Disclosures on supply chain sustainability A joint report from ACCA, the Net Balance Foundation and the Sustainable Investment Research Institute This report is part of a series of research projects carried out by the Net Balance Foundation in This report analyses the disclosure collaboration with ACCA Australia and New Zealand. of aspects of supply chain The series analyses disclosures on areas of sustainability by the Australian non-financial performance by Australian Securities Securities Exchange top 100 Exchange (ASX) companies. companies. Few, if any, previous studies of this Other repOrts by the Net balaNce FOuNDatiON aND acca australia aND New ZealaND nature have focussed on the sustainability of both upstream and Adoption of Integrated Reporting by the ASX 50, 2011. downstream elements of ASX 100 Disclosures on Managing Human Rights Risks, 2011. supply chain disclosure. Disclosures on Water, 2010. The report highlights many Disclosures on Social Investment, 2010. examples of good practice in the Disclosures on Corporate Governance, 2009. disclosure of relevant upstream and Anti-bribery and Corruption Reporting Disclosures, 2008. downstream policies and procedures within the ASX 100. It Disclosures on Human Capital Management, 2008. also shows, however, a wide range Disclosures on Climate Change, 2007. of variability in disclosure, both between and within different Disclosures on Stakeholder Engagement, 2007. industry sectors. www.accaglobal.com/sustainabilityreporting www.netbalance.com/insights/reports © The Association of Chartered Certified Accountants, O2ctober 2011 contents Executive summary 5 1. Introduction 6 2. Methodology 10 3. Results 14 4. Conclusions and recommendations 24 Appendix: Reporting frameworks and guidelines 27 References 32 About the authors 34 DISCLOSURES ON SUPPLY CHAIN SUSTAINABILITY 3 ackNOwleDgemeNts This report has been produced by the following team: • Archie Beeching, Net Balance Foundation • Kathryn Smith, Net Balance Foundation • Mark Lyster, Net Balance Foundation • Ben Spruzen, SIRIS • Tom Lehner, SIRIS • Rachel Jackson, ACCA 4 executive summary backgrOuND results It is becoming increasingly evident that the most The results of this study highlight that there is disclosure significant environmental and social impacts made by of relevant upstream and downstream policies and many companies occur beyond their internal operations, procedures within the ASX 100, with many examples of through their upstream and downstream supply chains. good practice represented. There is, however, a wide range These impacts include the upstream environmental and of variability in disclosure, both between and within social impacts of their suppliers, as well as the different industry sectors. The highest company average downstream impacts that occur through the use and score across upstream and downstream environmental disposal of their products and/or services. and social categories was 54%, while the top ten companies averaged 44%. Furthermore, there were 19 Companies have an influence over their supply chain in the companies that scored zero across all measurement form of purchasing power and choice of suppliers, as well categories, while 51 scored 10% or less, which contributed as through product and service design, marketing and to a relatively low overall average of 14%. engagement with customers. The sectors with the highest level of supply chain This report analyses the public disclosure on aspects of disclosure on average were: consumer staples; supply chain sustainability by the Australian Securities telecommunications and IT; real estate and Australian Real Exchange top 100 companies measured by market Estate Investment Trusts (A-REIT). The consumer staples capitalisation (ASX 100) as of 15 July 2011. Few, if any, sector has performed well as this sector includes previous studies of this nature have focused on the companies such as Woolworths, Wesfarmers and Metcash, sustainability of both upstream and downstream elements which have all performed consistently across each of the of ASX 100 supply chain disclosure. supply chain disclosure categories included in this study. Disclosure of supply chain sustainability information by The study ranked the ASX 100 companies and sectors the healthcare and consumer discretionary sectors has across four categories of supply chain disclosure. been shown to be trailing across all categories. • Upstream environmental disclosure – assesses each company’s disclosure on environmental considerations within its upstream supply chain (ie relating to suppliers). • Upstream social disclosure – assesses the disclosure of social considerations for the company’s suppliers, such as human rights and occupational health and safety. • Downstream environmental disclosure – relates to environmental considerations of a company’s downstream supply chain for its products and services. • Downstream social disclosure– relates to downstream social factors such as product and service responsibility. DISCLOSURES ON SUPPLY CHAIN SUSTAINABILITY EXECUTIVE SUMMARY 5 1. introduction The aim of this report is to analyse the disclosure on what is a supply chaiN? various aspects of supply chain sustainability by the Australian Securities Exchange top 100 companies A supply chain is a collective term for all elements measured by market capitalisation (ASX 100) as of 15 July included in the sourcing, production and distribution of 2011.The report focuses on the levels of disclosure of the products and services. Academics have defined supply ASX 100 as a whole and on the transparency and depth of chains as ‘the integration of key business processes from those disclosures. By measuring the levels and quality of end-user through original suppliers that provide products, these disclosures and providing case studies of good services, and information that add value for customers and practice, it is hoped that the report will identify and other stakeholders’ (Lambert et al. 1998, 2006). This highlight both areas of best practice and areas where includes the relationships, processes, procedures and more work is required. Furthermore, case studies highlight strategies used by businesses to provide their customers industry leaders, thereby demonstrating the opportunities with their product or service. Figure 1.1 depicts the two presented by supply chain sustainability and providing key areas of focus for this study, namely the upstream and incentives for other businesses to follow suit. downstream aspects of the supply chain. Few, if any, previous studies of this nature have focused on The supply chain consists of external elements, both the sustainability of both upstream and downstream upstream and downstream, and to some extent the elements of ASX 100 supply chains. Similarly, the internal operations of an organisation. Obvious upstream academic environment lacks a fundamental framework for elements include supplied goods and services such as raw measuring sustainability as it relates to supply chains in materials, supplier operations and labour inputs. their entirety (Vachon and Klassen: 2006). This study Downstream elements include points of sale such as retail shows that there is some disclosure of relevant upstream outlets, product marketing and distribution, use and and downstream policies and procedures, but that there is end-of-life product stewardship considerations. A a large range of variability in disclosure, both between and company’s supply chain activities will be guided by within different industry sectors. internal policies, strategies and other corporate governance mechanisms. Figure 1.1: Diagram of a supply chain showing upstream and downstream elements UPSTREAM CORPORATION DOwNSTREAM Labour Corporate Manufacture Products and Energy activity services Raw materials Sourcing and Sales and Point of sale procurement marketing Distribution partners Suppliers Customers Business partners, third-party manufacturers, internal contractors Waste and recycling 6 what is supply chaiN sustaiNability? Case study: walmart All company operations have an impact on society and the For many years, Walmart has recognised that they environment in some form. This also applies to the supply need to work closely with their supply chain through chain. Companies have an influence over their supply their suppliers and customers to extend the scope of chains in the form of purchasing power and choice of their sustainability commitments and improve the suppliers as well as through their engagement with overall sustainability of the company. Lee Scott, former customers during marketing and customer feedback company chairman, attributed the move towards a processes. It is becoming increasingly recognised that more sustainable supply chain to a reduction of companies should take responsibility beyond their internal inefficiencies and thus cost rather than altruistic operations to take into account both their direct and intentions (Plambeck 2007). In 2009 Walmart made a indirect impacts (Brammer et al. 2011). There is a clear commitment to work towards developing a better business case for improving both this area and related understanding of the sustainability of products sold in corporate reporting. Given the supply chain definition, it Walmart stores. This commitment has resulted in three follows that supply chain sustainability should encompass key supply chain initiatives. any value, policy or activity that promotes or achieves sustainable outcomes within an organisation’s supply As a starting point, Walmart has been actively chain. More specifically it has been defined as: engaging with suppliers through their supplier sustainability assessment survey. This survey was sent the strategic, transparent integration and achievement of to over 100,000 of their suppliers in 2009 to gather an organization’s social, environmental, and economic information about supplier sustainability performance. goals in the systemic coordination of key inter- The 15 questions included in the survey covered the organisational business processes for improving the areas of energy and climate, material efficiency, nature long-term economic performance of the individual and resources and people and community. Resources company and its supply chains. such as webinars and FAQ documents were developed (Carter and Rogers 2008: 368) to educate suppliers about the process and encourage as many suppliers as possible to complete the surveys. why are DisclOsures ON supply chaiN sustaiNability impOrtaNt? The second part of the process has involved working with a large number of suppliers, NGOS, government The UN has noted that: ‘The objective of supply chain agencies, academic institutions and retailers through sustainability is to create, protect and grow long-term the Sustainability Consortium (Sustainability environmental, social and economic value for all Consortium 2011) to develop a life cycle assessment stakeholders involved in bringing products and services to database. The retail working group of the Sustainability market’ (United Nations Global Compact Advisory Group Consortium is also working to develop methods to 2010: 5). communicate the work of the Consortium consistently with the various supply chain partners to educate and Internationally, Walmart has taken a leading position in encourage innovation. working with their supply chain to improve sustainability as outlined in the following case study. The third, long term supply chain initiative being developed by Walmart is an effective means to communicate the sustainability of products to their customers (Walmart 2011). DISCLOSURES ON SUPPLY CHAIN SUSTAINABILITY 1. INTRODUCTION 7 Supply chain sustainability has three principal benefits. adding value Firstly, it addresses internal business risk, secondly it adds There are cost savings related to gaining efficiencies within value to the business itself and thirdly it has the potential a business and this extends to the supply chain. Savings to benefit stakeholders (both individuals and companies) can be made through waste reduction, streamlining related to the supply chain. Each of these is outlined business processes and long-term planning such as: below. • increasing efficiencies in resource and energy use, managing risk transportation and waste production, which will reduce Companies have strong incentives to minimise their risk overall business expenditure within the upstream and downstream supply chains as part of both good business practice and duty to their • taking proactive measures to meet industry standards shareholders: (such as those set by the Australian Packaging Covenant: 2010), which will lower long-term monitoring • proactive identification and reduction of risk within the and compliance costs supply chain can reduce a company’s exposure to increased cost and time delays, as well as reputation • using sustainability reporting of the supply chain to risks and associated customer backlash (Melnyk et al. strengthen the organisation’s position as an industry 2003) leader in sustainability and to improve business partner relationships. • the earlier a risk is identified, the more effectively it can be managed benefits for external stakeholder groups Increased supply chain sustainability not only helps • reporting on risk reduction helps to increase brand businesses to grow, it also benefits customers and other integrity (Snir 2001). stakeholders as follows. There is also potential for the introduction of a carbon • Disclosures on supply chain activity assist customers in price in Australia (Australian Government 2011a) to put an making more informed decisions on their purchases increased focus on the requirements for companies to and the environmental and social impacts of their use. understand, manage and report on the scope three greenhouse gas emissions associated with their supply • Improving sustainability levels at all stages of the chain. supply chain could potentially lead to improvements in the quality of products, and services • innovations such as sustainable packaging, and design that facilitate recycling, reduce environmental and economic costs for both suppliers and customers • engaging with supply chains can be an effective means of disseminating knowledge on sustainability and thereby creating wide-ranging sustainability improvements. 8 supply chaiN sustaiNability repOrtiNg • Product certification and labelling schemes including: FramewOrks aND guiDeliNes – Good Environmental Choice Australia (GECA) There are a number of different reporting frameworks and guidelines that address elements of both upstream and/or – Forest Stewardship Council (FSC) downstream supply chain sustainability. The main frameworks and guidelines are indicated below and a – Ecospecifier Green Tag Certification summary of these has been included as an appendix to this document. – Fair Trade Label • Global Reporting Initiative (GRI) – Planet Ark’s Carbon Reduction Label • Dow Jones Sustainability Indexes (DJSI) – Green Building Council of Australia (AGBC) Green Star Rating Scheme • Carbon Disclosure Project (CDP), Supply Chain Initiative – Australian Green Infrastructure Council (AGIC) • BS 8903: 2010, Principles and Framework for Procuring Sustainably – Guidance • Other standards and associated certifications including: • Flexible Framework – UK Sustainable Procurement Taskforce – AA1000 AccountAbility Principles, Assurance and Stakeholder Engagement Standards • Australian and New Zealand Government Framework for Sustainable Procurement – Social Accountability International’s SA 8000:2001 • Ethical Trading Initiative – ISO 14000, Environmental Management Standards and Guidelines • International labour standards – GHG Protocol Initiative Product and Scope 3 Draft • Supply chain engagement tools (eg Supplier Ethical Standards Data Exchange) • Australian Packaging Covenant • United Nations Global Compact DISCLOSURES ON SUPPLY CHAIN SUSTAINABILITY 1. INTRODUCTION 9 2. methodology The scope of this study includes public disclosures of Table 2.1: Result category descriptions supply chain sustainability such as corporate sustainability reports and corporate website information. The data used Category Description in this report for ASX 100 companies were drawn from Upstream The first category relates each company’s disclosure wider-ranging research conducted by SIRIS and based on environmental on environmental considerations within its upstream publicly available information for the ASX 200. This data disclosure supply chain (ie relating to suppliers). Companies set is regularly updated by SIRIS as new data become scored points in this category if information was available. The data set used in this report for the ASX 100 disclosed about a policy or engagement activities to improve environmental performance of a supplier’s was extracted on 15 July 2011. operations or if companies disclosed any information on the environmental performance of their suppliers. The report was compiled using a set of assessment criteria developed by SIRIS to assess how companies are currently Upstream The second category assesses the disclosure of social publicly disclosing information on supply chain social considerations for the company’s suppliers, such as sustainability and the quality of these disclosures. The disclosure human rights and occupational health and safety. Companies scored points in this category if they results of the research were aggregated into four disclosed information about employee rights policies categories, which cover environmental and social aspects for suppliers and auditing of suppliers, or disclosed of the supply chain. These categories are described in requirements for their suppliers to have occupational Table 2.1. health and safety accreditation. Each company was scored out of 100 on its disclosures for Downstream The third category relates to environmental environmental considerations of a company’s downstream supply each category outlined in Table 2.1, giving an overall score disclosure chain relating to their products and services. out of 400. With each category evenly weighted, an Companies scored points in this category if they average score out of 100 was then calculated for each disclosed information about policies or programs company. addressing environmental impacts of their products or services or packaging or had disclosed for customers information related to environmental aspects of their It is recognised that owing to the different nature of products. products and services sourced and produced by different types of companies, performance between different Downstream The fourth category relates to downstream social sectors may vary. To assess this, the ASX 100 list of social factors such as product and service responsibility. companies has been categorised into ten sectors, which disclosure Companies scored points in this category if they are described in Table 2.2. These sectors are based on the disclose information about policies or programs to improve the quality and safety of their products or S&P/ASX 200 Sector Indices (Australian Securities services, or if they disclosed information on how they Exchange ASX 2010), however, some small changes have manage customer concerns about their products and been made for the purposes of this study. services. It is important to note that this study is based solely on publically disclosed information. The consequences of this are that any undisclosed information, whether positive or negative, including planned or intended future activity, was not taken into account. The list of ASX 100 companies used in this study and the business sectors in which they are included are shown in Table 2.3. 10