How Are Companies Putting Sustainability Standards to Work?
How Are Companies Putting Sustainability Standards to Work?
As Joel Makower highlighted back in February of this year, sustainability standards, particularly those that represent the broad spectrum of indicators within sustainability, are needed and becoming increasingly common.
But the unanswered question is this: Does a company's investment in implementing a sustainability standard have tangible business benefits? The question remains no matter whether a company is exploring a product certification, operational system, investor ranking or set of supplier requirements.
To try to dig up an answer to this increasingly pressing question, I set out to speak to a few industry leaders about the sustainability standards they had implemented. In defining the term "standard" in this realm, I included product certifications, sustainability rankings, operation standards and supplier standards.
What I found was that, regardless of whether the company's experience in standardization was focused on the supply chain, on consumer-facing green labels or on broad industry rankings, some key themes emerged:
- The usual reason for creating or utilizing a standard was to clarify a fuzzy concept and create differentiation;
- The flip side of this is that standardization begets commoditization, and in some cases it isn't clear if these standards are a good use of scarce resources and attention;
- We should beware of trendy "declarations" or rankings that may not truly demonstrate environmental or social benefit.
Why Utilize Standards?
When a company creates or utilizes an industry standard, it requires time and financial investment. A champion inside the company has to make the business case to the organization's leadership that the standard will be accretive to the brand or produce some beneficial business result.
The champion then has to learn or teach the standard to affected stakeholders within, and outside, of the organization. The standard then has to be implemented, and product or operational changes made.
Invariably, there is then marketing cost to explain the standard or communicate benefits to consumers or other stakeholders. A company should also be transparent about the status of a standard's implementation within the company -- and its value chain.
This seems like a lot of work. So why bother?
As anyone working in sustainability or corporate social responsibility can attest, explaining what it means to offer a "sustainable", "green", "responsible" or otherwise environmentally or socially beneficial product or service is an uphill battle. These words have many interpretations. When trying to communicate intentions, requirements and accomplishments -- specific, measurable clarity is essential.
For instance, when Clorox launched its Green Works line in 2008, it recognized that there were 5,000 new products each year that call themselves natural. Consumers needed a way to sort through the claims and understand what they were really buying.
Clorox first partnered with the Sierra Club to review its formulas and then earned third party certifications, in 2009 from the EPA through its Design for the Environment (DfE) program, and in 2010 obtained the Natural Products Association's Natural Home Care standard.
"We sought out third-party certification for our Green Works product line, because we felt this helped build trust from the consumer," said David Kargas, Sr. Group Manager, Public Relations at The Clorox Company. "Third party certifications like the ones from the EPA and the Natural Products Association help give consumers peace of mind that products that say they are natural truly are."
Ann Thrupp, Manager of Sustainability and Organic Development at Fetzer/Bonterra Vineyards, feels that USDA Organic is still a differentiator in the wine industry -- and in Northern California is relatively inexpensive to achieve.
Organic methods also contribute to product quality, and the certification (which Fetzer has held for 20 years for the Bonterra brand) is so intertwined with the brand that it would be difficult to tease out the benefit of the certification from the demand for the Bonterra brand itself. The Fetzer winery also is certified by the California Certified Sustainable Winegrowing program (CCSW).
Although the benefits of that particular certification program are less clear in the market currently, Thrupp commented, some buyers are paying attention to sustainability standards as well, so it makes sense for their company to have third-party verification of their track record of using comprehensive sustainable approaches.
Another example of the benefit of standards for clarification is in the supply chain. "Standardization begets commoditization," says Tim Mohin, Director of Corporate Responsibility for AMD. "And while I don't know if the industry is ready for broad sustainability standardization, it is very helpful for areas that are complex, such as in the supply chain, where conformance is necessary."
Does adherence to standards allow companies to reap the benefits of sustainability?
Mohin points out, though, that the commoditization that accompanies broad sustainability standards is not necessarily conducive to business advantage. "The alignment of CSR with specific strategies, operations and products of a given company almost defies commoditization. Creating differentiation can create specific business benefits."
It seems that being the first to the table, even simply within an industry, can be that differentiator and potentially drive costs out of system. For example, purchasing decisions made by Kaiser Permanente's Environmentally Preferable Purchasing program in 2010 alone will result in $26 million in annual purchasing and operational savings, including 5 million Kwh of energy conserved, 300 tons of plastic waste eliminated, and substantial reductions in consumption of hazardous metals and toxic chemicals.
Says Rachael Baker, Environmental Supply Chain Manager at Kaiser Permanente, "Our program clearly signals the market with our purchasing requirements and contributes to cost-neutral or cost-saving decisions. We then work hard to document our savings and share these success stories with others because we can influence suppliers to create healthier products ever more rapidly if additional buyers incorporate similar requirements."
This takeup by others in the industry is evidenced through Kaiser Permanente's Sustainability Scorecard. Since late 2009, this scorecard has required detailed environmental data disclosure by all of Kaiser Permanente's suppliers of medical equipment and products (representing $1 billion in annual spending) and is now being adopted by Kaiser Permanente's key supply chain partner and others in the health care industry to influence $10 billion in annual purchasing.
Other company-led leading standards such as Walmart's scorecard and other supply chain initiatives (said to have derived $140 million in supply chain savings for WalMart in 2009 alone) have also demonstrated that there are real dollars to be gained in creating and implementing standards, particularly in the supply chain.
On the product side, I asked Clorox whether they felt the use of the DfE label or other certification bought them market share. The sense was that the real market driver for GreenWorks was the decision to focus on being a cost-competitive product for the mainstream -- one that worked just as well as less environmentally friendly products. The certification itself may not have been the market driver, but it was necessary in order to maintain credibility and therefore have the right to derive revenue in the mainstream market as a differentiated product.
Are Standards Meaningful?
Where there is a great need for standardization in sustainability, or at least transparency, Mohin argues, is in sustainability ratings such as DJSI, FTSE4Good, Corporate Social Responsibility Index, Newsweek, Corporate Responsibility magazine and many, many others. Recent efforts such as those by SustainAbility to "rate the raters" help clarify what these ratings really tell us. There is a wide variety of criteria and entrance requirements (including, in some cases, a "pay-to-play" model) in the ratings world that brings to question the validity of many of the rating schemes.
Tim Mohin of AMD and I also had an interesting conversation about the state of sustainability standards, particularly as they relate to consumer-facing products, and how helpful they really are in reducing risk to society and the environment.
There is a movement to say that products are "free of" some chemical or other perceived hazard. Mohin calls this the "X-free movement." "But any toxicologist will tell you that hazard x exposure = risk. We are spending millions on the hazard part, and are doing much less to understand exposures or explain to consumers what the real risks are."
I recently gave a presentation with my colleague Julie Panko of ChemRisk on chemical footprinting of products [PDF]. This very concept was explored as an extension of our understanding about the true lifecycle impact of products. We cannot simply extrapolate a products' impact on society, the environment, or any individual, family or community by doing an LCA or claiming that the product is free of a certain chemical.
So in this sense, standards are not always helpful in determining true sustainability impact -- particularly when it comes to products. So what is an appropriate response for a company, given this reality?
"We have to be proactive in the face of uncertain science", says Mohin. "For instance, radio frequency of electronics is a hot issue right now. There is a lack of science and information, and the science that exists is conflicting. What if this changes? If there is a risk, we want to be the first to know."
Ann Thrupp at Fetzer/Bonterra raises another important point. "One of the biggest dilemmas in food is that there are a huge number of sustainability certifications -- and no one can agree on what they should be. Consumers get sick and tired of the confusion. For instance, a group effort like the Sustainability Consortium is good in that there is collaboration, but the group can't reach any kind of consensus. So efforts like this may ultimately be a waste of time. It is so hard to define sustainability -- it is contextual and involves continual improvement. Standards don't allow for that."
The Bottom Line
So it seems that where a standard exists or can be created, it can lend credibility and simplification to complex problems such as supply chain compliance, and sometimes even drive cost savings. There is potential to differentiate your product through a standard especially if you are leading your industry in doing so.
But simply adhering to a standard or certifying won't always create value, and the standard it isn't an end in itself. The end is in improving environmental outcomes and safety for humans and other living beings. And in that quest, it pays to be proactive; and to spend precious sustainability development resources on those areas that will have most impact.
Photo CC-licensed by Nick Saltmarsh.