Wind turbines

Balancing Green

Companies are championing their environmental credentials in glossy reports, speeches, and media interviews. However, many will admit off the record that they either do not believe in the need for these efforts, or (more commonly) that current initiatives do not meet any reasonable cost benefit test even if global warming is real and the danger acute. To wit, very few have a significant at-risk component in their senior managers’ compensation.

Given their behind-the-scenes skepticism, why do companies continue to champion sustainability causes in public? One reason is that many are put on the defensive when environmental sustainability is framed as a “profits vs. planet” or “societal good vs. corporate evil” movement. These narratives ignore the role of businesses and their supply chains in both employing people and delivering improved standards of living to humanity, especially the billions of people who have yet to enjoy the plenty that modern industry can provide.  

The real conflict is not “profits vs. planet” but “(some) people vs. (other) people.” More specifically, the conflict is between people who believe in the importance of environmental stewardship and people who are looking for jobs and affordable goods.

All stakeholders need to recognize that even the most environmentally responsible companies must manage their supply chains to satisfy growing demand and provide employment opportunities. 

One of the main challenges commercial enterprises face is that many of their customers only pay lip service to green products and services. Despite what consumers say when interviewed by journalists, NGOs, or academics, the vast majority would not pay more for sustainable products when faced with the choice at the retail shelf. Cleaning products maker The Clorox Company developed a line of environmentally friendly cleaners called Green Works. The product line was small and lost money, but Clorox gained valuable know how about the market and the challenges of manufacturing this type of product.

It may be irrelevant whether business executives personally embrace environmentalists’ arguments about “the challenge of our time” or believe it to be a hoax. Companies, as entities that connect supply and demand around the world, have many stakeholders in the communities in which they operate who are interested in corporate profits, jobs, business growth, and sustainability.

The business merits of sustainability, regardless of personal beliefs, are based on the fact that even the most ardent climate change skeptics in the C-suite face natural resource costs, public relations problems, regulatory burdens, and a green consumer segment.

Consequently, there are three compelling reasons for engaging in sustainability efforts: risk mitigation, cost cutting, and hedging.

Risk mitigation. Regardless of the degree to which company executives believe in the threat of climate change or the ravages of environmental degradation, many of their customers do, and they need to respond to these beliefs (even though the same customers are not likely to be willing to pay more for sustainable products). If they don’t, they risk incurring the wrath of NGOs and the media, leading to reputational damage.

Cost cutting. Investing in green initiatives can reduce supply chain costs. An example is how reducing the number of empty miles can shrink a company’s carbon footprint and capture cost savings in freight transportation. Retailer Macy’s eliminated 21% of empty miles and saved about $1.75 million annually by joining a program that posts retailers’ empty miles and finds shippers that can take advantage of the unused truck capacity.

Hedging. The third incentive for going green is that companies need to gain relevant expertise just in case consumer taste and demand change. For instance, millennial consumers tend to be more environmentally conscious than the baby boomer generation of consumers, and these convictions may shape future markets.

Balancing supply chain sustainability with enterprises’ commercial and societal obligations is a highly complex task. Casting sustainability as a purely ideological or moral struggle is a gross simplification of the balancing act that enterprises must perform to reconcile sustainability with the rigors of running successful businesses and the provision of employment and well-being for the communities in which they operate.

Consider, for example, aluminum producer Alcoa, a company that supports multiple green initiatives. Between 2005 and 2015 the manufacturer improved its production efficiency by 4.2% and reduced its greenhouse gas emissions by 25.9%. Yet to remain cost competitive in a global commodity business, Alcoa needs to burn Australian brown coal as a low-cost energy source – a strategy that has been condemned by environmentalists.

Sustainability is intimately connected with supply chains, the complex economic structures formed by companies that use the global supply of natural resources to meet worldwide consumer demand and provide employment for millions of people.

If we are to set and meet supply chain sustainability goals that are both realistic and effective, it is vital that we move away from sloganeering and carry out a sober assessment of what we are trying to accomplish, how much it will cost, whether the cost justifies the effort and any resulting dislocations, and how we go about it.