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Abstract

Traditionally, corporate sustainability efforts have focused on the direct impacts of a company’s waste or the emissions associated with its operations, buildings, and vehicles. However, the majority of the US economy’s climate, water, and pollution impacts are the result of complex supply chains, strung together to deliver value-added products and services. To mitigate these indirect impacts (by reducing greenhouse gas emissions, for example) and adapt to new risks, leading companies must engage with upstream suppliers and embed sustainability as a joint objective. Companies failing to do so may suffer damage to their reputations and operations. In a changing climate, increasingly frequent and severe weather events are making supply networks more vulnerable to disruptions and unanticipated costs. Investors and other stakeholders are responding by pressuring companies to disclose and quantify emissions and other supply chain environmental impacts. Despite significant progress made by some corporations in reducing their emissions and their exposure to potential hazards hidden in upstream operations, sustainability must be a society-wide effort.

Keywords

climate change corporate sustainability globalization natural catastrophes reputation superstorm supply chain

Two days after Hurricane Sandy—the largest Atlantic tropical cyclone on record—brought strong winds and dangerous flooding to the East Coast of the United States, customers trickled into a Brooklyn Starbucks hoping to find lattes, pastries, electrical outlets for charging cell phones, and a functioning Internet hotspot.¹ The power was back on, but the coffee was served black and the bakery case was bare. Milk and other perishables had gone bad during the two-day closure. This story played out across the roughly 1,000 Starbucks coffee shops that closed as a result of the storm (Popken, 2012).

These kinds of shortages are not confined to Starbucks: Extreme weather can have pronounced and prolonged impacts up and down the supply chain of nearly every product or service sold. Traffic congestion and other supply chain glitches can delay shipments for days or even weeks. During the week after Sandy struck, trailer and container shipments nationwide were 6.2 percent lower than a year earlier, and train carloads were down 6.8 percent, due to severely disrupted rail and port operations on the East Coast (Adler, 2012; JOC Staff, 2012).

A growing number of companies have become aware that changes in Earth’s climate—an increased risk of intense storms or prolonged droughts, for example—can make supply chains more vulnerable to disruptions that increase costs and damage reputations. Some companies have responded to environmental change by attempting to reduce greenhouse gas emissions, improve efficiency in operations and supply chains, and increase transparency and redundancy across their supply networks.

Traditionally, corporate sustainability efforts have focused on direct impacts, such as the energy purchased by a company and the emissions associated with its buildings and vehicles. Companies have touted these efforts to investors and the public, often through “good news” stories in voluntary reports about efficiency improvements and partnerships with environmental organizations. While these efforts can improve a company’s reputation and generate cost savings, they don’t address indirect impacts that occur within a company’s supply chain but outside its immediate control. To mitigate these indirect impacts and adapt to new risks, large leading companies must engage with their upstream—and often smaller—suppliers. Starbucks’s ability to deliver a sustainable cup of coffee is much more about how the company sources its beans, where it gets the energy to roast them, and what kind of to-go cups it buys, than about keeping the lights on in its storefronts.

Indirect impacts

Nearly any assessment of global megatrends notes the intertwined social, economic, and environmental impacts of the world’s food and energy systems. Those impacts include, most notably, threats to food and energy security, biodiversity, water scarcity, climate, and human health. World population is projected to grow to more than 8 billion in the next 20 years, accompanied by a 50 percent increase in demand for clean water and food (Beddington, 2009, 2011). During this same period, oil, gas, and coal use is expected to grow by 40 percent under current policies (Brower, 2012; International Energy Agency, 2010). Arctic ice losses, superstorms, and persistent droughts across major breadbaskets of the world are making it increasingly apparent that human societies will need to make major changes to stem the tide of these negative trends. When it comes to solving mammoth global challenges, the only remaining options are dramatic increases in the legitimacy, authority, and effectiveness of transnational policy regimes; groundbreaking technological advances; and major shifts in the consumptive behavior of developed countries.

However, these megatrends are only part of the story. A closer look at the US economy suggests that the direct impacts of agriculture, mining, transportation, and gas and electric utilities account for only about 30 percent of environmental ills—such as global warming, pollution, ozone depletion, and other toxic impacts to humans and the ecosystem (Suh, 2011). The remaining 70 percent of the economy’s environmental impacts are the result of complex supply chains, strung together to produce value-added products and services. These burdens are created less by the energy to heat and cool spaces, and more by the materials, furnishings, and electronics within buildings; less by the fuels that power mobility, and more by vehicles, vessels, aircraft, and the infrastructure supporting them; less by the raw sugar or grains from agriculture, and more by the packaged foods, beverages, and restaurants that provide much of our diet. In contrast to the Manhattan Project-scale policies and radical technologies needed to meet global agricultural and energy challenges, it will take a mountain of smaller efforts—ranging from product design improvements to policy incentives—to address the economy’s indirect impacts.

As if these challenges aren’t big enough, consider that global production and consumption are expected to quadruple in the coming decades as the consuming middle class transitions from 1.8 billion people in 2009 to nearly 4.9 billion by 2030 (Kharas, 2010). Simply put, consuming less is unlikely; producing and consuming better is paramount.

Greener supply chains as strategic assets

Corporate sustainability, a business approach that was created no earlier than the mid-1980s and catching fire in the early 2000s, attempts to create long-term economic, environmental, and social value through transparency and stakeholder involvement. Born from earlier concepts, including sustainable development and corporate social responsibility, corporate sustainability now has a commanding presence in the executive suites and annual reports of the largest companies on the planet.

Within these organizations, however, those responsible for improving environmental performance are often isolated, operating at a project scale rather than company-wide, formulating tactical decisions after the fact, and kept at arm’s length from critical resources. The pathways to new business models, in which strategic sustainability capabilities are truly embedded within core operations, are not always apparent. The supply chain, however, is emerging as an important place to embed sustainability, mostly because the risks of ignoring it are glaringly obvious.

Like sustainability, supply chain management has been difficult to define as a concept. Hundreds of definitions have been documented since its introduction in the early 1980s, yet the concept generally includes coordination, integration, and cooperation among multiple entities involved in the flow of products, services, finances, and information required by end customers (Stock and Boyer, 2009). As with corporate sustainability, businesses—and the researchers who study them—have struggled to figure out which parts of organizations should claim authority and responsibility for managing supply chain functions, and how to measure and compare performance. Both supply chain management and corporate sustainability are concepts that simultaneously include everything (coordinating all functions and materials required by end customers, in the case of supply-chain management; and balancing overall economic, social, and environmental performance in the case of corporate sustainability) and nothing at all (with little budget or organizational authority to influence strategy in either case). In many ways, it’s a natural fit for these two holistic concepts to join forces, and within many firms, supply chain sustainability is rapidly emerging as a strategic competitive asset.

Over the past three decades, two imperatives—cost efficiency and customer responsiveness—have resulted in the pervasive pursuit of two basic business strategies: globalization and speed. However, as firms have sought competitive advantages by creating borderless organizations and minimizing product lead times, major risks have emerged. These risks include supply chain disruption and discontinuity, inconsistent or inadequate product quality, unpredictable delivery times, and substantial, unanticipated additional costs stemming from environmental change (Craighead et al., 2007; Halldórsson and Kovács, 2010).

The geographical scope of global supply chains exacerbates many of these risks by exposing them to a variety of cultural, legal, and political issues. Without sufficient visibility into upstream supply processes, best practices in conventional supply chain management—such as centralized warehouses, clustered suppliers, reduced inventories, and just-in-time deliveries—can increase operational risks by making supply chains more vulnerable to environmental risks and less able to bounce back after a major event. The factors that have the greatest impact on sustainability and profitability—for example, how materials, energy, and labor are combined to produce and transport goods and services—increasingly lie beyond the boundaries of any one company’s direct ownership. In 2013, thriving as a manufacturer depends not only on outsourcing production and logistics to the most efficient partners and tailoring supply chains to meet the needs of individual customers, but also on working jointly with suppliers to meet quantifiable sustainability goals (PricewaterhouseCoopers, 2013). While it’s not surprising that outsourcing and flexibility would be key factors in global competitiveness, only recently has sustainability performance within the supply chain been identified as a third key to success.

Companies seeking to reduce operational, policy, or reputational risks associated with greenhouse gases often find that their direct emissions are dwarfed by the emissions in their supply chains (Plambeck, 2012). Across industries, direct emissions account for only 14 percent of the entire supply chain’s emissions (Matthews et al., 2008). For example, 93.7 percent of the energy used to produce women’s apparel in the United States is consumed by upstream suppliers of power, textiles, fabrics, chemicals, and transportation. Only 3.4 percent of carbon dioxide emissions are generated within apparel manufacturing facilities (Green Design Institute, 2007). Whether a firm seeks to reduce its operating risks or to manage its reputation, upstream investments and improvements are critical.

Reputational risks to supply chains

Companies face judgment in the court of public opinion, where they can be found guilty of negatively affecting climate, water, communities, employees, or any number of other resources and stakeholders. Firms attempt to sway these societal perceptions through annual reports and other corporate communications. However, for these communications to influence reputation, the activities reported and the way they are reported must also be seen as legitimate. Supply chains are at the heart of major developments in the world of sustainability disclosure and reporting, where omitting information about supply chain performance is increasingly unacceptable.

The Carbon Disclosure Project, which collects information on greenhouse gas emissions from thousands of organizations, is emphasizing supply chain emissions in its latest scoring methodology. New rules will require responses for 15 categories of carbon dioxide emissions that fall outside of direct emissions or emissions from the generation of purchased electricity. Failure to report these upstream and downstream emissions will likely call into question the legitimacy of a firm’s carbon reporting, and failure to show year-over-year improvements or high scores relative to other companies will likely impact firms’ reputations among important stakeholders (in particular, among large institutional investors).

Similarly, the Global Reporting Initiative, the leading standards developer for sustainability reporting, is developing its fourth generation of guidelines to more specifically address supply chain issues. The newly proposed standard would require companies to assess their biggest impacts, not only within a company’s owned and operated facilities but also upstream and downstream—regardless of whether or not those impacts are within the company’s control. This move has created significant anxiety among many firms, but is an indicator that the boundaries of corporate sustainability reporting are expanding.

It is not cheap to maintain the systems and programs to support sustainability disclosures and to reduce the risks of negative public relations campaigns. Li & Fung Limited, the Hong Kong-based firm responsible for sourcing up to $2 billion of goods annually for Walmart alone, reported that it conducted more than 9,800 audits of its suppliers’ compliance with social and environmental standards in 2011 (Li & Fung, 2012). Conducting audits is expensive, but the risks of poor performance can be large and long lasting. According to the advocacy group International Labor Rights Forum, fires in Bangladeshi apparel factories have killed more than 600 workers during the past six years, or more than twice the number of US mining deaths. The deaths have forced Walmart and Li & Fung to increase the stringency of factory audits, raising ongoing sourcing costs beyond the loss of life and one-time costs of supply disruptions (Chiu and Lahiri, 2012).

Some firms are finding ways to reduce risk through better design and improved operational efficiencies. For example, PCH International, a global supply chain and product development firm, is facilitating the technical assessment and financing of investments in energy and material efficiency within its supply chain network of independently owned factories in China—linking upstream visibility and performance gains to competitive design and manufacturing bids. This pioneering strategy uses sustainability performance information in the design of the supply chain—reducing risk up front, rather than trying to catch it later at significant cost.

A long-term commitment to sustainability has been correlated with improved long-term financial performance (Eccles et al., 2012). Internally, a positive reputation can also help attract and retain talent and has been linked to employee productivity (World Business Council for Sustainable Development, 2010). It can also moderate the extent to which external crises inflict damage on a firm. For example, following a climate-related supply shock, a workplace safety scandal, or illegal contamination of a product by a supplier, a good reputation can have a buffering effect—but only if the firm is highly regarded for its expertise or leadership in sustainable supply chain operations. A reputation based on avowed ethical principles or philanthropy, on the other hand, may backfire: Organizations that have built a name around “doing good” are often punished more harshly for violations of stakeholders’ high expectations than firms with neutral or even poor reputations (Sohn and Lariscy, 2012). In short, building a strong reputation for reducing carbon emissions in supply chain operations today may be increasingly beneficial as firms are more often forced to respond to climate-related crises.

Operational and physical risks to supply chains

Resource constraints and asset risks are pushing the time horizon for attaining sustainability from the future to the present. In the energy, mining, food, and insurance sectors, for example, new business models that embed strategic sustainability capabilities in core operations have begun to emerge, although probably not fast enough. Given the pace at which the planet is approaching its safe operating limits (Rockström et al., 2009), these new corporate models will need to be ready to dominate economies in the very near term, perhaps as early as 2020 (Sukhdev, 2012).

Natural catastrophes caused $370 billion in worldwide economic losses in 2011 (Swiss Re, 2013). Perhaps more striking is the amount of those losses that was uninsured—$254 billion, or almost 70 percent of the total. These costs were absorbed largely by businesses and governments, and the figures are likely underestimations, because they don’t include all losses within the supply chain. Business interruption losses caused by Sandy, for example, have been estimated to be several times the amount requested in government aid by the state of New York (Karni, 2013).

More frequent and more severe fires, floods, droughts, storms, and other natural events are increasingly responsible for substantial indirect losses related to business interruptions and the temporary relocation or rerouting of materials. Supply network designs often fail to address the risks of disruption and the costs incurred during attempts to continue operating during a crisis (Klibi et al., 2010). In addition, firms often find that they are underinsured for business interruption risk (Glasser, 2010) or that their insurance policies are not well aligned with operations, particularly operations of upstream suppliers (Dong and Tomlin, 2012).

These risks to individual firms can be quite large. In 2011, for example, unusually intense flooding crippled the central region of Thailand, where approximately 40 percent of total output of hard disk drives originates. The effects rippled through the industry, slowing the production of personal computers and reducing demand for other computer components. Intel, the largest supplier of processors to the personal computer industry, reported $1 billion in revenue impacts (Tibken, 2011).

Prolonged drought and wildfires in Russia during the summer of 2010 destroyed more than one-fifth of Russia’s wheat crop. The government banned all grain exports, placing historic levels of pressure on global wheat price futures. As a result, food manufacturing giant General Mills announced price increases for Wheaties, Cheerios, and other products (Blaine, 2010).

One-third of Colombia’s coffee-producing area is temporarily out of production while varieties of trees with greater resistance to disease are being planted. In 2011, diseases brought on by increased rainfall pushed prices for Arabica coffee above $3 per pound—approximately twice the current price for green coffee beans grown under more favorable, drier conditions across Central and South America (Terazono, 2013; Thorpe and Fennell, 2012).

The risks of climate change to corporate supply chains are wide-ranging. A recent Carbon Disclosure Project study surveyed 49 major multinational organizations, representing combined spending power of $1 trillion; 30 percent reported supply chain disruptions due to weather-related incidents in the previous year (Accenture, 2012). More than half of the 1,864 suppliers surveyed in the study expect an increase in operational costs due to climate change within the next five years. Leveraging sustainability and risk expertise within companies will be critical to next-generation innovations in a carbon-constrained and increasingly water-scarce world. Understanding the complexities of and opportunities for impact reductions—and assessing the pathways that lower a firm’s exposure or hazard—are becoming prerequisites for profitability.

Adapt or die: The corporate challenge

As economies become more globally interconnected and more dependent on the resources of regions that are experiencing the strongest impacts of climate change, supply chain risks will only escalate. Shifting from national policies and firm-centric initiatives to new business and policy models based on multilevel, multi-actor networks won’t be easy. The business community is an essential, though not exclusive, element of the transition to a sustainable economy: The world’s 500 largest firms reported revenues in 2011 roughly equivalent to the value of all goods and services produced in the United States, China, and Japan combined (World Bank, 2013).

Starbucks will certainly be able to adapt to shifts in global coffee production, even in the face of estimates suggesting that up to 60 percent of the world’s prime coffee-growing regions will no longer be viable by 2050 because of climate change (Davis et al., 2012; Laderach et al., 2011). This is, after all, the company that convinced customers to buy $4 cups of coffee. Less certain is whether corporate sustainability efforts will enable humankind to avoid catastrophic climate shifts, or to find solutions to climate challenges that align with broader societal objectives. Securing a supply of coffee beans is one thing; it’s another thing to protect the livelihoods of small farmers, stem the tide of biodiversity losses, regain balance in nitrogen cycles, and stave off depletion of local water resources.

The longer society waits to include these costs in its daily shot of caffeine, the more expensive adaptive measures are likely to become. So far, the improvements stemming from corporate sustainability have been enough to enable companies like Starbucks to weather the first of the superstorms. Through its efforts toward sourcing coffee ethically, making loans to small farmers, and promoting the reuse and recycling of its cups, Starbucks has proved that it is willing to incur some of sustainability’s costs. But governments and civil society cannot sit on the sidelines expecting voluntary corporate efforts to solve climate and sustainability challenges. They must encourage faster innovation cycles where technical solutions don’t yet exist, and regulate where the public costs of current business practices are too high. Preparing for, or avoiding, the coming “superstorm” of global climate impacts cannot be left solely to corporations or their supply chains.

Footnotes

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Note

Author biography

Timothy M. Smith is director of the NorthStar Initiative for Sustainable Enterprise at the University of Minnesota’s Institute on the Environment; and an associate professor of environmental sciences, policy and management, and bioproducts and biosystems engineering at the university. His research focuses on policy and market adoption of technologies that enhance environmental performance, public and private governance of sustainability, and sustainability systems modeling in decision making. He is a former AT&T Industrial Ecology Fellow and has advised the Environmental Protection Agency, the General Services Administration, the National Research Council’s Committee on Certification of Sustainable Products and Services, and other organizations on supply chain sustainability and product-based policies.

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