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This presentation contains Attorney Advertising.
Making the Supply Chain Sustainable
William A. Tanenbaum, Kaye Scholer LLP, New York
GreenTech, Environment Efficiency, Carbon Trading & Sustainability
Chair, Technology, Intellectual Property & Outsourcing Group
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Making the Supply Chain Sustainable - Past
What did it used to be?
Corporate “environmental managers” were generally limited to regulatory compliance function
Focus was on “keep company out of trouble,” but not involved in broader business affairs Not focus technology leadership (innovation)
Not focus on customer needs (revenue, value)
Not focus on recycling or product life cycle analysis (LCA) as serving strategic goals of company
Maybe some CSR, e.g., managing reputational risks
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Making the Supply Chain Sustainable -- Intermediate
What were the intermediate steps?
From negative --avoiding reputational risks from environmental impacts
To positive – enhancing brand image and value
To additive – expanding due diligence to evaluate whether the perceived premium cost for purchasing a manufacturing plant in the EU was offset by the value of the sellable carbon credits under the ETS
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Making the Supply Chain Sustainable – Reevaluation
Assessing the impact of product design, manufacturing processes, shipping, use of raw materials and the rest of supply chain on the (a) costs and (b) on the environment (and the regulatory and other costs of that)
Assessing cost savings missed by not adopting energy efficiency and use of sustainable materials
Corporate benefits
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Corporate Survey Results for Sustainability
Benefits of implementing sustainable business practices:
Costs savings
Competitive advantages
Product, service or market innovation
Process or business model improvement
New source of revenue or cash flow
More effective risk management
Employee satisfaction, retention
Enhanced stakeholder relations
Enhanced company and brand image
See “Sustainability and Competitive Advantage,” MITSloan Management Review, Fall 2009, Vol. 51, No. 1
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Financial Impact of Corporate Sustainable Practices
Stronger brand results in greater pricing power
Cost savings result from greater operational efficiencies, more efficient use of resources, supply chain optimization and lower costs and taxes
Market share increases because of increased customer loyalty (in relevant markets)
Cost of capital decreases because of lower costs and increased revenue from above factors See MITSloan study, citing Nike study
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Where Does Supply Chain Sustainability Fit?
A company and its supply chain are like an iceberg . . .
. . . and the supply chain is the underwater part, because:
much of the negative sustainable impact and the greatest opportunity for improvement lies in making the upstream supply chain more sustainable Put another way, a significant portion of emissions come from supply
chain
and some opportunities are in making downstream business processes more sustainable (shipping, inventory management)
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From the Supply Chain Customer’s Perspective
Need to improve supply chain sustainability in order to reduce the customer’s traditional business costs, carbon costs and future carbon costs, maintain or enhance position in the market
Need to require supply chain companies to measure and report environmental impacts
Need to use reliable measure metrics
Need to verify measurement and reports
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CDP Supply Chain Report 2010
CDP commissioned A.T. Kearney to produce Supply Chain Report 2010 (ww.cdproject.com)
Surveyed reports of 710 suppliers
48% were reporting for the first time
60% had a Board member responsible for sustainability
56% had emissions reduction plans
38% committed to objective targets
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CDP Supply Chain Report 2010 (2)
Surveyed members of CDP who are customers in supply chain
6% of those identified as leading companies in the CDP have already “deselected” suppliers for failure to be sustainable
56% expect to deselect failing suppliers
Customers are beginning to rewrite contracts to impose sustainability requirements
20% received sustainable reports from suppliers
Shows currently difficult to measure sustainability
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CDP Members’ Plans
89% have strategy for addressing suppliers’ sustainability and emissions practices
Plan to increase this issue in supplier management in next year
During next 5 years, metrics applicable to sustainability as part of procurement is expected to triple
Summary: these companies view sustainability an issue that extends beyond their own facilities to those of supply chain companies
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From the Supplier’s Perspective
Risk of loosing business
Risk of harming customer’s reputation
Need to comply with requirements
Need to measure, report and verify
Need to opt out of publication on emerging public databases
Problem of complying with conflicting sustainability policies
Responsible for supplier’s suppliers?
Need to push business model changes into supply chain
What is the future of just-in-time?
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Is the Walmart Sustainability Index a Prototype or De Facto Standard for Supply Chain Contractual Sustainability Requirements?
“With this initiative, we are helping create a more transparent supply chain, driving product innovation and ultimately providing our customers with information they need to assess products’ sustainability.” (http://walmartstores.com/Sustainability/9292.aspx)
Reflects view that being green a result of optimizing the supply chain, not necessarily an end in itself
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Walmart Step 1
Supplier Assessment
Supplier’s complete self-assessment survey Energy and climate
Material efficiency
Natural resources
People and community
Walmart started by requiring its top tier suppliers to complete survey in October 2009
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Walmart Step 2
Develop an lifecylce analysis database
Working with Sustainability Consortium (administered by Arizona State University, University of Arkansas and includes other companies)
Goal is to develop standards
What is relationship between Consortium and Walmart?
Develop global database of product lifecycles “from raw materials to disposal”
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Walmart Step 3
Retail tool
Type of product labeling
“provide customers with product information in a simple, convenient and easy to understand manner so they can make choices and consume in more sustainable way”
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Ratings and Use of Index
Suppliers are rated as “Below Target,” “On Target” or “Above Target” in certain categories
Tied to other corporate goals:
“Efficient use of raw materials” Reduce produce returns by reducing manufacturing defects
“Community” relations Reduce potential harm to Walmart reputation from suppliers’
employment practices
Compliance with index relies on third-party standards and certifications, CDP for example
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WalMart’s “15 Questions for Suppliers”
These questions provide summary and overview of the more complete supplier sustainability assessment requirements
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What are the IP and Confidentiality Issues in Supply Chain Compliance?
What steps should supplier take to prevent unauthorized access or use of sustainability report (including constituent data)
Does supplier or customer want to protect IP or confidentiality of metrics, tools or software used to measure, report or verify sustainability?
What IP protection is available?
Multijurisdictional differences in IP
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IP and Confidentiality (2)
Will use of any of the foregoing infringe another party’s IP?
Licenses required?
Indemnities required?
Scope of use?
RFPs and IP and NDAs
IP issues involved in collaborative inventions
Outsourcing and IP
Competitive intelligence issues
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Now that a Company Knows its Environmental Impact, What Does it Have to Disclose?
On January 27, 2010, the U.S. Securities and Exchange Commission (SEC) approved the release of climate change disclosure interpretive guidance.
On February 2, SEC released its “Guidance Regarding Disclosures Related to Climate Change.” Also announced that SEC will be focusing on climate change disclosures in reviewing corporate filings
Based in part on EPA requirement effective January 1, 2010 that companies meeting GHG thresholds must track them
Took note of voluntary disclosures now made to CDP and this might require disclosures under SEC rules
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SEC Guidance on Climate Change Disclosures
Source of reporting obligation is existing obligation to disclose material items under existing Regs S-K and S-X , Rule 48, Exchange Act Rule 12b-20
Negative standard adopted: With respect to Management’s Discussion and Analysis section of any filing (“MD&A”), interpretation in SEC guidance is that if a know trend, event or uncertainty (including legislation or regulation) cannot be excluded as not as not reasonably likely to occur, then a company’s management must evaluate it’s consequences on company’s financial condition or results of company operations on the assumption that the event, etc., will come to fruition.
Must determine effect of applicable emissions regulations (cap and trade) unless impact would not be material, under SEC standards of materiality
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SEC Examples
Material estimated capital expenditures for environmental control facilities related to impact of legislation of regulation
Legal proceedings
MD&A related: purchase and sale of carbon credits, facilities improvements to comply with regulations, effect on the demand and supply of goods produced, including reduced demand for goods producing GHGs; effect on supply chain
Risk factors: impact on corporate reputation; supply chain disruptions; weather disruptions (e.g., climate change)
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SEC Examples
Material estimated capital expenditures for environmental control facilities related to impact of legislation of regulation
Legal proceedings
MD&A related: purchase and sale of carbon credits, facilities improvements to comply with regulations, effect on the demand and supply of goods produced, including reduced demand for goods producing GHGs; effect on supply chain
Risk factors: impact on corporate reputation; supply chain disruptions; weather disruptions (e.g., climate change)
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Supply Chain Factors are Notable
While evaluation is continuing, because guidance was released only on February 2, 2010, the SEC guidance and private sector sustainability reporting requirements and third-party reporting standards are now intertwined and mutually reinforcing
Note that knowledge is apparently the standard even if supplier disclosures compliance (or lack thereof) in confidential manner, or if customer is impacted even if reporting by supplier is not publicly reported
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Other Disclosures
In financial statements, and in financial reserves
Outsourcing
Contracts
RFPs
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Conclusion
Sustainability reporting is coming and is here to stay
Transparency and verifiability will lead to convergence of IT with environmental management
Companies will need to account for supply chain impacts
Sustainability requirements will change contracts, and implicate IP and confidentiality outside historical scope of procurement practices
Customers’ and suppliers’ business will be won or lost on sustainability management
Sustainability reporting is mainstream business activity
Contracts will evolve to allocate ownership of carbon credits
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Question and Answers
William A. Tanenbaum, Kaye Scholer LLP, New York, [email protected]