A Competitive Advantage

14 Feb 2008Archived News Energetics in the News

Published: BRW Magazine - by Kate Burgess - Dr Mary Stewart, Principal Consultant; Sustainability, Energetics Pty Ltd gives advice about the new legislation, and how small to medium enterprises are not required to report their greenhouse gas emissions, or to reduce them. The evidence is that they will soon be under pressure to follow the lead of big businesses.

 

For now, most small and medium enterprises are not required by new legislation to report their greenhouse gas emissions (see “Deadlines then fines”, page 30), or to reduce them. But the evidence is that they will soon be under pressure to follow the lead of big businesses.

Consider the biggest general retailer in the United States, Wal-Mart. As part of a sustainability push, Wal-Mart imposed tough new conditions on its suppliers, asking them to document and reduce their carbon emissions.

The company is compiling an inventory of the carbon emissions embodied in the products lining its shelves. Its plan is to introduce carbon labeling and give priority to products that are aligned with its own measures for environmental sustainability – for example, stocking energy-efficient light bulbs at the most lucrative eye-level shelf spots.

“Prospective suppliers must make a submission to Wal-Mart, outlining what climate change means to their business, the likely implications of carbon restrictions and whether this will impact on the company’s ability to supply Wal-Mart,” a partner with PricewaterhouseCoopers, Sean Lucy, says.

Could such practices be adopted by a big Australian retailer, such as a Coles or Woolworths? Already Tesco and PepsiCo in the United States are following suit. They see an opportunity to gain a competitive advantage by establishing their green credentials. And if their strategies prove a winner with consumers, other retailers will follow.

The pressure on suppliers comes as big businesses tackle the final and most complex stage in managing their greenhouse emissions. Called Scope 3 under a widely used international accounting standard – the Greenhouse Gas (GHG) Protocol – this stage involves counting the emissions of inputs, meaning goods, supplied to the company.

“There has been enormous growth in interest (in Scope 3),” a consultant with sustainability advisers Energetics, Mary Stewart, says. “People are starting to realize that direct emissions are only half of the story and that to fully understand their emissions profile, they need to incorporate emissions embodied in supply chains.”

The push for sustainable supply chains will be led by retailers because consumers are worried about climate change, and want to do what they can, Lucy says. “The point of customer interaction is a pretty powerful thing – and it gives you leverage over the entire supply chain. There has been a mainstreaming of environmental concerns as a business issue.”

And companies are seeing more than reputations benefit from making their supply chain sustainable. Saving energy saves money – a benefit for SMEs – and the effect multiplies along the supply chain – a benefit for their customers.

“It’s not the actions of the small or medium size companies in isolation, it’s how you make the system as a whole work better,” Lucy says. “For example, you might use recycled metals as an input in your production process. If you work with the producer, you might redesign the metals so they are easier to dismantle. Then it doesn’t consume as much energy in the recycling process.”

SMEs along the chain need to take the initiative and develop a collaborative approach with their big customers, or risk being muscled out by rivals ahead of the game. Gaining the attention of big customers is not easy, Stewart admits.

She points out that large companies’ supply chain policies usually have clauses saying that they promise to engage with suppliers in an “open conversation”, but it is often difficult for SMEs to play the hard-line card and actually insist on a negotiation.

Instead, she suggests suppliers put forward the business case to their customers. “In order for big companies to put this in place, they really need a business case that demonstrates the benefit of the policy for all stakeholders. You might not achieve any efficiency gains or cut costs because these arrangements are not usually structured as a two-way conversation.”

SMEs that can bring their big customers to the table will gain a competitive advantage, PricewaterhouseCoopers partner Andrew Peterson says. “Companies will need to share cost reductions in an appropriate way,” he says. “There will be a cost advantage immediately – if there are five potential suppliers and one has a lower cost of doing it greener, it will begin to pick up most of the work.”

Supply chain policies and criteria developed by big companies can be used simply as a filtering process, rather than to achieve an economic outcome for the supply chain.
The introduction of ISO 14064, the international standard for greenhouse gas accounting and verification, has helped businesses along supply chains to join forces.

“Business has been able to use (the standard) as a driver for improvements or cost reductions to a supplier’s product that can ultimately be passed on to the end consumer,” Peterson says. “If there are requirements for suppliers to provide more energy-efficient inputs – then savings can be shared along the supply chain.”
However, it is important for SMEs and their customers to sort out who takes the responsibility for data collection and the reporting liability, he adds.

Some SMEs have teamed up with other suppliers to negotiate as a group under the auspices of an industry or trade association. A collaborative approach makes big savings possible, LEK Consulting managing director Simon Barrett says.
“We have found that when you go back through a product’s supply chain, you can often find more carbon in certain areas because no one ever bothered to think about or measure it before. We expect over time we will see material changes in some supply chains.”

SMEs with government customers are also facing change. At all levels, governments are overhauling their procurement procedures, asking product and service providers to lay out their sustainability credentials in tender documents.

“When tendering with government, there are no legal requirements with respect to sustainability – reporting is voluntary, although a number of government departments require you to explain to them the environmental credentials of your company.

“Carbon declarations are becoming more common. What are the carbon emissions or otherwise adverse environmental effects of your products?” Stewart asks.

There can be traps for SMEs embarking on sustainability programs. One typical problem is finding that the scope of change is much bigger, and more expensive, than they first thought. The cost needs to be balanced against real analysis of the competitive advantage.

“When they come to us they don’t understand the complexity of the question they’re asking – they don’t realize how many inputs they have,” Stewart says.

The Victorian Employers’ Chamber of Commerce and Industry (VECCI) has set up an advisory program for SMEs looking to become more sustainable called Grow Me the Money.
“The biggest barriers to small business are having the time or the tools,” its program manager Brenton Pettit says. “That’s why we went for online delivery. We see ourselves as a source of information, a hand holder to small business. Small business owners aren’t going to sit there and look in the Yellow Pages to find green suppliers.”

He agrees that SMEs are feeling pressure to adopt sustainable practices, but cost saving is also a big attraction. “Part of the reason for going green is in response to community expectations and pressure from customers and staff,” Pettit says.
“Research by VECCI found that 50 per cent of businesses though that implementing sustainability initiatives would help them save money.”

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