Today, society demands greater responsibility from the organizations they work for, buy from and invest in. Success in the war for talent increasingly hinges on a company’s corporate citizenship. Consumers are more likely to buy from companies with a reputation for social responsibility than from a neutral company. Socially conscious investors commonly use environmental, social and governance (ESG) criteria to screen investment decisions. Investment firms are even setting specific sustainable development goals for their portfolios. For example, Blackstone in September 2020 announced a commitment to reduce carbon emissions by 15% across its new control investments in which the investor regulates energy use.1
This expanded societal expectation requires a shift in business mindset, from focusing on driving short-term shareholder value to instead driving long-term value for all stakeholders. Ernst & Young LLP (EY US), is at the forefront of this paradigm shift. We’re a lead collaboration partner with the Embankment Project for Inclusive Capitalism, which was founded on the belief that for society and economies to thrive, business needs to focus on both the short and long terms. We’ve identified a framework and new metrics to help businesses better articulate the long-term value they create for stakeholders.
While there are many dimensions to long-term value creation, a commitment to sustainability is essential — so much so that those moving early can stand to gain a considerable competitive advantage. A particularly rich target for sustainability efforts is the supply chain, which has significant direct and indirect environmental and social impacts and can be a substantial source of new value through sustainability initiatives.
Value creation through a sustainable supply chain
The generation of long-term value is inextricably linked to embedding sustainability into business operations, particularly across the supply chain. There are many ways to create a direct sustainability impact in supply chain operations. For instance, how a company executes distribution — from the type of vehicles used to the truck capacity achieved — significantly contributes to its environmental outcomes. There are also indirect benefits from embedding sustainability into supply chain operations. The way a company sets its sourcing strategy, and the level of transparency in its upstream supply chain, can influence supplier behaviors such as reducing their carbon emissions or halting exploitation of slave labor.
Indeed, organizations have a great responsibility, as well as an opportunity, to ensure their supply chain operations are sustainable. There are monetary, reputational and competitive advantages at stake. EY research shows that sustainable supply chains’ investments can add 12% to 23% to value chain revenue. Furthermore, procurement organizations with higher adoption of supplier diversity programs generate a 133% greater return on procurement investments than a business that doesn’t focus on supply chain diversity.2 Additionally, a company that cares about preventing modern slavery in the workforce and the supply chain and cares about the environment attracts consumers to its brand. These monetary and reputational advantages can bring a competitive advantage.
Driving sustainable operations is also one of the best ways to safeguard communities and build a better working world. At times there can be tension between short-term business objectives and corporate citizenship but implementing sustainable initiatives across the supply chain benefits both business and society. It is a place where “doing well and doing good” coincide.
Key sustainability opportunity areas
An organization’s efforts to build sustainable, socially responsible operations can be broad in scope. Three key sustainability areas are prime opportunities for supply chain organizations:
- Environmental impact — The responsibility to reduce carbon emissions falls predominantly on the supply chain. Most emissions come from a company’s and its suppliers’ production, distribution and facilities.
- Waste reduction — There’s long been a focus on reducing waste, especially in manufacturing, where reducing scrap and downtime drives efficiency. With a sustainability lens, companies are now getting very innovative about how they reduce waste even further. Reverse logistics and recycling, such as getting returns from customers rather than having them thrown away, are another focus area.
- Human rights — The use of child and slave labor in production is a critical human rights issue that supply chain operations can tackle. Getting better visibility into the supply base by leveraging technologies such as blockchain can enable companies to do due diligence upstream in sourcing raw materials so that a supplier’s practices align with the company’s priorities.
- Initiatives to address each of these areas can be undertaken across the supply chain, from planning and sourcing to distribution and return or disposal.
- Procurement — In purchasing, areas of attack may include assuring conflict-free minerals and reducing suppliers’ energy consumption (i.e., reducing scope-three emissions).
- Production and product innovation — Supply chain organizations can reduce unplanned manufacturing downtime to improve energy utilization. They can source more sustainable forms of electricity to power manufacturing and increase waste recycling. They can also reconfigure products to make them more sustainable and recyclable. For example, Procter and Gamble has taken water out of some of its historically heavily water-based products. This initiative means the company doesn’t have to sequester water — an increasingly scarce resource — from the environment. It also reduces the product’s weight, making transportation more cost-efficient and reducing carbon emissions.
- Logistics and distribution — Opportunities may include incorporating more electric vehicles into the fleet or exploring different transportation modes to reduce emissions. Reducing the volume of a product that needs expediting may also reduce emissions, as expediting typically requires a more carbon-intensive transportation mode.
- Facilities management — Retrofitting factories, warehouses and other facilities with more energy-efficient appliances can generate substantial energy savings. From installing LED lights and improving insulation to replacing windows and adding solar panels, there are myriad ways to foster environmental benefits that can also save cost and time.