Green or Green Washed?

Green or Green Washed? 7 Lessons in Green Supply Chain in China
By Rebeca Kanthor

Ma Jun is one of China’s most prominent environmentalists. His book, China’s Water Crisis, has been compared to Rachel Carson’s Classic work, Silent Spring, which was instrumental in driving environmental change in the United States.

“It’s not easy being green,” said Kermit the Frog of his amphibian existence. Talk to sourcing managers, auditing firms, and NGOs and you’ll hear it’s not so easy being truly green in supply chain management either. To the average consumer with a do-gooder instinct, but with no insider experience, it’s hard to understand what “green” really means in the corporate sector. Rebecca Kanthor did an investigation for CHaINA into the topic and discovered that greenwashing, outright lies, and fake documents are a few of the dirty secrets of green supply chain management.

Lesson 1: In the financial downturn, more than ever it’s all about the bottom line.
Green is the new gold, the current adage says. Paul McCann, Director and China General Manager of Smurfit-Stone, a US company providing packaging solutions for companies manufacturing in China, says interest in sustainability has been a growing trend among his company’s clients for the last year or two.

Why the sudden interest? Most companies commitment to greening their supply chain is no more than a commitment to efficiency and cost-cutting, with green being an added bonus. It’s not that companies suddenly have the urge to go hug a tree; it’s because financially these changes made sense. 2008’s booming commodities market had a huge impact on companies interest in reorganizing their supply chains. Rising oil costs impacted the price of other commodities and made recycling materials and reevaluating sourcing locations smart financial moves.

Industry insiders say that in this uncertain economic climate, greening efforts by most companies have to impact on the company’s bottom line; otherwise it is not a financially viable direction.“Practically speaking, in this financial situation it’s going to be tough for companies to pay more money to be more environmentally friendly,”McCann says, “so I think companies will start with opportunities where becoming more environmentally friendly also saves them money. It makes sense right?”

If green is code for cost-cutting, is much of anything in the way of environmental sustainability actually being achieved? Not much, says one director of an industrial goods manufacturer who asked to remain unnamed. “If you’re just the normal company sourcing in China, you have zero control over where it is green, and that’s not your concern. Your concern is best price.”

From the supplier standpoint:“You’re damned if you do and damned if you don’t. If they [suppliers] became super compliant, the price would just rise and they wouldn’t get any new buys. All the factories would close.” He concludes, “Everything about green is PR now.” He acknowledges that for companies with large amounts of capital to inject into Chinese supplier infrastructure, perhaps the claims of greening efforts have some legitimacy. But in his experience that’s the extreme minority.

Lesson 2: Risk-prevention is a motivator
Greening is also motivated by risk prevention. Speaking from experience working with multinationals, the industrial goods manufacturing director says, “Only until you get caught doing something or are worried about getting caught doing something do you worry about green.”

Case in point: Wal-Mart. Wal-Mart’s foray intogreening its supply chain has begun to slowly change its reputation from a giant bully with poor labor practices, to a leader in environmental innovation.

Companies seeking to avoid risks often look to incorporate corporate social responsibility, including environmental responsibility, into their supply chain management. But making a commitment to these concerns means that any revelation that they are failing to live up to these promises can be a major risk itself.

Ma Jun, director of the Institute of Public and Environmental Affairs, has created maps of air and water pollution in China, and says companies using them to track suppliers do it to protect their image. “The potential risk from using very bad polluters, the scandals, provides another source of incentive,”he says.

But do Chinese companies feel the same sort of risk? While the 2007 Xiamen PX Plant protest mobilized more than 8,000 residents in a move to shut down a chemically polluting plant there is still not as much awareness of green supply chain management in China. Aside from Esquel, a Hong Kong shirt making company that has a good record for sustainability, most Chinese companies have not incorporated CSR in their marketing, Ma Jun
says, so in turn they don’t feel as much pressure to live up to the hype. “I think that it makes sense that those who make an open commitment to take a step forward, to step ahead of the others.”

Lesson 3: Greenwashing is prevalent.
Green. Eco. Environmentally-Friendly. Thesephrases have become tossed around in the public domain for the past few years. Marketing campaigns touting green initiatives are a firmly established trend. Alongside these buzzwords is another term: Greenwashing.

While concerns for the bottom line often are in line with environmental efforts like near-sourcing and more efficient packaging designs, and can bring real results, there is a fair amount of false information to wade through. How do we figure out what is PR and what is actual innovative practice?

At the Green Product Forum held in Shanghai this past May, Chris Terry of Hoffman Agency highlighted the problem for participants, focusing on several types of greenwashing that companies are guilty of, whether intentionally or not. Using a survey by TerraChoice, she explained how green claims often mask a trade-off, where the company is doing well in one area, but not in others.

Even companies that are known sustainability leaders can be perpetrators of greenwashing. Timberland is an excellent example. The major American footwear brand is known for its green initiatives, even creating a Green Index rating to measure the environmentalimpact of their products and disclosing the names of their suppliers.

Ma Jun says the truth isn’t so pretty. “That is a company that talks a lot about CSR. [But if they did the research], they could easily find that one of their suppliers has six years of records on our air pollution database consecutively, one year after another. And another has 3 years of records on our water site.”

Wal-Mart is considered an innovator in green supply chain management, both leading the way in innovation, and putting pressure on suppliers and competitors to keep up. The company is proud of all it has achieved.

“This is not about greenwashing. This is the real deal,” Wal-Mart China’s Senior Director of Merchandising Ross Farnsworth says, speaking of his work sourcing fresh fruit from local farmers. “As we got into this sustainability effort back in 2005, at first we did it from a defensive standpoint. But what we’ve learned as we’ve gotten into it, it just makes sense.”

On the other hand, Kathee Rebernak, who runs Framework:CR, a leading corporate responsibility and financial communications firm, says Wal-Mart has much to improve if it wants to avoid greenwashing claims. Her article “What’s wrong with Wal-Mart’s Sustainability Reporting” argues that the company is taking a PR approach instead of embracing transparency by speaking broadly about goals without tackling specifics.

Lesson 4: Transparency is key
What’s a company to do? There’s no way for it to track of all its suppliers in China, right?

Actually that’s becoming less true with the development of greater transparency in China, albeit very slowly. The data Ma Jun uses in his organization’s air and water pollution maps is provided by the government, which a year ago passed new measures on disclosure of environmental information. He introduces the maps to multinational and Chinese companies and shows them how they can be utilized.

Companies like Nike, GE, Wal-Mart and Esquel use the maps as a tool for keeping track of their suppliers and finding known polluters. Others, hesays, including Timberland, prefer to be ignorant even though they know the tool is available.

But while the pollution maps can help a company sustainably manage their supply chain, it’s not always so clear-cut. An underlying problem is that suppliers often contract out to other factories, making the supply chain links a bit fuzzy. The industrial manufacturing director believes that compliance is much harder in China than in factories in smaller Southeast Asian countries. “There are so many factories here, there’s no way they can regulate every one,” he says.

Lesson 5: The system of accountability doesn’t work.
Speaking from years of experience dealing with suppliers and client companies, the director maintains that most companies pressure their suppliers for the cheapest price and then expect compliance on environmental standards. Suppliers are struggling to survive and don’t want to lose money either, so they satisfy their client companies with fake documents. When scandal breaks, companies blame their suppliers for lying to them. As it did in 2007 with a rash of tainted product scares and more recently with reports of tainted drywall, the blame goes to Made in China, and not Poorly Managed Supply Chain.

Even if a company does put pressure on its suppliers to adhere to environmental standards, oftentimes lack of follow-through on these standards leads to a chain of fakes and lies.

According to Pierig Vezin, CEO of Wethica, which conducts long-term social responsibility audits forclient companies, it’s absolutely unrealistic to expect suppliers to measure up to client company’s standards. “If you ask a factory to be 100% compliant,” he says, “you ask it to kill itself.”

“There is really a faking business,” he says.“You have some buyers who want to buy in fully compliant factories. You have some factories that have become experts in making fake documents, in teaching the workers how to answer the auditors. And you have some auditing companies that have become expert at the way to say things that leads [to] ‘ok this factory is compliant,’ even if they haven’t said it really.”

Independent and in-house audits and inspections almost never lead to a company cutting a supplier, says Vezin. Instead there’s a back and forth of recommendations and reports. According to the manufacturing director, these communications sometimes never lead to any real change.

Even those documents that aren’t faked are sometimes not credible. Independent and in-house audits and inspections almost never lead to a company cutting a supplier, says Vezin. Instead there’s a back and forth of recommendations and reports. According to the manufacturing director, these communications sometimes never lead to any real change. “I know that 70-80% of the products going through are not compliant.”

Sometimes it is easier for certificates to be granted even if factories are not compliant. The industrial manufacturing director says that Yiwu,“filled with thousands of factories that couldn’t be inspected,” is such an example. “They have a fumigation chamber in Yiwu but the chances of your getting a fumigation certificate are nil.” If all the factories adhered to the proper certification processes, either the goods or the factory would fail the inspection, pushing the prices up.

“I always fight with some of my supply chain guys and I tell them I don’t want to buy fake documents,” he says. “And they go, they’re not fake. They’re real. They just didn’t go through the process.”

The director says, “When I talk to the guys in the bigger companies, and these guys are in charge of the whole supply chain, they have no idea this is going on.” It is credibility and authentication issues like these that make it nearly impossible for companies, even those with internal auditing systems to make good on their claims of green supply chain management.

Lesson 6: Green is a smart long-term solution
Still, efforts to affect change are having some impact. Frances Way, of the Carbon Disclosure Project, which partners with client companies pressure suppliers to disclose carbon emissions, believes that progress is being made. “It’s very much a business approach,” she says. “When you’re dealing with supply managers you’re not dealing with marketing; this is clearly something that’s embedding itself in the company.”

Of course, she understands that simply pressuring suppliers will not effect much change.“Supply chains are like balloons: if you squeeze them in one place they pop out somewhere else, so there’s a clear need for collaboration.”

What’s important, say many of those who work with companies to improve their sustainability practices, is not to be using 100% compliant suppliers, but to be willing to be work with honest suppliers and be willing to improve. “The key issue is not about whether a company is perfect or not,” says Ma Jun. “The most important things is when you have a problem, how do you respond to it.”

For some companies, pressure from their client companies is a reason to make changes. Wal-Mart’s Packaging Scorecard has had an impact on suppliers. One sourcing manager from a large US food company that sources to Wal-Mart says the scorecard has provided some clear guidance and also some pressure to improve. Beyond the risks of scandal, Way of the CD Project highlights an even greater risk to the sustainability of a company- the risk of being unprepared in a changing global climate.

“The worst thing that can happen to a procurement department is disruption to supply,” she points out. She warns companies that there are aspects of climate change that will affect their ability to source raw materials. Flooding, storms, and extreme weather all will influence a company’s long term sustainability. She suggests companies that research their options earlier rather than later.

So far that message has not reached many of the suppliers her client companies work with. 58% of the suppliers her client companies work with did not perceive a risk from changes related to climate change.

She maintains, “The longer you wait, the harder it will be to change the raw materials, and the more likely you are to have a more expensive option of change.”

Lesson 7: But in the end it has to pay to go green.
But from a longer term perspective, those who embrace sustainability are positioning themselves for a market that increasingly favors green. “I think that in the end customers that are prioritizing are very savvy, because it does eliminate costs but it also helps them with their brand,” says Smurfit-Stone’s McCann. “As you talk about positioning a brand to a next generation of consumers, it’s very smart.”

Until the cheapest price is no longer the goal, greening efforts may not go much further than those that double as cost-cutters. For a company to go green, Ma Jun believes that environmental groups need to work to ensure that there is enough financial incentive for supply chains to be better managed. “If we keep allowing those who cut corners to gain the competitive edge in China than we will not be successful in our efforts to protect the environment.”

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