W Tanenbaum Making The Supply Chain Sustainable 0210

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Making the Supply Chain Sustainable

William A. Tanenbaum, Kaye Scholer LLP, New York

GreenTech, Environment Efficiency, Carbon Trading & Sustainability

Chair, Technology, Intellectual Property & Outsourcing Group

This presentation contains Attorney Advertising.31938779

Making the Supply Chain Sustainable - Past

What did it used to be?

Corporate “environmental managers” were generally limited to regulatory compliance function

Focus was on “keep company out of trouble,” but not involved in broader business affairs Not focus technology leadership (innovation)

Not focus on customer needs (revenue, value)

Not focus on recycling or product life cycle analysis (LCA) as serving strategic goals of company

Maybe some CSR, e.g., managing reputational risks


Making the Supply Chain Sustainable -- Intermediate

What were the intermediate steps?

From negative --avoiding reputational risks from environmental impacts

To positive – enhancing brand image and value

To additive – expanding due diligence to evaluate whether the perceived premium cost for purchasing a manufacturing plant in the EU was offset by the value of the sellable carbon credits under the ETS


Making the Supply Chain Sustainable – Reevaluation

Assessing the impact of product design, manufacturing processes, shipping, use of raw materials and the rest of supply chain on the (a) costs and (b) on the environment (and the regulatory and other costs of that)

Assessing cost savings missed by not adopting energy efficiency and use of sustainable materials

Corporate benefits


Corporate Survey Results for Sustainability

Benefits of implementing sustainable business practices:

Costs savings

Competitive advantages

Product, service or market innovation

Process or business model improvement

New source of revenue or cash flow

More effective risk management

Employee satisfaction, retention

Enhanced stakeholder relations

Enhanced company and brand image

See “Sustainability and Competitive Advantage,” MITSloan Management Review, Fall 2009, Vol. 51, No. 1


Financial Impact of Corporate Sustainable Practices

Stronger brand results in greater pricing power

Cost savings result from greater operational efficiencies, more efficient use of resources, supply chain optimization and lower costs and taxes

Market share increases because of increased customer loyalty (in relevant markets)

Cost of capital decreases because of lower costs and increased revenue from above factors See MITSloan study, citing Nike study


Where Does Supply Chain Sustainability Fit?

A company and its supply chain are like an iceberg . . .

. . . and the supply chain is the underwater part, because:

much of the negative sustainable impact and the greatest opportunity for improvement lies in making the upstream supply chain more sustainable Put another way, a significant portion of emissions come from supply

chain

and some opportunities are in making downstream business processes more sustainable (shipping, inventory management)


From the Supply Chain Customer’s Perspective

Need to improve supply chain sustainability in order to reduce the customer’s traditional business costs, carbon costs and future carbon costs, maintain or enhance position in the market

Need to require supply chain companies to measure and report environmental impacts

Need to use reliable measure metrics

Need to verify measurement and reports


CDP Supply Chain Report 2010

CDP commissioned A.T. Kearney to produce Supply Chain Report 2010 (ww.cdproject.com)

Surveyed reports of 710 suppliers

48% were reporting for the first time

60% had a Board member responsible for sustainability

56% had emissions reduction plans

38% committed to objective targets


CDP Supply Chain Report 2010 (2)

Surveyed members of CDP who are customers in supply chain

6% of those identified as leading companies in the CDP have already “deselected” suppliers for failure to be sustainable

56% expect to deselect failing suppliers

Customers are beginning to rewrite contracts to impose sustainability requirements

20% received sustainable reports from suppliers

Shows currently difficult to measure sustainability


CDP Members’ Plans

89% have strategy for addressing suppliers’ sustainability and emissions practices

Plan to increase this issue in supplier management in next year

During next 5 years, metrics applicable to sustainability as part of procurement is expected to triple

Summary: these companies view sustainability an issue that extends beyond their own facilities to those of supply chain companies


From the Supplier’s Perspective

Risk of loosing business

Risk of harming customer’s reputation

Need to comply with requirements

Need to measure, report and verify

Need to opt out of publication on emerging public databases

Problem of complying with conflicting sustainability policies

Responsible for supplier’s suppliers?

Need to push business model changes into supply chain

What is the future of just-in-time?


Is the Walmart Sustainability Index a Prototype or De Facto Standard for Supply Chain Contractual Sustainability Requirements?

“With this initiative, we are helping create a more transparent supply chain, driving product innovation and ultimately providing our customers with information they need to assess products’ sustainability.” (http://walmartstores.com/Sustainability/9292.aspx)

Reflects view that being green a result of optimizing the supply chain, not necessarily an end in itself


Walmart Step 1

Supplier Assessment

Supplier’s complete self-assessment survey Energy and climate

Material efficiency

Natural resources

People and community

Walmart started by requiring its top tier suppliers to complete survey in October 2009


Walmart Step 2

Develop an lifecylce analysis database

Working with Sustainability Consortium (administered by Arizona State University, University of Arkansas and includes other companies)

Goal is to develop standards

What is relationship between Consortium and Walmart?

Develop global database of product lifecycles “from raw materials to disposal”


Walmart Step 3

Retail tool

Type of product labeling

“provide customers with product information in a simple, convenient and easy to understand manner so they can make choices and consume in more sustainable way”


Ratings and Use of Index

Suppliers are rated as “Below Target,” “On Target” or “Above Target” in certain categories

Tied to other corporate goals:

“Efficient use of raw materials” Reduce produce returns by reducing manufacturing defects

“Community” relations Reduce potential harm to Walmart reputation from suppliers’

employment practices

Compliance with index relies on third-party standards and certifications, CDP for example


WalMart’s “15 Questions for Suppliers”

These questions provide summary and overview of the more complete supplier sustainability assessment requirements


What are the IP and Confidentiality Issues in Supply Chain Compliance?

What steps should supplier take to prevent unauthorized access or use of sustainability report (including constituent data)

Does supplier or customer want to protect IP or confidentiality of metrics, tools or software used to measure, report or verify sustainability?

What IP protection is available?

Multijurisdictional differences in IP


IP and Confidentiality (2)

Will use of any of the foregoing infringe another party’s IP?

Licenses required?

Indemnities required?

Scope of use?

RFPs and IP and NDAs

IP issues involved in collaborative inventions

Outsourcing and IP

Competitive intelligence issues


Now that a Company Knows its Environmental Impact, What Does it Have to Disclose?

On January 27, 2010, the U.S. Securities and Exchange Commission (SEC) approved the release of climate change disclosure interpretive guidance.

On February 2, SEC released its “Guidance Regarding Disclosures Related to Climate Change.” Also announced that SEC will be focusing on climate change disclosures in reviewing corporate filings

Based in part on EPA requirement effective January 1, 2010 that companies meeting GHG thresholds must track them

Took note of voluntary disclosures now made to CDP and this might require disclosures under SEC rules


SEC Guidance on Climate Change Disclosures

Source of reporting obligation is existing obligation to disclose material items under existing Regs S-K and S-X , Rule 48, Exchange Act Rule 12b-20

Negative standard adopted: With respect to Management’s Discussion and Analysis section of any filing (“MD&A”), interpretation in SEC guidance is that if a know trend, event or uncertainty (including legislation or regulation) cannot be excluded as not as not reasonably likely to occur, then a company’s management must evaluate it’s consequences on company’s financial condition or results of company operations on the assumption that the event, etc., will come to fruition.

Must determine effect of applicable emissions regulations (cap and trade) unless impact would not be material, under SEC standards of materiality


SEC Examples

Material estimated capital expenditures for environmental control facilities related to impact of legislation of regulation

Legal proceedings

MD&A related: purchase and sale of carbon credits, facilities improvements to comply with regulations, effect on the demand and supply of goods produced, including reduced demand for goods producing GHGs; effect on supply chain

Risk factors: impact on corporate reputation; supply chain disruptions; weather disruptions (e.g., climate change)


SEC Examples

Material estimated capital expenditures for environmental control facilities related to impact of legislation of regulation

Legal proceedings

MD&A related: purchase and sale of carbon credits, facilities improvements to comply with regulations, effect on the demand and supply of goods produced, including reduced demand for goods producing GHGs; effect on supply chain

Risk factors: impact on corporate reputation; supply chain disruptions; weather disruptions (e.g., climate change)


Supply Chain Factors are Notable

While evaluation is continuing, because guidance was released only on February 2, 2010, the SEC guidance and private sector sustainability reporting requirements and third-party reporting standards are now intertwined and mutually reinforcing

Note that knowledge is apparently the standard even if supplier disclosures compliance (or lack thereof) in confidential manner, or if customer is impacted even if reporting by supplier is not publicly reported


Other Disclosures

In financial statements, and in financial reserves

Outsourcing

Contracts

RFPs


Conclusion

Sustainability reporting is coming and is here to stay

Transparency and verifiability will lead to convergence of IT with environmental management

Companies will need to account for supply chain impacts

Sustainability requirements will change contracts, and implicate IP and confidentiality outside historical scope of procurement practices

Customers’ and suppliers’ business will be won or lost on sustainability management

Sustainability reporting is mainstream business activity

Contracts will evolve to allocate ownership of carbon credits


Question and Answers

William A. Tanenbaum, Kaye Scholer LLP, New York, [email protected]

Date post:	19-Oct-2014
Category:	Business
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W Tanenbaum Making The Supply Chain Sustainable 0210

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