Energy report for Ernst & Young

The sustainability agenda and its several sub-sections - climate change, carbon footprinting, energy costs, renewable resources, ethical practices, corporate social responsibility - has risen inexorably in the public and corporate mind in the past decade. It will only continue to grow in importance.

As our survey of senior executives from $1bn-plus corporations has shown, sustainability is clearly an issue that excites their interest, both as an opportunity for growth and a threat to their profitability. The results make salutory reading, as they demonstrate a high level of awareness, coupled with fear that taking action on sustainability issues will involve considerable cost and difficulty for their businesses.

For example, while 71% of respondents view embracing sustainability measures as a means to enhance their companies' reputation or brand, 60% see the possibility for business growth and 50% can see the opportunity to reduce costs, a further 43% are concerned that the green agenda may increase their costs and 31% believe that regulatory compliance will create difficulties for them.

In this section we set out some of the key factors that influence a business's ability to respond to the challenges of the sustainability agenda and to anticipate future changes, using supply chain management to bring financial and reputational benefits to the business.

Carbon accounting
As the cost of oil and gas continue to rise, and the international community (including governments and agencies such as the United Nations) pays increasing attention to carbon emissions, businesses are under pressure to take action to reduce their carbon footprint throughout their supply chain.

In some regions, such as Europe, this pressure is being applied most forcefully by customers and consumers, our survey found. In Asia, by contrast, regulation is cited as the main driver behind companies implementing sustainable, green and carbon-related strategies in their supply chains.

Yet whatever the motivation, there are several good reasons, quite apart from external pressure, for businesses to act swiftly and purposefully to improve their supply chain performance. For example, a company like British Telecom, with 5,000 sites, has introduced a strategy to develop wind farms on many of these locations, which will give the company greater control over its energy needs, reduce its costs, improve its brand reputation and could even produce profits from selling energy.

Having a detailed understanding of your company's carbon footprint will become increasingly important in the coming years. Although this is currently difficult to achieve, we believe it is imperative that international corporations take steps to measure the CO2 they emit in order to give themselves an accurate predictor of their future costs.

In some cases, this could yield surprising results. For example, importing flowers by air freight from Kenya may appear to be alarmingly carbon intensive, yet when compared with importing the same flowers from the Netherlands, which grows them in heated greenhouses, it is actually a greener practice. Being aware of the energy sources of your suppliers is another important step. Should you import newsprint from Sweden, where energy is generated by nuclear power plants, or from alternative suppliers using coal-burning energy? The true environmental cost of manufacturing goods in China, where power generation is high-carbon, needs to be set against the relative environmental costs of manufacture in Europe along with the emissions from transportation.

There is a strong possibility that carbon will become a parallel currency to money in the future. Companies will need to operate within a carbon cap, or else pay for the excess they produce. This calculation will include carbon emitted through the supply chain, so it is critical that companies quickly come to understand the implications of both their own and their suppliers' and partners' carbon footprint.

For some organisations, the supply chain can account for as much as 30 times the carbon emissions of the business itself. On average it already accounts for 75% of companies' emissions. This creates a dramatic opportunity to work with suppliers and partners to devise strategies to push down emissions.

Suggestions include:
. Avoid unnecessary flights, if video conferencing is available.
. Improve logistical efficiency, such as ensuring that lorries travel full, and by switching from air to sea or from road to rail.
. Add extra insulation to buildings, install energy efficient lighting and look at creating energy from waste products.
. Switch to low-carbon or renewable energy sources such as solar, thermal, wind or bio-fuels.
. Offset the remaining carbon emissions.

Businesses need to be cautious over offsetting emissions, however. As Stuart Williams at Ernst & Young points out: "There is a credibility issue with offsetting, since it is nor really taking action, but rather buying a clean conscience. It is a cost rather than a saving to your business and at its most extreme, it is environmentally inefficient. If you pay for an energy project in a developing country, it could take years to offset the emissions from one flight to New York."

Thinking globally
Just as corporations are now sourcing their materials from new and distant locations, manufacturing throughout the world and entering new markets, consumers in the Google age can not only compare prices and get instant product comparisons and reviews, they can also find information on a company's reputation and its corporate social responsibility.

Managing this reputational risk through the supply chain is becoming ever more important, whether guarding against accusations of exploiting child labour, creating pollution or selling unhealthy products.

As supply chains have grown more lengthy and complex, it has become harder for businesses to maintain the same oversight and control that they have traditionally enjoyed. If you outsource manufacture to a low-income economy and visit the facilities, can you be sure that the spotless and well-maintained building that you see is typical, or is there a child labour sweatshop across town?

Companies need to adopt a common standard for their global operations, so that for example, if a company tells its European customers that it uses only sustainable timber products, it should not use unsustainable timber elsewhere. As Stuart Williams puts it: "Angry blogs can mean reputational risk."

The profusion of new technology connected to the internet has created a new form of surveillance. It is easy for millions of people to see pictures of an office, through one connected camera. Leaving office lights on at night is a very visible signal that a business is unconcerned about the environment, potentially leading to loss of brand reputation or customer boycotts.

Equally, taking advantage of e-commerce as a means of connecting with customers quickly and cheaply (both for the business and for the customer) reduces environmental impacts and is likely to enhance brand reputation. It also provides access to a worldwide customer base.

In tandem with businesses' own sustainability standards, they need to pay attention to national and international regulations and targets. Some countries, including the UK, have announced ambitious targets for carbon emission reductions, while others have none at all. Some US states, such as California, have rigorous emissions standards for vehicles, while some countries have none at all. We have noted a trend for manufacturers to shift production to locations with weaker environmental protection, where, for example, old computers are dumped in the river once they are beyond use.

Companies need to beware of such practices, partly because of reputational risk but also because standards are likely to rise sharply in the coming years as the dangers of climate change become more evident, fuel costs rise, pollution is taken more seriously and governments act more robustly on the issues. If a business does not apply the highest standards, it will store up problems, requiring severe and painful short term cuts in future.

While some companies argue that they are acting responsibly by cutting their emissions 'per $1m growth in turnover', others are committed to making absolute cuts. This approach goes down better with governments and with customers, who are suspicious of statistical manipulation.

Living up to promises
From viewing sustainability as a buzzword to be used in marketing materials, companies are now obliged to live up to their word. This requires careful planning and foresight, since failure to act appropriately can have negative consequences.

For example, one large UK retailer promised that it would print 'carbon units' on all of its products. Yet since it sells around 50,000 products, this was an unrealistic target. Some months later, the retailer announced that just 30 products would be labelled. There is clearly a danger of losing credibility with customers.

By contrast, the desire of consumers to buy sustainably-produced goods is rising fast, presenting opportunities for businesses to launch new products and gain market share. This can apply to the packaging, sourcing materials, manufacture and distribution of products: demonstrating to consumers that a business has considered the environmental impact of each decision can yield positive benefits.

Our survey found that 44% of respondents said they were confident they can deal with sustainability issues. Although this is a reassuringly high figure, it is matched by an alarming amount of inactivity on the part of many large global companies, who have yet to realise the full potential of the savings and benefits that can be achieved by integrating sustainability issues into their supply chain management.