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As the Climate summit ended in Poland with an agreement that will nudge the world toward tougher CO2 emissions targets, American business and civil society are coming up with innovative strategies to rise to the challenge. At the conference “Responsible Supply Chains: Building Positive Impact in a Changing World” at the Stanford Graduate School of Business last week, American environmental leaders showcased effective solutions beyond the business case to incentivize environmental progress: the creation and promotion of norms and the careful design of market systems show great promise to curb emissions and protect people and the environment in the absence of top down regulation.
Early environmental entrepreneurship was driven by the business case. When financial incentives are aligned and it makes good business sense to take action, there rarely is a debate. Eliminating waste and reducing the volume of a product’s packaging generates savings in the cost of materials and in some cases in the cost of transportation. The collection and recycling of materials may generate a new source of revenue. Paul Wormser of Clean Energy Associates pointed at such an opportunity to close the supply chain of the solar industry by collecting and repurposing the 30 million metric tons of valuable glass used to produce the 500 GW or 3 billions square meters of solar panels installed over the past 20 years that are will soon go offline. These now well established environmental strategies present little to no friction. Yet, they are not implemented in a systematic fashion across industries. Beril Toktay, Director of the Ray C. Anderson Center for Sustainable Business at Georgia Tech, pointed out that “the gap between what’s technically feasible to make the circular economy a reality and what’s happening in practice is enormous.” For example, according to a study by the MacArthur Foundation, The New Plastics Economy, a staggering 72% of plastic packaging material escapes collection and only 2% is re-injected in a closed loop into production. Aligned financial incentives go a long way, but certainly not all the way.
It’s as if the environment needs a PR firm to raise awareness about the climate entrepreneurship opportunity. With Project Gigaton, Walmart endeavors to do just that. It is hoping to inspire its suppliers to take carbon reduction pledges, implement environmental best practices, and deliver environmental impact. The ambition of the project is to remove one gigaton of emissions from the product value chains by 2030. The company identified science based targets and developed educational materials available online for all suppliers to accelerate their learning curve and identify the most promising actions they can take. In the absence of compliance audits and considering the power imbalance between WalMart and its suppliers given its quasi-monopsony status, the mechanism is imperfect. Indeed, by Zach Freeze’s own admission, a senior director of sustainability at WalMart, nothing prevents companies from reporting made-up information. Furthermore, WalMart didn’t put a rigorous data collection process in place that would allow the company to understand its role in causing the environmental progress claimed by Project Gigaton. But that’s not the point. Wal-Mart is working to create a movement, to establish new norms. When WalMart purchases a product, incentives are aligned for the supplier to sell more of the same product to other buyers. If that product has environmental virtues, everyone benefits. WalMart is giving environmental trailblazer companies a stage and is creating beacons to inspire others to follow suit. WalMart strategically leverages its size and influence to celebrate environmental responsibility and elevate it as a factor in business decisions. This approach to environmental norm building provides a blueprint for market leaders in most industries.
Now a year into the Gigaton project, Freeze sees traction. The company is successfully pushing suppliers to implement tried and true practices where the business case is clear. Will the strategy build enough momentum for suppliers to then continue to build an environmental legacy beyond the business case? That story remains to be written. In the meantime, strategies are emerging to remove obstacles in areas where financial incentives may not have been aligned to start with. Trevor Zimmer, a senior designer at Dalberg provided such an example. For much of the fragmented apparel industry, hiring a chemist to develop environmentally friendly product formulations is extremely costly and flies in the face of maintaining a competitive position in the market. As a result the choice of chemicals used to produce garnements falls on the factory and remains mostly unexamined for its impact on workers’ health and on the environment. Material Wise, a nonprofit organization, hired Dalberg’s services to develop an industry-wide collaboration and provide verified chemical hazard assessment data to all of its actors. This kind of pre-competition value chain cooperation will enable creators to specify product formulations when placing an order. This will drive new demand for chemicals with safer properties, driving their cost down for the benefit of all producers involved. The hope is that this market design intervention will soon align the financial incentives which then will drive the entire industry toward safe practices. If successful, this collaborative, industry-wide approach to environmental stewardship could be replicated in industries such as the built environment and consumer electronics.
My key takeaway from the environmental panel of the Responsible Supply Chains conference is that collaborations are developing quickly to fill the void of political leadership in the US. Indeed, developing norms and expectations and aligning incentives for success is nothing else than what you can expect from good regulation. Of course, those partnerships still lack the urgency that stricter regulation could bring.
“Responsible Supply Chains: Building Positive Impact in a Changing World” was presented by the Center for Social Innovation and the Value Chain Innovation Initiative at the Stanford Graduate School of Business on Dec 13, 2018. This article is a collaboration between Malhotra and Bernadette Clavier, Director of the Center for Social Innovation.
Solar photovoltaic power generation system, solar photovoltaic system, photovoltaic power system photocredit: Getty
December 20, 2018 at 01:16PM
Forbes – Entrepreneurs