products and moving consumers towards the more environmentally friendly ones will be seen as vital.
This expectation of retail will happen faster than we think.
AFTER MANY YEARS OF WORKING HARD to encourage consumers to change their buying habits in favour of sustainable products, we have seen only small pockets of success.
Let’s face it: Not many consumers are really prepared to bother
Unfortunately, although there is growing public awareness of the urgent environmental matters we now face, only a small section of the consumer market is changing its buying behaviour. According to research performed by Marks and Spencer (M&S), the UK consumer market contains a ‘deep green’ group of consumers representing 8% of the market, as well as a ‘lighter green’ group representing 28%.
Aside from these two factions, there is a segment of consumers (38%) who could be persuaded to buy green if the price, quality and convenience of a product is good enough. And then there is a recalcitrant hard core (26%) who do not really care about sustainability issues and are unlikely to change their buying behaviours in any circumstances.
Furthermore, many research projects have suggested that even among those consumers who might be inclined to think about sustainability issues, only a small percentage will make purchasing decisions based on the environmental information displayed on a product label or on the web. It’s hardly surprising that most consumers don’t have the time or the inclination to search out detailed environmental information when they are making minor purchases of, say, a toothbrush or a cauliflower.
Would you really bother to look at environmental information for the 200 items of the weekly shopping cart?
The problem with this kind of ‘voluntary sustainability’ is that it actually penalises the people who bother to make the right purchasing decisions – mainly because it asks them, in most cases, to pay more, let alone endure the hassle of going through all the information. After a while, even deep green consumers begin to question why they should be taking the hit by buying more expensive stuff when, elsewhere down the supermarket aisle, someone who doesn’t care about the environment is being rewarded with a cheaper shopping basket.
What, they ask themselves, is the point of making such sacrifices, and why should they act more or less on their own?
These are fair questions, and there is no easy answer to them. Those who make the right choices should not be penalised. So what we actually need is a new system that moves away from voluntary sustainability and makes good behaviour a viable and rewarding option for everyone.
We must look at other ways of instigating the wholesale change that we need.
The European Commission has released the following facts and figures from the Single Market for Green Products initiative:
* The global market for low carbon environmental goods and services is estimated at €4.2 trillion. EU companies’ market share is 21% (UK Department for Business, Innovations and Skills, 2012).
* Xerox reported savings of $400 million and Zara €500 million in 2009 by designing their products to minimise their life-cycle environmental impact.
* There are currently more than 400 environmental labels worldwide (www.ecolabelindex.com).
For analysis at company level, 80 leading methodologies and initiatives were identified according to which GHG reporting could be carried out (EC study, 2010).
* For product carbon footprinting, 62 leading initiatives and methods were identified (EC study, 2010).
* PUMA has stated that 94% of the environmental impacts of its products occur along the supply chain.
* 90% of consumers buy green products at least sometimes (Eurobarometer).
* 39% of consumers say business claims about the environment are not accurate (GFK, 2011).
* Only 6% of EU citizens trust producers’ claims about their products’ environmental performance completely (Eurobarometer, 2009).
* 94 companies examined used 585 different indicators in environmental reports. Of the indicators disclosed, 22% were used by more than 3 corporations; 55% were used only once (Journal of Cleaner production, 2012).
* Investors are interested: the investors’ base behind the Carbon Disclosure Project grew from 35 investors with assets of 4.5 trillion USD in 2003 to 655 investors with assets of 78 trillion USD in 2012.
* More than 1/3 of 250 business executives said that they could not keep up with consumer demand for sustainable products and services and 62% declared that sustainable investments were motivated by consumer expectations for green products (Accenture, 2012).
Many CEOs claim that sustainability is part of their company’s DNA.
What a cliché, what an easy thing to say, impossible to prove or dispute. But how can sustainability be in a company’s DNA until the core product or service of the company has significantly less impact?
The real DNA of companies are their products or services, what they offer to customers, what they sell. The first thing is to understand the true impact of your products.
Product sustainability questions get you to that elephant in the room.
We discovered that around 70% of the overall environmental impacts of their carpet tiles were related to the raw materials used to make them.
Of these, the oil-based nylon yarn, just one single raw material, had the single biggest environmental impact. In fact, nylon production accounts for almost half of the impacts across the full lifecycle of a carpet tile, a hard pill to swallow for a carpet manufacturer (the fibre is what makes carpet a carpet).
Rather than neglecting the elephant in the room, Interface re-focused its efforts where it could make the biggest difference: reducing the amount of yarn used, finding ways to recycle old yarn into new, and looking for bio-based alternatives to nylon. Today the company has products made out of 100% recycled nylon using half the amount of yarn, cutting the overall environmental impact by half.
As a side note, some other carpet manufacturers were marketing wool carpet as a natural and sustainable option but wool has between four and six times more embodied carbon than virgin nylon.
For more on this subject, read ‘Full Product Transparency‘. This book outlines a path towards a more practical era for ‘corporate responsibility’, where companies make real environmental gains based on hard facts, using lifecycle assessment (LCA) and environmental product declarations (EPDs).
Here is a video produced by our colleagues in China. It was used to inspire and provoke conversation at their annual sales meeting. Let us know what you think.
Click on the image and the video will play from their site.
A practical guide for policy-makers. So how do we get beyond the car sector?
Below is a brief guide to creating transformational change within a sector or product category based on the concept of FPT.
1. Do an LCA in order to understand the main environmental impact of that sector or product category (e.g. food, buildings, chemicals, electricity, etc.).
2. Develop a common metric based on the full lifecycle impact or at least on the main impact area.
3. Establish a long-term goal stating what performance is required by when. This can be a fixed value or variable in order to increase competition.
4. Establish minimum performance required and ban underperform- ing products (you might get some World Trade Organization issues but there are always ways around it).
5. Create a system where industries pay penalties for underachieving and/or tax credits for overachieving. That encourages industries to compete and innovate. 6. Mandate visibility of the common metric on all promotional materials.
7. Enable and encourage national taxes, whereby the products with more environmental impact pay more and products with less impact pay less (variable product tax).
8. Enable local regulation that gives ‘incentives’ to products with less impact (e.g. what free parking and free congestion charge is doing for the cars).
9. Support and enable data intermediaries to be creative and do their job to help consumers make sense of the data.
10. Release the power of public procurement and buy only products that achieve certain performance levels.
11. Encourage equally the power of corporate procurement.
12. Award with the EU Ecolabel those products that demonstrate more than 50% impact reductions over the average product.
13. Sit and relax – the market usually delivers (but you need to tell the market what you want).
Let’s look at the building sector and try to apply this thinking (in a very simplistic way):
a) Magic metrics could be kWh/m2 and kg of embodied CO2/m2 (I will focus on the first one).
b) Set up a minimum European standard of, let’s say, 100 kWh/m2 for new buildings in 2020.
c) Give the EU Ecolabel to new buildings under, let’s say, 50 kWh/m2.
d) Give tax discounts to new buildings under, let’s say, 50 kWh/m2.
e) Facilitate licences/permits to the super-performing buildings (e.g. fast track or no permit required).
f) Existing houses pay variable rate of stamp duty and local council tax according to their energy rating (would encourage retrofit more radically than green deal type of approaches).
g) Government would commit to the strongest standard for new buildings and would retrofit existing government buildings to a minimum standard.
h) Mandatory energy ratings displayed in every public and private building including offices, retail, etc.
This is a back of the envelope approach that does not take into account the fine details such as the differences in building types such as domestic, office or retail, but it gives an idea of what the magic metric approach can deliver.
Join us at the PEF Policy Conference where they will release details on the upcoming pilot phase on the development and testing of Product and Organisational Environmental Footprinting Category Rules, benchmarks and communication vehicles.
Rana Pant from the European Commission Joint Research Center will be available to assist Michele Galatola from DG Environment on the technical aspects of the pilot phase. An updated programme for the event will be posted tomorrow here.
The PEF Policy Conference will be held on 29-30 April 2013 in Berlin. Objectives include; developing an early understanding of open questions, next steps and perspectives from different stakeholders on the future use of the detailed product environmental footprinting methodology and respective policy options. All participants are invited to actively contribute to the open dialogue to sharpen the common understanding of the road ahead.
Please click on the image below to find out all about the PCF World Forum including the program of events for this coming week.
The European Commission has released a fantastic initiative around the subject of ‘Building the Single Market for Green Products’. Helping companies and consumers navigate the green maze.
What is the problem for companies?
A company wishing to market its product as green in several Member State markets faces a confusing range of methods and initiatives. Let alone the hundreds of certification sharks, private labels and incumbent national systems that make a huge amount of money from this.
What is the problem for ‘Mum’ in the supermarket?
Consumers are also confused by the stream of incomparable and diverse environmental information: according to a recent Eurobarometer, 48 % of European consumers are confused by the stream of environmental information they receive. This also affects their readiness to make green purchases.
In the words of Commissioner Potocnik
“To boost sustainable growth, we need to make sure that the most resource-efficient and environmentally-friendly products on the market are known and recognisable. By giving people reliable and comparable information about the environmental impacts and credentials of products and organisations, we enable them to choose. And by helping companies to align their methods we cut their costs and administrative burdens.”
The EC is launching a three-year pilot phase. Their objectives:
* Set up and validate the process of the development of product group-specific rules (Product Environmental Footprint Category Rules – PEFCRs), including the development of performance benchmarks. Where product group-specific rules already exist and are used by stakeholders, the Commission will use these as a basis for the development of the PEFCRs;
* Make the application of the environmental footprint methods easier, especially for SMEs, by testing innovative ways of managing the process and through the development of tools;
* Test different compliance and verification systems, in order to set up and validate proportionate, effective and efficient compliance and verification systems;
* Test different business-to-business and business-to-consumer communication vehicles for PEF information in collaboration with stakeholders.
I hope businesses will jump at these pilots to achieve our dream of open standards and push for full product transparency in the market without delay.
Draft Commission Recommendation on The use of common methods to measure and communicate the life cycle environmental performance of products and organisations (April 2013)
What has happened to the car industry using g CO2/km as a metric is a very good example of the depth of transformation that product transparency can deliver. This fascinating metric has enabled European regulators to mandate top-down targets for car companies, enabled customers to have a comparable reference for the car footprint and provide national and local legislators the means to tax what is higher impact and support what is lower.
This transparent metric has also created competition in the car sector with the focus being upon their biggest environmental impact, ‘in life use’, which in turn has created a huge level of innovation in the car industry and supply chain. A decade ago the car industry had no incentive to design cars that would consume any less petrol. It really wasn’t at the core of car manufacturers’ strategy.
The industry used to design cars that were affordable to build but not necessarily always affordable to run. Yet according to European Union (EU) research, passenger cars make up 12% of total EU CO2 emissions. And yet, according to the European Environmental Agency, around 77% of the impact of a passenger car is in the ‘use’ phase with a further 13% directly linked to the production of the fuel consumed in the ‘use’ phase.
For this transformational change to take place an overall regulatory framework at EU, national and local level was needed. Furthermore, and crucially, a common industry metric was required that could be used in the car industry. That magic metric was to be tail-pipe (exhaust) emissions measured as grams of CO2 per kilometre driven (g CO2/km). Although incomplete, because it didn’t take into account whole-life CO2 emissions and environmental impacts, this partial transparency at least focused on the biggest issue and has transformed the industry. g CO2/ km has given a purpose to policy-making, often bureaucratic, expensive, ineffective and siloed. Below is an overview of some of the key regulatory interventions this common standardised metric has enabled.
First, the bottom-up approach.
The EU Car Labelling directive was enacted to ensure that a label on fuel economy and CO2 emissions is attached to a car or displayed in a clearly visible manner near each new passenger car model at the point of sale. This bottom-up approach was based on driving transparent competition, which in turn enabled the customer to make an informed decision taking into account the biggest environmental impact of the product. Most customers might still choose a car mainly by the design or the brand but at least they have the right to know the impact of their decisions. What has been the main result of this transparency? It has cut off all the ‘greenwash’. No manufacturer today is doing green marketing on the little things they are doing in their factories or their recyclable seats. Why? Because this wonderful metric is allowing customers to say, ‘please cut the fluff and just tell me the g CO2/km for this car’.
Sustainability commoditized as it should be, like money: terrible news for marketing agencies, great news for the world. The beauty of such a metric goes beyond ‘point of sale’ to ‘all promotional materials’. Thanks to the same directive, today all car advertising must include the g CO2/km for that specific car being advertised. That has created consistency and transparency whilst simultaneously empowering the customer to not only become accustomed to the metric but make critical buying decisions based on this metric. My mother today knows that 160g CO2/km is too much and 100 g CO2/km is acceptable. Many Londoners know cars under 100 g CO2/km don’t pay the congestion charge. Consistent transparency creates customer literacy and awareness which leads to change.
Second, the old-school, top-down approach.
This key metric allowed an EU-wide regulation that came into law in 2009, requiring each manufacturer to decrease their average portfolio of emissions to 130 g CO2/km by 2015 and 95 g CO2/km by 2020. In 2008, the average g CO2/km for car emissions in the UK was 158.0 g CO2/km. In 2009 that figure was 149.5 g CO2/km so the change because of legislation is huge. Look at how effective those ugly technocrats from Brussels have been! How ironic that the UK Climate Change Committee highlights cars as one of the few successes of carbon reductions in the UK. This legislation came about because the EU ran out of patience with industry voluntary agreements.
Yes, those voluntary agreements so loved by politicians because they don’t have to impose any difficult decisions. In 1998, the European Automobile Manufacturers’ Association (ACEA), JAMA, and KAMA agreed to reduce average CO2 emissions from new cars sold to 140 g/km by 2008. That was a 25% reduction, quite considerable. But predictably when there is no stick or carrot on the table, the car manufacturers’ commitment achieved a mere 2.2% reduction between 1998 and 2006. What would you expect? So the EU set up a mandatory target and crucially gave a sensible period of time (2020) to allow companies to invest, innovate and so make the necessary widespread changes required to meet the targets of this regulatory framework.
It also came with sticks in the form of financial penalties.
Surprise, surprise, it’s working! CO2 emissions from new passenger cars have started decreasing substantially: 1.6% in 2007, 3.2% in 2008 and 5.4% in 2009. That’s the beauty of the market: tell it what you want to achieve and it will find a way to do it. The problem is that on many occasions we don’t tell the market, our supplier, what we want, or worse, we don’t have the metrics. These two combined policies, of setting agreed, clearly measurable targets and making this information clearly visible to the end customer are completely changing the playing field of competition within the car industry. And this competition through innovation will compel manufactures to meet the EU-wide target of 95 g CO2/km by 2020. Car manufacturers are doing what they are best at – designing cars – as opposed to inventing labels, patronising customers with green marketing, ‘engaging’ employees, sustainability reporting and other semi-useless stuff. But our beloved metric goes much further. It can transform national and local policy-making aimed at changing behaviours and purchasing decisions. One example at national level is the French Bonus/Malus scheme. Simply put, customers choosing to buy a heavy polluting car will pay extra tax on the price of the car, whereas customers choosing to buy a more fuel efficient car will receive a reduction in the price of the car. The tax penalty ranges from €200–2600 per car.
The incentive reductions range from €200 to €5000 and higher for even cleaner cars.
Around 31% of new vehicles will be eligible for the bonus, 25% for the malus. There are around 44% of new vehicles currently emitting between 130 and 160 g CO2/km that are not affected by the new measure. Furthermore, the bonus will be deducted from the price paid to the dealer and must be identified and visible on the bill. These facts will also provide incentives to dealers to sell cleaner cars. Another example is UK company cars.
In the UK you pay more tax for your company car if your car produces more CO2. For example, for a car of less than 75 g CO2/km the tax rate for petrol cars is 5%. For a car of 150 g it is 19% and for a car of 235 g it is 35%. This is a good example of variable tax on a clean or dirty product. The more you pollute the more tax you pay. But our magic metric is also very useful at the local level.
In London, cars which emit 100 g/km or less of CO2 and meet the Euro 5 standard for air quality qualify for zero congestion charge. A 100% exemption from congestion charge also applies to electric vehicles. In many towns in the UK such as York, Salford or Milton Keynes and Richmond, one can have discounted residents’ parking if you have a low carbon vehicle and free parking if you have an electric car.
Guess what? Customers are paying attention to the environment! Such a crazy bunch of tree-huggers…
