Supply Chain Sustainability Taking Center Stage

Stephen DeAngelis

October 19, 2011

When a particular business topic can dramatically affect a company’s reputation or bottom line, one way of making sure that it receives the proper attention is to assign a top-level executive to oversee activities in that area. A good example is the Chief Financial Officer. The next “Chief” that may be taking a seat at the executive table is the Chief Sustainability Officer. “Roughly every decade a new role is created inside corporations with claims to equality with the existing ‘C-suite’,” writes Anthony Goodman. “This decade the new contender is the chief sustainability officer.” [“Sustainability eyes its own corner office,” Financial Times, 3 January 2011] He continues:

“Is this a fad or a role that will endure? CSOs already have their own professional association. The Sustainable Forum boldly claims on its website that ‘as regulations and compliance issues grow, it is certain that the role of the CSO will be as necessary as the CFO, CIO, or CEO’. The evidence, however, is mixed. In 2007, Heidrick & Struggles, the recruitment firm, reported on the emergence of the new CSO role. The firm said it had ‘witnessed a substantial rise in demand for a new breed of environmental, health and safety (EHS) leader – now often known as the Chief Sustainability Officer (CSO), to mark the transformation of the role.’ However, last year Ellen Weinreb, the CEO of Sustainability Recruiting, analysed the number of US CSOs that occupy the position of one of the five named executive officers in a company’s securities filings. The answer: ‘I found just two CSOs: David Clary from Albermarle Corporation and Frank O’Brien-Bernini from Owens Corning.’ However, Ms Weinreb notes that there has been an ‘increase in senior-level corporate positions – those with VP and Director titles.'”

Goodman reports that, even though the titles may vary, a number of large companies have appointed a senior executive to “a CSO role.” Those companies “include Coca-Cola, GlaxoSmithKline, IBM, Nestlé, Walmart and Unilever.” Although it seems natural to me that a CSO would have a supply chain background, Goodman indicates that they “come from a variety of backgrounds including engineering, innovation and communication.” The reason for such varied backgrounds is that sustainability deals a broad number of diverse activities. Peter Capozucca, sustainability strategy leader at Deloitte, told Steve Minter, “If you consider sustainability broadly, inclusive of not just climate change but issues related to energy, materials, recycling, waste, the use of water, companies are extremely focused on that. They are not viewing it necessarily as a standalone sustainability initiative but more as linked with issues and strategic priorities they are dealing with anyway, whether on the cost or revenue side of the equation.” [“Sustaining a Green Strategy,” Industry Week, 16 March 2011] In other words, sustainability issues involve many of the same activities already involved in most companies’ sales and operations planning (S&OP) process anyway. That’s one reason that I believe someone with supply chain background would make a good CSO. Minter continues:

“Neil Hawkins, Dow’s vice president of sustainability, cites global issues such as renewable energy, clean drinking water and the rising consumerism that goes along with an expanding middle class in emerging markets, as the sustainability drivers in the world. They also, he says, are drivers of growth for business.”

It’s that connection between sustainability and business growth that is really getting the attention of CEOs and company boards. In companies that don’t have a chief sustainability officer, that role often falls onto the shoulders of the CFO. Kate O’Sullivan writes, “Once the domain of tree-hugging do-gooders, the green movement now offers bottom-line appeal, and finance executives are taking notice.” [“Going for the Other Green,” CFO Magazine, 1 September 2011] She reports:

“Today, CFOs looking to squeeze as much efficiency out of their plants and operations as possible have found that certain cornerstones of the sustainability movement, such as reducing waste and power usage, offer fresh ways to do what they do so well: manage risk and control costs. The environmental benefits are a nice outcome, too, of course, but they are not the main motivation behind many companies’ heightened focus on green initiatives. Finance executives are also realizing that greener practices may be able to help them control volatile energy and input costs, which are a growing concern. … Whether the cost of energy and materials will continue to soar as a result of growth in emerging economies, or whether weak demand in the United States and Europe will keep it in check, price volatility in one direction or another seems certain. For CFOs, one way to hedge against price swings and maintain some ability to plan and forecast is to figure out how their companies can reduce their use of such wildly fluctuating commodities. Between the cost-cutting opportunity and the possibility of making materials costs more predictable, finance chiefs are finding that green business has transformed from an idealistic approach to an incredibly pragmatic one.”

Procurement analyst Paul Teague agrees with O’Sullivan. He writes, “A new report from consultancy Ernst & Young says that there is increasing pressure for finance officers to take the lead in their company’s sustainability efforts.” [“Want to get closer to the CFO? Wear green,” Procurement Blog, 26 September 2011] Teague continues:

“[Sustainability is] a responsibility, the firm says, that would have been unimaginable a few years ago. But, the report continues, the impetus is understandable: investors are seeing the confluence of sustainability, risk management, corporate reputation, and revenue.”

Teague says that Chief Procurement Officers “should rejoice in the report’s finding because of the opportunities it presents.” He explains:

“Among the steps CFOs should take, the report advises, is development of a reporting system to track a variety of metrics on their companies’ sustainability efforts. Well, CFOs are in luck because CPOs have already done that to track sustainability efforts in their supply chains. In companies from IBM to Walmart to P&G to Estee Lauder, procurement officers have been tracking their suppliers’ sustainability records for some time and including those efforts in the criteria they use to judge supplier performance. And, they have amassed big savings from their efforts. Some companies, like PepsiCo, are even finding ways to create new revenue streams from sustainability efforts. Surprisingly, even emerging-world companies are finding profits from greenery. In other words, CPOs know how to track sustainability performance and use the results of their tracking to benefit the top and bottom line. CFOs can learn from them. … As Humphrey Bogart’s character ‘Rick’ said to Claude Rains’ character ‘Captain Renault at the end of the movie Casablanca, ‘This is the beginning of a beautiful friendship.'”

Eric Johnson writes, “If you’re looking for a buzzword in the logistics industry of late, it doesn’t get much buzzier than ‘sustainability.'” [“The green Tiebreaker,” American Shipper, 11 April 2011] For transportation companies, sustainability is becoming a significant issue. According to Johnson, an American Shipper survey revealed “nearly 40 percent of 156 respondents said they ask their logistics services providers (LSPs) to submit a sustainability plan ahead of buying decisions.” Jonathan Gold, vice president of supply chain and customs policy for the National Retail Federation, told Johnson, “As far as the importance of sustainability as a factor, I believe it is being considered on par with the other traditional criteria such as price and service. Rates and service, particularly service, are still key factors, but sustainability is definitely being discussed and considered. Is it a key decision right now? I don’t think so, but it’s definitely in the mix. It depends on the company, and how they do the rankings. For some it will be higher than others.”

So what sorts of activities do senior-level sustainability executives engage in? Goodman writes:

“What do these new CSOs actually do? Research analyst Verdantix noted: ‘Whilst the job titles vary the responsibilities are similar: improve sustainability governance, develop climate change strategy, launch climate change and sustainability products and implement policies that move the organisation on a global basis towards strategic sustainable business goals.'”

Goodman, a partner at Tapestry Networks, a professional services firm, indicates that he and his colleagues “have spoken to numerous CSOs in the past two years to identify the challenges they are facing.” From those discussions, “three main challenges” emerged: “getting traction inside the business, working with external stakeholders, and encouraging the innovation necessary to meet stretch goals.” Concerning the first challenge, Goodman writes:

“Dealing with internal blockages is a challenge that every new entrant to the C-suite has faced. The recent wave of new chief risk officers (CROs) appointed after the financial crisis face a similar problem. Neither CROs nor CSOs can achieve their objectives without embedding risk management or, in this case sustainability, in often reluctant business units. The new chiefs have little positional authority and even smaller budgets and headcount, so influencing skills become paramount. A European CSO told me: ‘Internal management is the most important aspect in my job.’ A US CSO added: ‘You need someone leading the sustainability group from the business side who already has credibility with business units. Relationships make a difference.'”

Shouldering a big responsibility with little authority is never an enviable position. The secret to success is making those who do have authority (and budgets) believe that the big responsibility is theirs. Concerning his second challenge, Goodman writes:

“CROs may have spent hours with regulators over the past few years, but CSOs spend extensive time outside their company working with a broader array of stakeholders from investors to regulators to NGOs. A CSO told us: ‘Thirty years ago, we became defensive when we were targeted by NGOs. Now, we’ve opened up more and engaged with our critics, without going in the other direction and greenwashing.'”

Face it companies are always going to face charges of greenwashing. After all, the sustainability programs that are going to have legs are those for which a business case can be made. That doesn’t mean that CSOs shouldn’t buddy up with stakeholder NGOs. The best NGOs understand that their goals are inextricably linked to corporate behavior. Fostering those goals within the corporate community is best achieved through cooperation rather than confrontation. About the final challenge, Goodman writes:

“The final challenge CSOs face is to meet the aggressive goals set by their companies. For instance, Unilever’s CEO Paul Polman has said that the company has set itself the challenge of ‘doubling the size of its business whilst at the same time reducing its environmental footprint.’ The company has also said that it doesn’t know how to achieve that objective today. Often it is the CSO who is responsible for seeking out ground-breaking new technologies that support ambitious goals like Unilever’s. One European CSO remarked: ‘There are some areas where we’ve said we have a goal, and don’t know how [to achieve it].'”

There’s nothing wrong with establishing “stretch goals.” As the old adage goes, “Necessity is the mother of invention.” By making those stretch goals a necessity, innovations necessary to achieve them are more likely to be found. Goodman concludes:

“Previous holders of the C-suite ‘newcomer of the decade award’ can still be found on the executive floor. Chief information officers play a critical role in supporting enterprise effectiveness. CROs seem to become more entrenched after each new corporate crisis. Others, like chief strategy officers, simply fade away. Whenever a new C-suite role appears, commentators argue about whether the role will eventually lead its inhabitants to the promised land of the CEO’s corner office? So, what does the future hold for the CSO? With increasing commitment to sustainability across the corporate world, a considerable span of internal and external responsibilities and a skill set that includes both technical and leadership capabilities, the CSO could become a real contender for the CEO’s job. At the very least, the role of CSO could be an important developmental step on that road. If CSOs can also prove that they have been instrumental in their companies achieving innovative breakthroughs that benefit investors and other stakeholders alike, then they will be in a strong position to demand their reward.”

As I noted in a post entitled C-Level Supply Chain Executives, the promotion of Tim Cook to replace Steve Jobs as Apple’s CEO is a step towards getting more supply chain professionals in the top position at major corporations. Sustainability is just another of the many titles that such professionals can wear. The bottom line is that more and more companies are coming to recognize that the supply chain is at the heart of their business. They cannot be the best, like Apple, if their supply chain is not world class. Supply chain professionals have known this for years and they welcome the fact that others are beginning to recognize this as well.