05 March, 2010

Sustainability: a task for market leaders

Sérgio Abranches

Sustainability cannot be a solitary quest of a few heroic companies. It has to be a collective action within and across the major supply chains of the economy. Yet, larger corporations have a leading role to get any real progress in greening the supply chain.I was once speaking about corporate and public corruption, illegal business practices, such as deforestation and forced labor, and sustainability to a very select audience. The point was that firms that indulge in such practices may be profitable for some time, but will eventually fail and fall. The broader issue was corporate risk management and sustainability. The focus was climate change risk. The specific reference was to business practices in Brazil. The audience, a global advisory board of CEO’s of large corporations that belonged to the supply chain of a firm that has an important stake in the Brazilian market.

I argued that climate change risk was a real and present danger that required prompt action of major corporations. They should start leading their supply chains towards a low-carbon model. I wanted to convey the idea that a firm’s carbon footprint was inextricably linked to its supply chain’s footprint. “A dirty link in the chain ends up by making the whole chain dirty.”

I gave several real-life examples related to sustainability and corporate social responsibility. Amazon deforestation was linked to soy and beef exports, hence deforestation was part of these industries’ carbon footprints. Cattle ranching, soybean, sugar cane plantations, and charcoal production were tainted by the use of forced labor. I showed how the supply chains for these activities housed both illegal and legal activities. How, for instance, pig-iron mills bought legal iron-ore from a top mining company, illegal charcoal from loggers in the Amazon, or the Brazilian savannah, and legally sold their product to top steel mills. The mining and steel companies were ranked among the best, most competitive Brazilian firms with a sizable share of their global markets. Or, how sugar cane cultivated and harvested with the use of forced labor would lead to two of the country’s major export commodities: sugar and ethanol.

When I finished talking, one of the CEO’s was outraged, and asked me on a high pitch: “Why are you doing this? Why are you doing this?” As he looked around the round table to his peers, he saw they were perplexed by his reaction. He, then, added: “I agree with everything he has said, I agree with everything he is proposing. But why he’s chosen to say it so bluntly?”

I know what he wanted to hear. An unspecific, general, motivational defense of sustainability, without naming names, or blaming the leading corporations for the blunders across their supply chains. Except for a few foreigners that knew very little about Brazil, all the others were acquainted with this reality. As this CEO had been at the top of a supply chain with all the problems I mentioned, he blamed me for a useless blame game.

I’m used to this sort of reaction from some audiences, when I speak too candidly about corporate misbehavior. They get even angrier when I say that large globalized firms that buy illegal products, that won’t take action to clean up their supply chains are even more responsible than the small sheep in the herd. It is a simple argument. When one looks into, let’s say, the supply chain for the Brazilian steel industry, what one see is a very heterogeneous mix of practices, uniting giant corporations and small and medium low quality ones. Now who is to blame? The smaller and weaker parts of the chain, or the larger and powerful ones? The former can’t survive without the complacency of the latter. Large corporations can make do without small and mid-sized low-quality suppliers, especially those who resort to illegal practices. The larger have the power to discipline the smaller.

There is no sustainable firm, if its supply chain is not entirely sustainable. An unsustainable supply chain is ultimately the responsibility of the larger companies in it, both upstream and downstream.

Usually Brazilian law enforcers and regulators tend to go after the smaller fish, rather than the big ones. This has proven useless again and again. Getting the few larger ones to behave and to lead their suppliers and buyers into good behavior will do the trick. Shut down the smaller companies, and others will emerge to replace them.

It was tough talking and enforcement through market leadership that made possible the “pact against slave labor” in Brazil. ILO and the Brazilian Labor Ministry cooperated to identify cases of forced labor in the Brazilian economy. Investigative reporting by the NGO Brazil Reporters brought further evidence to a dirty list of proven cases of “slave labor”. The business-oriented NGO Ethos Institute took care of mobilizing and coordinating corporate support to an “anti-slave labor pact”. A company would commit not to buy from those in the dirty list by signing the pact. A significant number of large corporations operating in Brazil signed it.

The pact has not eradicated slave labor yet, but it has contributed to reduce its scale in the economy. Forced labor is gradually being eliminated from the larger and more value-added supply chains.

It was tough talking that enabled Greenpeace to bring large consumers of Brazilian soybean, like McDonald’s, to discuss Amazon deforestation. After Greenpeace named the names and showed the data, McDonald’s called the large traders and told them to stop buying soy from illegally cleared land.

The so-called “soy moratorium” has contributed to significantly reduce the role of soy export production in land-grabbing and land clearing in the Amazon.

It was though talking that has also helped Greenpeace to convince large supermarket chains like Walmart, Carrefour and Pão de Açúcar to tell beef wholesalers they would not buy meat from their Amazon operations. Cattle-ranching and beef wholesaling were the leading factors of Amazon deforestation.

The “beef moratorium” has not yet yielded the same results the “soy moratorium” has achieved, but it has made visible progress. Other large players on the beef and leather supply chains felt compelled to join the agreement.

Corporations adhere to these “pacts” for sustainability because of their values, or due to market pressures from large scale buyers and consumers’ manifest preferences? I’d say market pressures and consumer preferences have, at the very least, a decisive role in strengthening and enforcing corporate values.

These are extreme examples, but they help to make it very clear that sustainability is about market leadership. Leadership may require the help of regulatory inducements and constraints or some other form of pressure to emerge, though. They also help us to understand that there can’t be sustainable companies operating within unsustainable supply chains. An internal sustainable logistics and an indoors low-carbon operation by themselves do not make a firm sustainable or low-carbon, if its supply chain continues to be a high-carbon one. A “no questions asked” policy is antithetical to a sustainability policy. Sustainability has to be obtained throughout the product’s life cycle, from the very beginning of the supply chains leading to the final product, and up to its end use or consumption, waste and disposal.

Particularly now, in the climate change era, sustainability cannot be a solitary quest of heroic few companies imbued with high values. It has to be a collective action within and across the major supply chains of the economy.

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