The costs of sustainability

Driving sustainability in supply chains has been a popular subject over the past few years, but recently, this changed. In mid January, research initiated by Actal, a Dutch agency responsible for reducing bureaucracy between government and enterprise, was published, exposing the costs of The Netherlands’ sustainable public procurement policy. The research revealed that the implementation of this sustainable public procurement policy had cost several hundreds of millions of Euros. Needless to say, the tax payers in The Netherlands were not happy about it. Political leaders were quick to argue that the policy should be terminated as quickly as possible…Then on 26th February, CEO of AkzoNobel Nobel Hans Weijers announced that the KPI’s the company had been using to measure the firm’s sustainability performance, would be scrapped. These KPI’s related to the Dow Jones Sustainability Index and although AkzoNobel’s ranking on the index had been used to assess the company’s sustainability performance for many years, it was thought too arbitrary to monitor or reward executive performance…

It just goes to show how difficult it is for the government and public enterprises to integrate corporate social responsibility (CSR) into their businesses, and particularly their purchasing and supply processes. So does the implementation of CSR actually cost money? Does it drive up company costs? Based upon the outcome of recent PhD research at Eindhoven University of Technology, one would say “YES”. Improving animal wellbeing in chicken farms by allowing chickens to wander around in big barns (instead of spending their lives cooped up in small pens), increases the cost price per egg beyond a doubt. Yet Dutch consumers are happy to pay a few cents extra to give chickens a better life… Similarly, forcing light bulb manufacturers to create full supply chain transparency through accurate registration of hazardous materials and components according to the European REACH program (Registration, Evaluation, Authorisation and Restriction of Chemical substances ), requires a massive investment in administration, regulation and procedures in order to comply with EC regulations on environmental safety.

This is obviously the price we have to pay for securing better labor conditions in South East Asian sweatshops and preventing hazardous materials from flowing freely into the environment when products are thrown away. These measures are necessary if we want to create a better world for the next generation, aren’t they? Nobody in our Western economies will disagree with the need to create greater animal wellbeing and a safer environment. The problem is, that investments can be measured whilst the benefits in the long term cannot.

The same is true for other segments of government spending in many European countries, like education. Large sums of money are spent on education and taxpayers argue about the effectiveness of the educational programs. Yet nobody argues that since education comes at a high price, it should be abandoned…

Why then do we argue about the need for sustainability in public procurement practices? In the Dutch instance, it all boils down to a mistake on Actal’s part. Having conducted the research in four sectors, they failed to instruct KPMG to investigate the results (read revenue) from the Dutch public procurement policy on sustainability. Should they have assessed the benefits in correlation to the costs, they may have come up with a more balanced view on the subject. By focusing solely on the costs of the program, the research has given way to opportunistic attacks from certain political parties.

Relating executive pay to the Dow Jones Sustainability Index (where a company is ranked based upon the insights of a limited number of experts), may be a little naïve… Which company actually relates executive pay to the AEX or another European stock exchange index? Company ranking, as you are bound to be aware, is subject to many more factors than company performance alone. It would be far better to relate executive pay to factors that managers can influence. In fact, we would recommend you link executive pay to individual sustainability targets per operating company or business group, for which executives assume direct responsibility. This would be an alternative to general macroeconomic indicators.

Lessons to be learned from this discussion: 1) corporate sustainability programs should be judged on the basis of their costs and their contribution to the environment, society and company performance and 2) executive pay should be related to those business factors that actually influence them.

Whatever the solution, it is important for results from government and corporate sustainability programs to be reported simply and clearly, so that they can be understood by the public (such as the number of trees saved by using recycled paper, or the number of car kilometres saved by using public transport).

When it comes to supply chain managers, the current debate on corporate social responsibility is not encouraging. It is the supply chain, governments and businesses, that has the most impact on the environment. In which case, purchasing and supply chain managers should be motivated, even more so, to adopt sustainable solutions in their supplier relationships. There is compelling academic evidence that promoting sustainability in supply chains drives innovation, company reputation and firm performance . Isn’t it about time we abandoned the single performance criterion that most purchasing and supply organizations suffer from? By this I mean of course hard dollar/euro purchasing cost savings!

By pushing specific sustainability performance measures in supply chain relationships, everyone will be able to make more balanced sourcing decisions. To be able to do so, top managers will have to get their acts together when it comes to creating responsible companies. Executive pay should be tied to sustainable performance first. After that, purchasing and supply chain managers are bound to follow suit.

Arjan van Weele, Professor at Eindhoven University of Technology, Faculty of Industrial Engineering and Innovation Sciences and Board Member of the European Supply Chain Forum.