Bloomberg BNA -- Multinational corporations say they are increasingly taking on a regulatory role in their supply chains to improve performance on environment, health and safety (EHS) issues, especially in developing countries where government oversight can be weak.
Although EHS regulations are strong in some developing countries, including China, they can be difficult to enforce, as governments struggle to keep up with growth in manufacturing.
Multinational corporations have traditionally conducted facility audits to make sure their supply chains are complying with local regulations and their own supplier standards. But many facilities lack the technical skills and management expertise to meet those standards.
To fill the gap in local expertise, General Electric, Wal-Mart Stores Inc. and Hewlett-Packard Co. are providing more training and education programs to help suppliers learn how to manage a range of EHS issues, from energy and water use to fire safety, company officials told Bloomberg BNA. They said the companies are also implementing new tools to track their suppliers' performance.
‘Find It and Fix It.'
GE, which produces appliances, lighting, power systems and other products, has focused its supply chain auditing on countries where government enforcement is weak, according to Ann Condon, who leads efficiency, stewardship and product environmental compliance programs across GE's global supply chain.
“A long time ago, we concluded that there were specific countries where suppliers' performance was often not good,” including China, India and a few other countries, Condon told Bloomberg BNA.
China accounted for about 40 percent of GE's supplier assessments in 2012 and 56 percent of “findings,” which occur when auditors note issues at a facility, such as a missing permit.
But the auditing program wasn't generating long-term improvement in most suppliers, Condon said. So in 2011, GE added a requirement for suppliers to move from a “find-it-and-fix-it mode to more of a management-system mode,” she said.
Using a new key performance indicators (KPI) tool introduced in 2012, GE now compiles a scorecard for suppliers on how well they're managing issues related to the environment, health, safety, labor rights, security and human rights.
For example, Condon said one of the key indicators is whether a facility has a well-trained environmental specialist. The supplier could receive a score from zero to five, depending on the environmental expert's level of training.
There are also questions on water and energy use built into the KPI tool.
“Right now, we're asking some fairly simple questions on that front,” such as whether suppliers know what their energy use is or whether they have an approach for measuring or reducing their energy use, Condon said.
GE doesn't have enough data yet to show how well the KPI tool is working, but it has seen that suppliers who score better on their management systems tend to have fewer audit findings and less severe findings, which means GE can audit them less often, Condon said.
“It was kind of an ‘aha' moment,” she said.
Collaborating on EHS Training
To help suppliers build these EHS management systems, GE has partnered with local and international nongovernmental organizations (NGOs) on training and education programs.
“GE is not alone in working with suppliers with significant environmental, health, social, human rights and security issues,” the company says on its website. “We long ago realized that these challenges, especially in some of the fastest-growing economies, were bigger than what one organization-even one as big as GE - could address alone.”
GE was one of several founding partners of the Environment, Health and Safety Academy launched in 2009 in China's Guangdong Province, which is known as the “factory to the world.”
The academy is part of a public-private partnership led by the Institute for Sustainable Communities (ISC), based in Vermont.
The academy works with local universities and other organizations to provide training in essential skills for EHS management, including labor practices, and in sustainability leadership, through courses on greenhouse gas emissions, energy efficiency, water resources and related topics.
GE, Pfizer, Honeywell, Wal-Mart and other multinational companies have provided training materials for the academy, which teaches a combination of local regulatory requirements and international best practices.
“This really is an area where collaboration gives us a whole lot more,” Condon said.
Creating a ‘Cultural Shift.’
The academy seeks to improve policy implementation and strengthen its impact by significantly expanding the pool of qualified EHS managers in China, ISC President George Hamilton told Bloomberg BNA.
Before the academy was established, GE and other corporate partners involved in the academy wanted to get to the “root cause” of persistent problems appearing in factory audits, Hamilton said. They agreed that one of the major factors that defines success in a factory audit is “a factory manager that gets it,” he said.
So the academy focuses on preparing managers to prevent EHS issues from arising, rather than just reacting to them, which is often what happens after facility audits or assessments conducted by companies.
“People have to get on board to create a cultural shift within a factory towards more sustainable management of EHS factors,” Hamilton said. “It's not the line workers or the owners, but the managers in between, because we think they'll have the most ability to get the job done.”
Hundreds of global companies have sent their EHS managers and suppliers to be trained in ISC's program in China.
More than 88 percent of those trained say they've made positive changes in their EHS practices, including improvements in wastewater treatment, energy efficiency and injury rates, and the establishment of a routine and transparent system for reporting EHS problems, ISC said.
Chinese regulators have also gotten involved as students or guest lecturers and through model audits, said Matthew DeGroot, ISC's Asia program director.
“We work with a lot of regulators all the time, and they're very appreciative of the program because the capacity for enforcement is weak,” DeGroot told Bloomberg BNA. “Some of these industries in China haven't even been around for more than 20 years at the most, so regulators are often catching up to where industry already is.”
Sustainable Working Conditions
Since the 2009 establishment of the academy in Guangdong, the ISC has launched similar academies in Jiangsu, China, as well as in Bangladesh and most recently in India.
Wal-Mart was a founding partner of the Bangladesh academy, which will focus on fire safety and building safety training in the wake of the catastrophic Dhaka garment factory collapse in April 2013, which killed more than 1,100 workers. The company is collaborating with ISC on curriculum development and encouraging its suppliers to participate in the program.
“Our objective is to train factory management and workers, so that improvements in working conditions are sustainable,” a spokeswoman for Wal-Mart told Bloomberg BNA in an email.
“This applies for environmental, social, and safety factors.”
Safety is one of several factors Wal-Mart considers as part of its ethical supply chain strategy.
The company has also made supply chain sustainability a priority through a partnership with a nonprofit coalition called the Sustainability Consortium.
The consortium, led by the University of Arkansas and Arizona State University, is providing research for a Sustainability Index that Wal-Mart uses to track the environmental impacts of products suppliers make.
“Engaging the supply chain is critical,” Jack Sinclair, executive vice president of food for Wal-Mart U.S., said Jan. 29 at an event organized by the National Council on Science and the Environment. “We can't do this alone. We even have to engage with our competitors.”
The index scores suppliers based on the sustainability of their products. The scores then feed into decisions on which products are purchased from suppliers for retail sale in Wal-Mart stores.
Since its launch in 2009, the Sustainability Index has been rolled out across 700 product categories and to 5,000 suppliers, according to Sinclair. It is currently used only by buyers in the U.S., but Wal-Mart plans to expand the index to stores in South Africa, Chile, Mexico and China.
The company has committed to buying 70 percent of goods sold in Wal-Mart and Sam's Club locations in the U.S. from global suppliers who use the index by the end of 2017.
Based on data gathered through the index, Wal-Mart has been working with suppliers, nonprofits, industry experts and government to address “hot spots” across its supply chain.
Sinclair said these hot spots are “areas that, when addressed, could have an exponential impact.”
Filling Regulatory Vacuum
One such hot spot is greenhouse gas emissions from fertilizer used in farming.
Fertilizer use accounts for almost half of Wal-Mart's supply chain emissions, said Elizabeth Sturcken, who leads the Environmental Defense Fund's partnership with Wal-Mart on green supply chains.
“It's surprising, but not so surprising when you think that Wal-Mart is the biggest food supplier in the U.S.,” Sturcken told Bloomberg BNA.
Sinclair said the majority of fertilizer is lost due to runoff or leaching.
Wal-Mart and EDF are working with farmers in 18 U.S. states, as well as Central America and South America, to optimize fertilizer usage, which saves money for farmers while reducing greenhouse gas emissions and water quality impacts.
“This is an area where there's been no regulatory action, where Wal-Mart in effect becomes a new standard in saying that they want fertilizer optimized,” Sturcken said.
She said Wal-Mart has also filled a “vacuum” in U.S. regulation for chemical-intensive products. The company is asking suppliers to move away from about 10 chemicals of concern and transition toward greener alternatives in home and personal care products.
“When Wal-Mart acts in a big way across multiple product categories,” like fertilizer or chemicals, “it is really taking a leadership role and becoming a de facto regulatory entity in a lot of ways,” Sturcken said.
Encouraging Supplier ‘Ownership.’
Hewlett-Packard, which sells imaging and printing systems, computing systems and information technology services worldwide, recently adopted a similar scorecard system for measuring suppliers' social and environmental responsibility (SER).
HP has been working with its suppliers on SER issues for more than a decade. The company assesses social and environmental risks in its supply chain based on location, procurement category, company information and external stakeholder reports, including a pollution database run by the nonprofit Institute of Public & Environmental Affairs in China.
HP's supply chain program has traditionally focused on audits, but that approach “has not necessarily encouraged a sense of ownership by suppliers of SER performance,” HP said in a report on its approach to supply chain responsibility.
In 2013, the company began trying to encourage more ownership of SER issues by requiring suppliers to schedule and pay for third-party audits and remediation efforts on a regular basis. HP also introduced a five-tier SER rating system that draws on the results of those audits and other SER performance indicators.
Suppliers that receive higher scores on the SER scorecard will receive more business from HP, while poor ratings could results in a reduction of business.
Supply Chain Emissions Goal
Greenhouse gas emissions, which are one of the environmental indicators considered in the scorecard, have been identified by HP as one of five persistent SER issues in the supply chain that require extra attention and investment.
The company is also starting to place a stronger emphasis on improving environmental performance in other areas, including reducing waste and water use in its supply chain.
In September, HP became the first company in the IT industry to set an emissions reduction goal for its supply chain.
By 2020, HP's goal is to drive a 20 percent reduction in first-tier manufacturing and product transportation-related GHG emissions intensity among suppliers, compared with 2010. HP calculates intensity by dividing suppliers' emissions by HP's annual revenue.
Since the goal was announced, HP has been educating its suppliers about the goal and the company's expectations for how to reach it, starting with China and Southeast Asia, according to Zoe McMahon, HP's director of global social and environmental responsibility.
“An important thing about the goal from our perspective is it's not something we're putting out there and letting our suppliers abide by,” McMahon told Bloomberg BNA.
Suppliers also need to understand what good emissions management looks like, she said.
HP has laid out a series of first steps for helping suppliers meet the emissions goal, including an expansion of its energy efficiency program for manufacturers. HP works with the groups Business for Social Responsibility (BSR) and World Wide Fund for Nature (WWF) to develop energy efficiency programs at supplier factories in Asia.
The company will also develop new efficiency programs for product transportation and suggest emissions reductions projects for suppliers that have especially GHG-intensive operations, such as LCD panel manufacturers.
Driving Industry Alignment
HP's supply chain emissions reduction goal does not include supplier- or country-specific targets, but the goal was set to be consistent with the emissions reduction target included in China's most recent five-year plan, McMahon said.
“It's about complementing the regulatory regime” in countries like China that have targets, or being a bit more aggressive in countries that don't have targets, she said.
While local regulations for greenhouse gas emissions and other environmental impacts have a role to play in supplier oversight, McMahon said harmonized approaches from industry can have more impact.
“What's interesting about environmental standards is that, unlike labor standards, where you have often contested but at least internationally agreed upon standards, you don't have internationally agreed upon environmental limits or standards,” McMahon said. For environmental impacts, there's a range of policies around the world and a range of enforcement, she said.
“What's more helpful for us as a company is to work with what we consider best practice,” she said.
HP is currently working with other businesses in the Electronic Industry Citizenship Coalition (EICC) to develop an industry standard for reporting on suppliers' greenhouse gas emissions.
McMahon said she hopes to drive more industry alignment on the issue because many of HP's suppliers are common to other electronic or IT companies.
“We're not just influencing our suppliers,” she said. “We're influencing the whole ecosystem of supplier.”