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Most commonly this collaboration happens through procurement: 62% of members now reward suppliers who employ strong environmental practices, up dramatically from 28% in 2010 and 19% in 2009.

At the same time, suppliers are becoming more transparent about their emissions and related mitigation strategies, indicating that they now recognize the growing business case for disclosure and collaboration. While disclosure scores among suppliers show improvement, performance scores still trail, indicating that these companies must now transition from communication to taking specific steps to drive emissions reductions. Among specific sectors, utilities scored better than suppliers in other sectors, perhaps due to the more regulated state of the utility industry. Regionally, the disclosure and performance scores of Asian-based and European-based companies exceed the scores of companies from North America and the rest of the world. Suppliers in Asia and Europe have more comprehensive climate change strategies in place —and have generated better results—than their competitors in North America or the rest of the world.

Finally, the results point to several clear avenues that corporations can pursue to further their supply- chain efforts, including better ways to evaluate suppliers, more effective procurement strategies, and improved measurement tools to quantify gains.

Supply Chains and the Sustainability Imperative

The financial credit crunch that has spawned the global financial crisis is the most profound economic shock in over a generation. Economists have to turn back to the 1971-73 period to find a parallel that produced anything like this degree of change. However, the world is also facing an environmental credit crunch, the effects of which are starting to become apparent.

Credit is simply a means by which we use tomorrow’s standard of living to enhance today’s standard of living. To buy a television on credit means owning a television today (a higher standard of living), while accepting a lower standard of living tomorrow (as the debt is repaid). Environmental credit is the same concept – burning a barrel of oil to heat a home today means that the consumers deny themselves the ability to burn that barrel of oil to heat their home tomorrow – an inter-temporal transfer of environmentally-determined living standards.

A credit crunch is simply when that inter-temporal transfer is made more difficult (or in extremis, impossible). The price movements of basic materials and energy today indicate just such an environmental credit crunch. We have just had the worst global recession in seventy five years, and oil trades at more than $100 per barrel. For the first time in modern history, resource constraints act as a brake on economic activity. One third of all economic activity today depends on the consumption of nonrenewable resources – akin to financing a third of one’s household budget on credit cards.

These twin credit crunches — financial and environmental — influence one another. The solution to an environmental credit crunch is simple: we need to do more with less. Achieving that efficiency requires better investment in capital and education, which in turn requires funding for that investment. However, the financial credit crunch limits the availability of funding at exactly the time it is most needed. Similarly the political concerns about the constraints imposed by an environmental credit crunch may induce governments to direct financing toward certain industries (agriculture, for instance), denying capital to other sectors of the economy and compounding the impact of financial credit crunch.

Amidst all of this sit supply chains – stretched across the world, vulnerable to disruption, and representing the economic and trading structures of what is almost certainly a bygone age. Certain issues, including trade protectionism, limits on capital flows (such as foreign direct investment or trade finance), regulation and politics all render existing supply chains vulnerable. However, the environmental credit crunch factors in as well. Transport expenses and power costs change the economics of lengthy supply chains. However, shifts in environmental conditions also make supply chains more important (importing food into water deprived areas, for example).

The two credit crunches mean changes for the way we supply our economies today. What those changes are, precisely, we cannot know – because we still do not know the extent of the twin credit crunches. What should be clear for policy makers is that to concentrate on the financial credit crunch in isolation is a highly risky strategy. The environmental credit crunch has the potential to be at least as economically damaging. This logic also extends to business. The future trend level of economic growth will depend on our ability to innovate and become more environmentally efficient. It is clear that we are standing at the brink of a new era.

Paul Donovan, global economist at UBS and the co-author of From Red to Green: How the Financial Credit Crunch Could Bankrupt the Environment


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