Sustainability doesn’t stop at the factory gate

The attention devoted to sustainability has been growing for years, and has gradually matured. That is also reflected in the way companies approach this theme. They are increasingly taking responsibility for the entire value chain around their product or service.

“Consumers are the driving force”, says Johan Fastenakels, expert in sustainable and socially responsible investment at KBC Asset Management. “They make their purchases judiciously and demand ever more transparency from companies. How green are they really?

Companies have to respond to this. And they are doing so. For example, some supermarket chains, in addition to a nutritional rating (‘nutri-score’), also provide an environmental rating ( ‘eco-score’) for products. This enables consumers to judge the sustainability of a product before buying it. Clothing manufacturers are also increasingly providing information about where their apparel comes from.”

Partly under pressure from consumers, companies are making ever greater efforts to become more sustainable.

In recent years, those efforts have increasingly included focusing on the entire value chain.

Johan Fastenakels: “Companies realise that a large proportion of their footprint is not due to their own activities, but those of their suppliers, for example those providing raw materials or specific product components.”

The ‘sustainable’ footprint is not restricted to the environmental impact alone; social aspects or the way a company is managed also play a role. Together, these elements make up the Environmental, Social and Governance (ESG) criteria. “The working conditions when raw materials are extracted or when products are packaged often have a major impact,” says Johan Fastenakels.

“Companies which are not yet looking at the full scope are advised to get with the programme quickly”, adds Alex Martens, sector analyst at KBC Asset Management “The legislation is getting stricter every year and attention for the whole value chain is becoming more important. You can also look at it from a risk management perspective.

The value chain of a business often extends to distant foreign locations. Not all companies have oversight of the precise situation, and that can sometimes produce surprises. Sustainable chain management and adequate control reduce the risks of incidents in the supply chain. Lastly, there’s your reputation as a business.

Choosing sustainable suppliers of raw materials or semi-manufactures helps your reputation and can provide a boost for your revenues. A strong brand is worth its weight in gold. It also encourages companies to maintain the sustainable standard, because reputational damage is the nightmare of every business.”

It is therefore no coincidence that wind turbine manufacturers are increasingly focusing on local recycling rather than ordering their components in China. Worn-out wind turbine blades can then be given a second life, for example as a cycle rack. Furniture manufacturers are also increasingly opting for local procurement.

It reduces their transport costs and makes them less dependent on production in distant countries and on transportation. Remember the worldwide chaos that was caused when the Ever Given container ship was stuck in the Suez Canal.

“Polluting industries are also switching to sustainable alternatives”, says Alex Martens. “Steel production currently accounts for 7% of global CO2 emissions. But we are increasingly seeing examples of ‘green steel’, which aims at minimising carbon emissions.”

There are several options open to companies. They can change supplier, but that doesn’t really change the global situation. Increasingly, they are engaging in dialogue with their suppliers to persuade them to transform their way of working.

“We are seeing companies evolving into the role of coach, working in partnership with the supplier to find solutions to make production more sustainable”, explains Johan Fastenakels.

He cites the example of supermarkets, which are increasing the pressure on their suppliers to stop supplying fruit and vegetables in plastic packaging and to imprint logos into the produce instead of using an adhesive label.”

Investors are watching these developments closely. Companies which focus on the full scope of sustainability are quite simply more future-proof. Financial institutions are therefore increasingly taking parameters such as these into account in making their selections.

“For example, we set stringent criteria for companies’ palm oil policy in our sustainable and socially responsible investments”, says Johan Fastenakels.

“Harvesting palm oil often causes harm to the environment, combined with poor working conditions for the harvesters. In these funds we only admit palm oil plantations and refineries which are members of a roundtable on sustainable palm oil and which are fully engaged.

We also carry out additional checks to make sure these companies are not involved in any scandals.”

“A further bonus is that there are often financial benefits”, says Alex Martens. “A sustainable chain aims to be less complex, and that saves costs. There are fewer links in the chain, and transportation and packaging costs are lower.”

According to Alex Martens, there is also scope for value creation: “A sustainable relationship with suppliers can generate added value in the short and longer term, for example by ironing out any hiccups in supplies. Look at car makers, which are suffering major losses due to the shortage of computer chips.

Sustainable collaboration also means forging a bond for the longer term. The longer a company works with a supplier, the more they learn about the quality of that supplier, as well as about the origin of the raw materials or products and the working conditions of workers.”

All those suppliers are of course aware of the way things are going. They are increasingly taking proactive steps towards sustainability in order to strengthen their position in the market.

That speeds up the transition, creates new markets and even new business models, for example the recycling of discarded materials and the creation of a circular economy.

New business models, cost savings, value creation, … It is clear that a company which takes sustainability seriously across the whole value chain will reap the economic rewards.

Companies which secure their long-term continuity in this way accordingly deserve the attention of every investor.

This article is informational only and should not be considered investment advice.