Sustainability has been a megatrend not only since Greta Thunberg and the most recent natural desasters. At the same time, it is a complex topic. Of course, looking at climate change, it is absolutely necessary to reduce first of all CO2 emissions. But sustainability is much more than that. The so-called Triple Bottom Line (TBL) is completed by social as well as economic aspects (and is about to be revised). Sustainability is also important for Logistics and Supply Chain Management. The upcoming Supply Chain act will affect companies Supply Chains in many ways.
In this post I give an overview of existing initiatives and current legislative (including the upcoming Supply Chain act). Then, I will highlight relevant aspects of Sustainability for Logistics and Supply Chain Management. Finally, I have asked Dan Heuer from Fair Venture for his take on sustainability on logistics and supply chain management from the perspective of a service start-up.
The context – existing initiatives and legislation
Sustainability, or rather the negative impact of non-sustainable practices entails external effects. External effects are defined as indirect cost or benefit to an uninvolved third party that arises as an effect of another party’s activity. For example the production of transportation packages consumes a lot of CO2 emissions that are the drivers for the greenhouse effect. Transportation packages made of wood by Ligenium can help to reduce the impact. Also poor working conditions for drivers of food delivery service providers can have a negative impact on social stability.
Therefore, free market mechanisms will not provide adequate results. And governments, NGOs and international organisations have to find and agree on effective instruments to influence the behaviour of involved parties such as consumer, producers and also investors. But still, the points of view and interests are quite different. Also, definitions, “standards” and guidelines to create transparency and implement sustainable practices are very diverse. In the following paragraphs some relevant concepts, standards and guidelines that can be considered as the environment for sustainability actions of logistics and supply chain management in companies are enumerated.
Concepts for a desired state and defined goals
A starting point for any effective action is to define the desired state and the goals of actions. They still have to be broken down to the business context of a specific company and supply chain. But especially the SDGs provide a first valuable insight towards what the actions of managers have to be aimed at. CSR and ESG are aimed at narrowing down sustainability in a business context.
- SDG (Sustainable Development Goals): The SDGs or Global Goals were set up in 2015 by the United Nations General Assembly and are intended to be achieved by the year 2030. They are a collection of 17 interlinked general goals designed to be a blueprint to achieve a better and more sustainable future for all.
- CSR (Corporate Social Responsibility): A form of international private business self-regulation which aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethically-oriented practices. It can be seen as a strategic initiative that contributes to a brand’s reputation. And it must coherently align with and be integrated into a business model.
- ESG (Environmental, Social, Governance): An evaluation of a companies collective conscientiousness for social and environmental factors. It is typically a score that is compiled from data of specific metrics related to intangible assets within the enterprise. ESG criteria can also help investors avoid companies that might pose a greater financial risk.
Creating transparency and legislation for sustainability accounting
A major driver for sustainability is creating transparency on established practices. This is why a consistent and truthful reporting is one of the most important targets of NGOs and international organizations to influence corporate behaviour. The reporting of activities with regard to sustainability can be summarised under the term sustainability accounting. Also in this area a multitude of frameworks and “standards” can be found:
- GRI (Global Reporting Initiative): International independent standards organization that helps businesses, governments and other organizations understand and communicate their impacts on climate change, human rights and corruption etc. Developed by the Global Sustainability Standards Board (GSSB), the modularly structured GRI Standards are the first global standards for sustainability reporting and intended as a free public good. Although the GRI is independent, it remains a collaborating centre of UNEP and works in cooperation with the United Nations Global Compact.
- CDP (Carbon Disclosure Project): is an international non-profit organisation based in the United Kingdom, Japan, India, China, Germany and the United States of America that helps companies and cities disclose their environmental impact. It aims to make environmental reporting and risk management a business norm. It also should drive disclosure, insight, and action towards a sustainable economy. Today, nearly a fifth of global greenhouse gas emissions are reported through CDP.
- TCFD (Task Force for Climate-related Financial Disclosures): The Financial Stability Board (international body that monitors and makes recommendations about the global financial system and was established after the G20 London summit in April 2009) established the TCFD to develop recommendations for more effective climate-related disclosures. The recommendations are grouped around the core elements of how organizations operate: governance, strategy, risk management, and metrics and targets.
- SASB (Sustainability Accounting Standards Board): is a non-profit organization, founded in 2011 by Jean Rogers (former Loeb Fellow at Harvard University, registered Professional Engineer, principal at Arup, a global engineering consultancy and management consultant at Deloitte) to develop sustainability accounting standards. SASB’s work is overseen by the SASB Foundation Board of Directors. Prominent members have included a former SEC chair, former FASB chair, former mayor of New York City, a chair of the central bank of the Netherlands.
Initiatives of the European Union
The European Union is one of the forerunners in operationalising and implementing specific sustainability standards and binding legislation. At the same time countries in the European Union are responsible for a major share of the CO2-emissions.
- EIA (Environmental Impact Assessment): Assessment of the environmental consequences of a plan, policy, program, or actual projects to prepare an investment decision. The EU has established a mix of mandatory and discretionary procedures. In order to unify sustainability disclosures across the private sector by 2023, the EU started enforcing the Sustainable Finance Disclosures Regulation (SFDR) and Non-Financial Reporting Directive (NFDR).
- NFDR (Non-Financial Reporting Directive): This directive established important principles for certain large (>500 employees, turnover > 40 mio. EUR) companies in the European Union to report sustainability information (e. g. environmental protection, human rights, anti-corruption, diversity) on an annual basis. It also introduced a ‘double materiality perspective’. This means that companies have to report on how sustainability issues affect their business and on their own impact on people and the environment.
- SFDR (Sustainable Finance Disclosure Regulation): The scope of this directive are asset managers, financial advisers and insurance providers in the European Union. The regulation requires them to disclose how market participants are assessing not only the sustainability risks that could negatively impact their financial returns. They are also required to report how their investments could adversely impact sustainability factors – the negative impact of investments on environment and social factors. This is called the “double materiality” of sustainability.
- EU taxonomy: is a classification system, establishing a list of environmentally sustainable economic activities. It is meant to help the EU scale up sustainable investment. It provides companies, investors and policymakers with science-based definitions for which economic activities can be considered environmentally sustainable. In this way, it should create security for investors, protect private investors from greenwashing, help companies to become more climate-friendly, mitigate market fragmentation and help shift investments to where they are most needed.
Providing guidelines to stimulate and support action
Already very early, guidelines to support and stimulate actions towards sustainable behaviour were developed. They are ranging from specific guidelines to determine CO2-emissions to comprehensive management instruments:
- ISO 14000: is a family of standards related to environmental management. It exists to help organizations minimize how their operations negatively affect the environment, comply with applicable laws, regulations, and other environmentally oriented requirements and continually improve their environmental management. ISO 14000 is similar to ISO 9000 quality management in that both pertain to the process of how a product is produced, rather than to the product itself. The requirements of ISO 14001, that was published in 2015, are an integral part of the Eco-Management and Audit Scheme (EMAS).
- ISO 26000: is an international standard providing guidelines for social responsibility (SR, or CSR for corporate social responsibility). It was released by the International Organization for Standardization on 1 November 2010. Its goal is to contribute to global sustainable development by encouraging business and other organizations to practice social responsibility to improve their impacts on their workers, their natural environments and their communities.
- Greenhouse Gas Protocol (GHG): is a privately funded organization that works with governments, industry associations, NGOs, businesses and other organizations, provides standards, guidance, tools and training for business and government to measure and manage climate-warming emissions. GHG Protocol establishes comprehensive global standardized frameworks to measure and manage greenhouse gas (GHG) emissions from private and public sector operations, value chains and mitigation actions.
- EMAS (Eco-Management and Audit Scheme): is a management instrument developed by the European Commission for companies and other organisations to evaluate, report, and improve their environmental performance. It is based on the PDCA-cycle known from Quality Management. EMAS is open to every type of organisation willing to improve its environmental performance. It also covers all economic and service sectors and is applicable worldwide.
- SA8000: is an auditable certification standard that encourages organizations to develop, maintain, and apply socially acceptable practices in the workplace. It was developed in 1989 by Social Accountability International, by an advisory board consisting of trade unions, NGOs, civil society organizations and companies. SA8000’s criteria were developed for cross-industry use to create a common standard for social welfare compliance.
German legislation: the Supply Chain Act
The Supply Chain Act (German: Lieferketten-Sorgfalts-Gesetz, LkSG) regulates corporate responsibility for human rights compliance in Supply Chains for the first time. This Act on Corporate Due Diligence in Supply Chains was passed by being published on July 22, 2021, following completion of the parliamentary procedure. The main regulations include:
- The Supply Chain Act obliges companies with operations in Germany to respect sustainability by implementing defined due diligence requirements. Initially, the law will apply to companies with at least 3,000 employees in Germany from 2023. From 2024 on it will apply to companies with at least 1,000.
- Core elements of the due diligence obligations include the establishment of a risk management system to identify, prevent or minimize the risks of human rights violations and damage to the environment.
- Due diligence obligations apply to a company’s own business operations, to the actions of a contractual partner and to the actions of other (indirect) suppliers. This means that companies’ responsibility exists along the entire supply chain.
- The law is based on internationally recognised conventions. It contains behavioral requirements such as the prohibition of child labor, slavery and forced labor, appropriate wages, the right to form trade unions or employee representatives, the access to food and water.
- An authority will be provided with effective enforcement tools to monitor companies’ Supply Chain Management. The “German Federal Office of Economics and Export Control” can require information, as well as request companies to take concrete action. It can enforce this by imposing penalty payments (up to 8 million EUR or up to 2% of annual global sales).
The above overview includes a multitude of concepts, standards, guidelines and frameworks. This shows that it is anything but easy to formulate and implement a clear sustainability strategy let alone to create a consistent sustainable Supply Chain.
Challenges of Sustainability for Logistics and Supply Chain Management
Even though politics selected reporting as main incentives, Supply Chain Management, Logistics and Purchasing are functions that have a major influence on the implementation. They influence scope 3 emissions, shape the supply network by selecting and developing of sustainability-compliant suppliers and align purchasing decisions (e. g. bundling of procurements or selection of transportation mode) to sustainability goals. In this section some challenges and fields of action towards a sustainable supply chain are highlighted. A major part of this section is based on a BVL Whitepaper and a BME study.
The German Associations of Purchasing and Logistics (BVL and BME) contributed recently to the development of sustainable supply chains by a white paper and study:
- The BVL Whitepaper on Sustainability in Logistics and Supply Chain Management: The German Logistics Association (BVL) published in May 2021 a white paper that contains a description how logistics and supply chain management affects the 17 SDGs, a presentation of their initiative Logistics4 Future, expert interviews on success factors and best-practices for sustainability in logistics and supply chain management. The whitepaper (in German) can be downloaded here.
- The BME Logistics Study on Sustainable Supply Chains: The German Purchasing Association (BME) conducted the internet based survey in cooperation with Prof. Dr. Huth of the UAS Fulda from May to July 2021 and published in November 2021. 226 participants from different industries (more than 50% of the participants are from the following sectors: transport&warehousing, automotive, pharma/chemical and mechanical engineering) and different company sizes in terms of turnover (29% > 1bn EUR, 18% between 250 mio. and 1 bn. EUR, 25% between 50 mio. and 250 mio. EUR, 21% < 50 mio. EUR). The study (in German) can be downloaded here.
Creating awareness for Sustainable Supply Chains
A core element of all sustainability initiatives is a consistent strategy that fits not only the organization itself but also the environment it is operating in. Some trends – such as globalisation, e-commerce or individualisation of products – are seen to have a negative impact on sustainability. However, the context also offers some opportunities. Among the trends in logistics that participants in the BME study consider as supportive for sustainability are green Supply Chains, artificial intelligence, the internet of things, 3D printing and robotics.
Also interesting was the opinion of potential benefits of sustainable Supply Chains by the participants of the BME study. The highest benefits were seen in a better reputation, the fulfilment of stakeholder expectations and positive effects on the competitiveness (76%, 66% and 60% answers in the categories “high” and “very high”). Minor effects were seen in the profitability and the reduction of disruptions in the supply chain (43% and 27%). This shows that sustainability initiatives are somewhat client driven and that regulations seems necessary.
Formulating a Sustainability strategy for Logistics and Supply Chain Management
A sustainability strategy for Supply Chains offers guidelines on what to do and on how to set priorities. Müller and Sikala (p 49 ff.) suggest a process that is based on the most important fields of action and the initial situation of the company. In this process the most important fields of action are derived by an initial analysis of the external context, the impact of the company on people and environment and the interests and expectations of the most important external and internal stakeholders. This analysis leads to potential fields of actions that can be prioritised in a second step by evaluating their relevance from an internal and external perspective.
The analysis (external context, possible impacts, the interests of stakeholders) to identify possible fields of action means a VUCA world on its own, because there are many different aspects of sustainability (for example the above mentioned 17 SDGs). Many different interests of stakeholder groups (for example customers, employees but also the population around the premises etc.) have to be managed, and often, their interests and concerns may even be contradictory and can change dynamically.
Priorities for sustainable Supply Chains are very company-specific. For example a sustainability strategy for a car manufacturer must obviously be based on greenhouse gas emissions of their products but also in their supply chain accordingly. In contrast the sustainability strategy for a fashion company must also focus on working conditions in the production locations and in the distribution process when using CEP-service providers as well as the handling of the returned products.
The BVL whitepapier identifies quality education (SDG4), decent work and economic growth (SDG8), sustainable cities and communities (SDG11), climate action (SDG13) and partnerships for the goals (SDG17) as very relevant for logistics. In addition, the BME study reveals work safety, fair working times, avoidance of environmental damage and avoidance of discrimination in the employment process as top priorities of the participants. According to the study, the least important aspects of sustainability are the freedom of association, avoidance of loss of biodiversity and the right to collective negotiation.
A moren traditional approach to develop a sustainability strategy is top down, since the most important drivers according to the BME study are customer requirements or a project of the management. However, in order to create awareness and pave the way to a more participatory bottom up approach might also be considered. Decentralized initiatives involve more members in a grassroots-movement. But of course, the formulation of a consistent overall strategy might be achieved by centralised coordination.
Organisation and implementation
Especially when not only the own organization is concerned an orchestrated project management and implementation are crucial. Only when responsibilities are clearly defined the strategy can be effective. Also, management instruments such as reporting and metrics must be in focus when implementing Sustainability for Logistics and Supply Chain Management effectively.
It is probably best to assign the tasks to a staff office, which reports to a top management responsible. Reasons for this are: almost all business units are affected, form implementation direct access to the management is needed, and decentralised activities will probably not be fully realized because they are not coordinated and not the first priority.
The reality reflects this only partly. 7% of the participants of the BME study have implemented a dedicated organisational unit for sustainability. Another 35% have assigned the sustainability tasks as add-on topic to an already existing organisational unit with other missions. 36% of the respondents have implemented a complaint center to report issues in connection with sustainability problem. This system is considered es effective in 56% of the cases. Also, 63% of the study participants use metrics to evaluate the effectiveness of the supply chain sustainability system.
Accordingly the actual implementation of sustainable supply chain processes is still quite low according to the BME study. Only a maximum 20% of the participants consider sustainability in the Supply Chain processes as fully implemented (using the SCOR model processes plan, source, make, deliver, return). Another maximum 46% consider sustainable Supply Chain processes partly implemented. The process with the highest level of implementation is the deliver process.
Getting information on sustainability practices of partners in the supply chain is very difficult. Even sustainability information of direct partners are available for a maximum 32% of the participants (and another maximum 47% partly). Concerning the second supplier or customer level only 13% (supplier) resp. 16% (customer) have full sustainability information and 43% resp. 32% partly.
Instruments for sustainable supply chains
Now, what does implementation mean? There are obvious measures. Examples are reducing carbon emission when forwarding goods by using trains instead of trucks or ships instead of planes. Also replacing face-to-face-meetings by video-conferences can avoid emissions. But there are more systematic instruments to implement sustainable Supply Chains.
Among the most widely used standards and guidelines for the implementation of sustainability are the ISO 14000 for environmental management (19% of the participants of the BME study have fully and 43% partly implemented it), “green” guidelines for warehouse planning (17% fully, 47% partly), “green”guidelines for packages (12% fully, 48% partly), ISO 50000 for energy management (8% fully, 34% partly) and the EMAS (8% fully, 27% partly).
50% of the participants of the BME study use a Supplier Code of Conduct (SCoC). In almost all cases it is tailor-made for the company. This SCoC is mostly used in 53% of the cases for every supplier. Another 38% use it only for selected suppliers. In 70% of the cases the SCoC contains a clause that obligates suppliers to use the same sustainability standards. Additionally around one third also offer coachings and trainings for employees and around 20% also for suppliers.
Another instrument to influence supplier is the integration of sustainability criteria in the supplier evaluation. 50% of the respondents of the BME study use a supplier evaluation for selected suppliers (e. g. A suppliers) and 29% for all suppliers. Of those companies 52% include some sustainability criteria and 18% include them extensively. In most of the cases the evaluation is done by self-assessments (95% regularly and irregularly). In addition 46% use Quick-checks and 59% use audits. Another possibility that was not explored in the study are companies like Ecovadis that provide sustainability ratings. Ecovadis also provides interesting resources about sustainability and Supply Chain Management.
A rarely used instrument by the participants of the BME study (3% use it for every supplier and 7% for selected suppliers) is the environmental profit & loss accounting (EP&L). This instrument was developed by Kering. It measures the environmental footprint in terms of carbon emission, water usage, air pollution, waste etc. and calculates its monetary value. The goals are creating transparency on impacts, facilitate decision making and manage risks strategically.
A more widely used instrument is the ESG-risk assessment (ecological, social, governmental). This is used by 7% of the BME study respondents thoroughly and by 42% partly. When used, the most retrieved parameters are supplied products or services themselves (76%), political and legal environment of the supplier (63%), industry of the supplier (61%) and company size (59%).
Also digital tools can contribute to more Sustainability for Logistics and Supply Chain Management. For example the tool of Risk Methods can avoid disruptions in the Supply Chain but also urgent transports by plane or identify poor labour conditions. It thus creates synergies with the general supplier risk management. Another example of intelligent digitalisation according to the BVL-Whitepaper are AI-based picking or route planning tools such as PSI or Big-data-based CO2-emission controlling-tools by Kühne&Nagel.
Still a long way to go
A lot has been done in the last years and efforts are accelerating. But things are not always easy and a lot of work hast still to be done. Three examples illustrate this:
- For example, the calculation of scope 3 emissions often causes problems. Scope 3 emissions are emissions that go beyond the reporting of company’s own emissions (scope 1) and the electricity required to generate them (scope 2). They include emissions that occur during the use or scrapping of products and also in all activities in the production of input materials and their transport. The reasons are manyfold. Not all suppliers especially in the lower tiers are known. Also emissions are often not the focus of business activities. Examples for these companies could be coffee farmers in South American or farmer who grow the cows the for the leather used in the production of car seats.
- Also not all relevant goals can be achieved at the same time. Trade-offs have to be made. Examples include: express delivery by plane vs. penalties and losses of reputation for late delivery, sustainable production in Europe vs. local production in politically unstable countries or should a transportation company invest in biodiversity by reforestation or carbon neutrality by using electrical trucks.
- Today, companies often achieve carbon neutrality by offsetting. This means that instead of reducing their own emissions, they invest in projects that save CO2 elsewhere. For example a reforestation program in South America. Some agencies that organise those programs are not reliable. And it is not guaranteed that projects are even implemented. Or if they are implemented it is not said that they exist for a very long time.
Interview Dan Heuer (FairVenture)
To get deeper insights into how to develop and implement a sustainability strategy I spoke to Dan Heuer, Founder of Fair Venture, a Czech consulting and support company in the field of corporate social responsibility (CSR) and corporate sustainability. I got to know him during a research Projekt on sustainability reporting that i conducted together with the logistics department of the Skoda Auto University.
TL: First of all: tell us a bit about why you started Fair Venture.
Dan Heuer: Hello Thomas and thank you for you invitation to the interview. I have been amazed by nature since I was young. And I have been also inspired by my father who is business man. When I went to study sustainability, I focus on the role of companies. Then I studied the topic on my own and develop deep knowledge in this field. And finally, I believe everybody should make living from his/her passion. I did it and it is great.
TL: Who are your clients (branches, sizes, localization)?
Dan Heuer: Among our clients are smaller Czech companies who want to develop sustainability strategy and go through transformation. But we work also for branches of multinational companies who need to calculate its carbon footprint or create national sustainability report. Anyway, sustainability is a topic for everybody. Therefore, we work also with NGOs or even investors to help them set a criteria for assessing sustainability of their portfolio.
TL: What are the biggest challenges for companies when they want to get more sustainable?
Dan Heuer: The biggest challenge is to “go deep”. On one hand, you can do few nice activities as one green product, separate waste and use LED light. On the other hand, you can go deep. You can distribute responsibilities in management, engage employees, go to carbon neutrality and make sustainable business.
It is hard to make the decision and inspire others to go deep. But it is what we need.
TL: Can you give me some examples of successful implementations of a sustainability strategy?
Dan Heuer: You can find those who are doing well at www.bcorporation.net. Generally, we can think about sustainable companies as Patagonia or Austrian company Sonnentor. These companies based its business on the values of sustainability. And they are the best. Then there are companies as Microsoft, Nestle or Danone. These companies have to go through transformation. They have usually great sustainability strategies. But it is complicated for them to become sustainable and profitable at the same time.
TL: What are the most important first small steps when companies want to start a sustainability initiative? And are example projects with a high visibility like planting trees to reduce emissions and enhancing biodiversity a good idea?
Dan Heuer: I can’t say what is good and what is bad idea. It always depends on the specifics of the companies. The best first small step is to gather all people in the company who care and create a sustainability team.
This team should analyse the situation and choose priorities. Banks can focus on financial education, bakeries on biodiversity and real estate developers on carbon neutrality and so on.
TL: How can companies embed sustainability sustainably in their organization?
Dan Heuer: By working on company culture! Employees must accept this value as their own. Like this it will be more than another KPI and it will last.
TL: Concerning supply chains: what are your top 3 trade-offs in logistics or supply chain management when it comes to logistics or supply chain management? And what is an appropriate approach to solve them?
Dan Heuer: First is the issue of transportation. Unfortunately, it is cheaper to source materials in Africa and process them in Asia than do everything locally in Europe. To avoid it, some companies start to consider also carbon footprint together with price and quality. These companies prosper during Covid more than others.
Second is a control of suppliers in the Third world. Some commodities need to be sourced from Third world and for sure it is good to support local producers. But how you can ensure the quality and even sustainability? This is the role of certification as Fairtrade, Organic, FSC, UTZ and others. They will help you to ensure sustainable materials when you do not know your suppliers personally.
The third is offsetting. You can offset your carbon emissions by investing in projects which avoid or capture CO2. Usually, the projects help build low carbon technologies in developing countries or finance nature recultivation as planting trees. But offsetting is dangerous! We need to lower our carbon emission. That is what companies need to do first. Only the rest of emissions which cannot be quickly reduced can be offset. Example: reduce your flights and then offset only the few necessary. But work on eliminating flights completely. Or reduce energy consumption, then switch to renewable energy and offset only the energy from gas. But plan how to avoid gas as well.
TL: Do you think there is a paradigm shift from a competitive supply chain to a collaborative supply chain?
Dan Heuer: I can’t say what is the global trend. But we can see that the collaborative sustainability certifications I already mentioned are doing well. The companies with collaborative supply chains were definitely doing better during the covid than others.