This article comes from an Ethical Corporation focus on sustainability in food and drink supply chains, sponsored by PepsiCo UK & Ireland. Food and drink brands must tackle supply chain environmental impacts to make good on green promises
Food and drink brands have long been thought of as consumer goods companies. Not any more. Brands that are serious about cutting their environmental impacts are starting to think about themselves as part of a new breed – they are all farmers now.
Green-thinking brands have twigged that by far their biggest environmental impacts are not in food processing, but food growing. Agriculture accounts for most of the greenhouse gas emissions, water use and waste in food supply chains. These impacts occur long before food is turned into the well-known brands we see on supermarket shelves.
These environmental impacts are outside a company’s direct control. The Carbon Disclosure Project (CDP), which requests energy data from companies, estimates that 70% of carbon impacts in a food and drink brand’s supply chain come from outside manufacturing.
Much of this comes from farming. Cadbury, for example, has found that dairy farming accounts for 64% of the carbon footprint of a Dairy Milk chocolate bar. Just 14% of the bar’s footprint comes from manufacturing the product. PepsiCo has discovered that 60% of the environmental impact of a bag of Walkers Crisps is from sources outside the company’s direct control. Just over a third comes from raw materials, mainly growing potatoes and sunflowers for sunseed oil.
Numbers like these show that greening the supply chain represents a huge opportunity for food and drink brands that want to lay claim to environmental credentials. Helping suppliers reduce carbon emissions, water use and waste can lead to big savings too, as every resource used in supply chains costs money.
Managing environmental impacts in the supply chain is also sound risk management. Climate risks include new laws to cap-and-trade emissions, and the physical risks of extreme weather on agricultural supply chains. Food and drink brands have a clear interest in preserving climates that enable food to grow. Should crops fail in future because of climate change, these brands could suffer.
Working with the Carbon Trust, PepsiCo UK has put the potential cost of climate change to its UK business at more than £200m by 2020 if it takes no action to climate-proof its supply chain. Risks include the loss of revenue if crops fail – such as potatoes in the UK because of flooding, or oranges in Brazil because of high winds – and the extra cost of having to buy raw materials on spot markets.
Martyn Seal, European sustainability director at PepsiCo, says: “We are an agriculture company. Everything we make relies on the environment. That’s our challenge.”
Brands may have every reason to green their supply chains, but getting suppliers to manage their own environmental impacts poses challenges.
The sheer scale of many food and drink brands’ supply chains, which stretch to thousands of suppliers all across the world, makes data collection hard work. Not all brands know, for example, just how many farmers are in their supply chains, as they often deal with cooperatives that have many members and include small farmers.
Persuasion process
And even in the food and drink sector, where manufacturers and retailers call the shots, brands cannot simply command suppliers to cut resource use. They instead must persuade suppliers to address environmental impacts, a process that takes time.
Despite the challenges, food and drink brands know what they must do. It starts with identifying what their environmental issues are and whereabouts in the supply chain they occur.
Cadbury’s conformance and sustainability director, David Croft, says robust data and good metrics are essential to understanding environmental impacts. He explains: “You must make certain you are measuring effectively and understanding the impact of what these measurements are telling you. Then you can prioritise action in the most effective way to get most value.”
Marks & Spencer’s head of sustainable business, Mike Barry, agrees. “You’ve got to look behind the value chain and get to the hotspots,” he says. “That’s where you get the best bang for your buck.” M&S has an estimated 2,000 suppliers and 20,000 farmers.
Having set a strategy that prioritises what action to take, Barry says, brands should start measuring green performance and success across the supply chain. Then what he calls the “compliance regime” can start, where suppliers are scored and rewarded on environmental criteria. “This is the point where you get innovation,” says Barry, explaining that suppliers start to find new ways of cutting impacts to impress their corporate customers.
Fact-finding
That’s the long-term vision. For now, companies across all sectors are only starting to collaborate with suppliers to reduce environmental impacts. CDP reports that just three of the 34 companies that took part in its supply chain leadership programme last year used supplier sustainability scorecards. A further three were developing them.
Six food and drink manufacturers have this year asked suppliers to report on environmental impacts through the CDP. Suppliers receive an “information request” asking about their energy use. Brands taking part this year are Cadbury, ConAgra, Heinz, Kellogg’s, PepsiCo and Unilever. Nestlé took part in the process last year, but has since decided to approach suppliers itself.
Brands are still working out exactly what their indirect environmental impacts are, and finding simple ways to reduce them. To cut carbon, a number of UK food and drink brands are working with the Carbon Trust, which advises companies on carbon management.
Food and drink brands account for 39 of the Carbon Trust’s 64 current carbon reduction label projects. Carbon reduction labels, which can be displayed on packaging, show the carbon footprint of an individual product across its entire supply chain. Companies that sign up to a carbon label project commit to reduce that carbon footprint by a minimum of 3% within the first two years.
In March 2007, PepsiCo became the first UK company to put carbon reduction labels on products, on packs of Walkers Crisps. In February 2009, Walkers announced it had cut the carbon footprint of its crisps by 7% since joining the scheme. The biggest reductions came from cutting gas and electricity use in crisp manufacturing – direct impacts – saving the company £400,000 a year.
The more experience companies have of carbon footprinting, the easier it gets, as in-house skills and understanding increase, says Andrew Smith, head of corporate responsibility at PepsiCo UK. The company is extending carbon footprinting work to its Quaker Oats breakfast cereal in the UK and Tropicana orange juice in the US.
Brands can also benefit from the work being done by other companies, says Euan Murray, carbon footprinting general manager at the Carbon Trust. He says the methodology for measuring the carbon footprint of one tonne of sugar was developed by British Sugar in response to demands from Cadbury. This methodology is now used for other British Sugar customers, such as Coca-Cola.
Supplier engagement
Brands have had successes, but engaging suppliers remains a challenge. Last year the CDP supply chain leaders got just 640 responses from suppliers, an average response rate of 46% per member. Response rates varied from 6% to 80% between members.
CDP supply chain director Frances Way says brands could improve response rates by really communicating the sustainability message to buying teams. “Get suppliers in a room and get them excited about the whole process,” she advises brands. Buying teams are in regular touch with suppliers, making them the obvious channel for encouraging green practice in the supply chain.
Yet some suppliers remain suspicious of brands asking them to do what is perceived as extra work. The Carbon Trust’s Murray explains: “There’s a commercial dynamic at play. Suppliers are worried that anything suggested by customers is a way for them to pay less.”
To overcome these doubts Murray says brands should sit down and talk to suppliers about their intentions at the outset of a project. Where supply engagement has failed, brands were not clear enough with suppliers or failed to ask the right questions, he says.
Murray, whose father is a sheep farmer, explains: “If I were to ask [my father] what the carbon footprint of one of his sheep was, he’d look at me as if was crazy. If I asked him how many sheep he had per acre, what he feeds them over the winter, what fertiliser he uses – these are all questions he can answer.”
Mark Pettigrew, sustainability manager for agricultural production at PepsiCo, who has spent 30 years working with potato farmers, says he has not had serious resistance from growers. He says: “Like all of us, some have a greater interest in going down the sustainability path than others.” He agrees that brands and suppliers must talk the same language. For example, rather than talking of cutting greenhouse gases or CO2, which is released by fertilisers, it is much better to talk about ways of “optimising input costs”, he says.
PepsiCo UK sustainability manager James Barlow says: “Supplier engagement is primarily, in the long term, to secure supply chains.” Getting the message across to suppliers about the physical risks of climate change on their crops, and the opportunities of meeting rising demand from retailers and consumers for low carbon products, has proved persuasive, he adds.
Fiona Page, sustainability sourcing manager of PepsiCo Europe, says the key to supplier engagement, on any issue, is clear communication. “You need to get a consistent message to suppliers. Try to keep it simple,” she says. “We don’t ask suppliers to do anything that we are not prepared to do ourselves.”
Dax Lovegrove, head of business and industry relations at WWF, says brands should push suppliers to cut impacts, but must be careful not to push too hard. “I would not want to encourage brands to take a bullish approach towards suppliers. They need to build capacity and create incentives.”
Creating incentives is something M&S does, for example, by helping suppliers generate green energy on their farms. Barry says the retailer got the idea from Germany, where farmers generate their own wind and biomass electricity to sell to the grid. To get the projects going, M&S promises to buy the power from the supplier.
Creating new income streams for suppliers is an idea that Cadbury is hoping to pioneer on a smaller scale with cocoa farmers in Ghana. The company plans to create additional income for farmers through forestry carbon credits, which they could sell on global carbon markets. Croft hopes projects could be up and running in “three or four years”.
Carbon focus
Understandably, brands have focused on carbon management in the supply chain, which includes management of greenhouse gases such as methane and nitrous oxide. Yet Lovegrove says companies should double check they measure and manage all greenhouse gas emissions in their supply chains.
Water too remains an under-managed issue for many brands, although some are making progress in this area (see below).
Lovegrove also advises companies to join relevant commodity roundtables, many of which WWF helped to set up, such as those on palm oil, soya and sugar cane. He says: “If companies are not members of these commodity roundtables, they should ask themselves, ‘Why not?’” These multi-stakeholder roundtables, which discuss environmental concerns with production of these raw materials, are useful places for brands wanting to engage suppliers, he says.
For now, the next step is setting up green performance scorecards for suppliers. CDP will this year start to benchmark suppliers that have responded above and beyond the average, says CDP’s Frances Way. She says: “Procurement people like facts. It’s important that we provide them.”
In 2010, CDP may introduce targets for suppliers. This would be in keeping with an emerging trend towards including green performance in supplier scorecards. Brands “have to move to scorecards and performance metrics”, says Way.
To date, leading brands have been inclined to stress to suppliers that they are interested and committed to environmental sustainability, and leave it at that. The day when suppliers lose business because buying teams feel they are slacking on their carbon, methane, or water management could be on its way.
How to gather carbon footprint data
Methods for measuring environmental impacts in supply chains remain work in progress. The most advanced process is for product carbon footprinting, which is being led by brands working with the UK’s Carbon Trust.
First the Carbon Trust helps brands map the scope of their carbon footprint to identify where major emissions sources are likely to be. Euan Murray, carbon footprinting general manager at the Carbon Trust, says: “That then allows you to get your sleeves rolled up with the process of collecting data.”
Companies using the Carbon Reduction Label to show a product’s total carbon footprint can use a mixture of their own and industry data to measure impacts in their supply chains.
Under the PAS2050 standard, brands must use their own, primary data for energy use in their own manufacturing operations.
For supplier energy use, brands can either get data themselves or use industry averages, known as secondary data. This is cheaper and simpler, but is less accurate. Good secondary data exists for some supply chains, says Murray, although there “could be more” academic and industry-wide research for companies to draw on.
Brands should go beyond compliance and collect their own data, says Murray. “It’s good practice over time to get more measured data for across the supply chain.” The more a brand understands the specifics of its supply chain, the bigger its opportunities to make financial and environmental gains, he says.
Doing a carbon footprint is itself a cost. The Carbon Trust says the most expensive footprinting project it has done ran to £30,000. Murray stresses that these costs fall dramatically once brands have systems in place for collecting data and are anyway outweighed by the benefits of lower emissions. Brands must also pay a small, annual licence fee to use the Carbon Reduction Label – which starts at £5,000 a year.
Food and drink brands and retailers working with the Carbon Trust on measuring their carbon footprint or carrying a carbon reduction label include Cadbury, Coca-Cola (Coca-Cola, diet Coke and Coke Zero), Innocent Drinks, PepsiCo (Walkers, Quaker Oats, Tropicana), Sainsbury’s and Tesco.
Water – a local challenge
Unlike carbon, which is a global problem, water shortages are a much more local challenge for brands. A tonne of water wasted in many parts of the UK, for example, does not harm or deprive others in the world in the same way that a tonne of emitted CO2 will in years to come.
Food and drink brands wanting to understand their water footprint – the amount of water used to grow and process their products – will have to take a locally specific approach.
PepsiCo sustainability director, Martyn Seal, says: “Responsible water stewardship is a complex challenge. Companies need to work together, and engage with global experts, to identify the right metrics and the right approach.” PepsiCo is reviewing water scarcity issues for its manufacturing sites and key locations in its supply chain, he says.
Dax Lovegrove, head of business and industry relations at WWF, says: “Companies are still getting to grips with water footprinting.” He advises brands to find out now which parts of their supply chains are in water-stressed regions of the world, as a basis for action. He says brands should know the source of water they use – whether it comes from rainfall, which is fairly sustainable, or from underground aquifers, which is not.
Lovegrove cites M&S, Unilever, Nestlé and Coca-Cola as emerging leaders in this area, but admits no brand has cracked the complex issue of embedded water in its supply chain.