Sustainability Strategies Addressing Supply-Chain Air Emissions (2014)

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118 A P P E N D I X E Corporate Programs Introduction This case study cluster aims to showcase several compel- ling voluntary programs put in place by industry. These include multi-company initiatives and programs launched by individual shippers and carriers. In particular, the compa- nies whose efforts are profiled range from large, well-known corporations to small, ordinary firms with few available resources and limited capacity—yet are also developing and executing sustainability projects. The purpose is to illustrate the significant strides that have been taken by the private sector, often without any direct regulatory pressure; to characterize what sorts of results are being achieved; and to make suggestions for ways in which regulatory agencies can encourage shippers and carriers to advance supply-chain sustainability even further. Industry Initiatives This section focuses on two specific industry initiatives. The first of these draws together shippers and carriers, with a primary focus on ocean container transport; the second is a consortium of apparel and outdoor companies concerned with the environmental aspects of their end-to-end supply chains. These efforts are selected because of their significant work to promote sustainable supply chains and transporta- tion. In particular, both initiatives demonstrate the ability of the private sector to tackle complex issues of environmental impact measurement on a purely voluntary basis. As such, they demonstrate a possible alternative or complementary approach to public-sector regulations in addressing complex, multi-party issues. BSR’s Clean Cargo Working Group Founded in 1992 and headquartered in San Francisco, CA, Business for Social Responsibility (BSR) is a global network of over 250 companies that work together to develop sustain- able business strategies and solutions through consulting, research, and cross-sector collaboration. Along with public and private companies, nongovernment organizations, sector associations, sustainability groups, and educational institu- tions are all involved with collaboration. In addition to strategy and reporting work with companies, BSR facilitates and provides expertise for the transportation and maritime industry through their Clean Cargo Working Group (CCWG). The BSR CCWG is a business-to-business collaboration committed to integrating sustainable business principles into transportation management. The group was established in 2003 in response to the growing complexity of global supply chains and increasing regulations and customer demands. Shippers began to need standardized, credible information about the environmental performance of car- riers, while carriers were receiving requests for sustainability measures and metrics. The CCWG consists of 29 shippers, including American Eagle Outfitters, IKEA, Nike, Heineken, Wal-Mart, and some carriers such as APL, Maersk, OOCL, and Kuehne + Nagel. Sixty percent of the global container- ship fleet by volume is represented by ocean carriers in the CCWG. CCWG members develop and use practical tools for measuring, evaluating, and reporting the environmental impacts of global shipping. These tools, along with dialog and collaboration, help members track and benchmark their environmental performance and easily report to customers in a standardized format. CCWG has compiled a comprehensive database of the shipping industry and, from that, has been able to develop baselines and measurement tools. One of the benefits of the CCWG calculation method is that it provides an indus- try standard for assessments and sharing of information in respect to the air emissions impacts of shipping. CCWG assembled emissions data (CO2, SOx, and NOx) from some of the largest transportation carriers, thereby enabling the creation of measurement tools that did not exist previously.

119 These are tools that carriers are unlikely to be in a position to assemble on their own. It provides carriers with an efficient, standardized, and transparent tool by which to calculate envi- ronmental impacts and to relay this information to shippers and stakeholders who can make decisions based on reliable information about the environmental performance of trans- portation service providers (BSR, 2012). CCWG’s Performance Metric Tool is a valuable Excel- based tool for ocean carrier environmental performance. The vessel-by-vessel data collection method assesses the environ- mental performance of a carrier in six key areas, including CO2, SOx, NOx, waste/water/chemicals management, envi- ronmental management systems, and transparency. Detailed inputs are required. Total scores are then placed into the out- put scorecard. Additionally, for CO2 performance, a score is provided for each trade lane and compared to performance from an indexed CCWG average. CCWG also has created a carrier “scorecard” to quantify per- formance and benchmark individual carriers against industry performance. The organization asserts that through its actions it has realized an average 8 percent decrease in aggregated CO2 emission rates across trade lanes from 2007 to 2008, and a 17 percent decrease compared to 2006 (BSR, 2012). Additionally, CCWG has both an Intermodal Calculator Tool and an Environmental Performance Survey (EPS). The Intermodal Calculator Tool helps carriers calculate their CO2 emissions and footprint for intermodal shipments. The EPS is a qualitative survey meant to supplement the quantitative performance metrics. It collects best practices in areas where quantitative metrics are less suitable at the present time (e.g., pilot projects) (CCWG, 2012). Outdoor Industry Association’s Sustainability Working Group Founded in 1989 and headquartered in Boulder, Colorado, the Outdoor Industry Association (OIA) is a trade organi- zation for companies in the outdoor apparel, footwear, and equipment industry. In 2000, several key players, such as REI and Timberland, started the Sustainability Working Group within the OIA in an attempt to begin to create a clear basis for evaluating sustainability of outdoor industry product (OIA 2012, pers. comm., June 1). The Sustainability Working Group now has over 250 member companies and has developed one of the most collaborative, innovative programs yet, the Eco Index. Based on members’ own previous research and tool development, the Eco Index was developed to address the environmental impacts of the supply chain. By 2011, the OIA had adopted the full Eco Index and, in conjunction with the Sustainable Apparel Coalition, began to develop a second version of the Eco Index that would be broader and applicable to all apparel and footwear prod- ucts, not just those in the outdoor industry. The Eco Frame- work is the foundation for the original index. The new index is driven more by lifecycle data and digs further into specific areas of impact, such as energy and GHG, carbon emissions, and air emissions. Version 2, to be released in July 2012, will have a transportation component and indicators will be reor- ganized. Although OIA created the initial Eco Index, the Sus- tainable Apparel Coalition brought the scale and knowledge of supply chain to be able to leverage the index to a broader level, beyond what the OIA could have done with the outdoor industry (OIA 2012, pers. comm., June 1). Since the Eco Index tool is still under development, it remains an internal-use-only tool for companies. Because of this unique positioning of the index as an internal learn- ing tool, it has allowed companies to collaborate and work toward the greater good for the industry. This fully voluntary, collaborative effort and development of a tool by the compa- nies actually using it is groundbreaking. The Eco Index was not developed by the government or consultants but by com- petitors who shared the common goal of creating a single, shared, global tool for measuring the environmental impact of apparel and footwear (OIA 2012, pers. comm., 1 June). Lessons from Industry Collaborations The voluntary industry initiatives studied have made great strides in promoting greener supply chains and transportation practices. Among their accomplishments, they contribute by • Sharing best practices in sustainability across companies. Industry consortiums are an ideal forum for advanced firms to share their experience with others. • Developing common methodologies and metrics. In the absence of comprehensive definitions, methodologies and metrics for supply-chain sustainability emanating from a public agency with a sufficiently broad perspective, it is useful for industry groups to advance a common under- standing of what constitutes sustainability and how it should be measured. Both CCWG and the OIA have made significant progress in this regard. • Experimenting with different methods (advanced by differ- ent groups) that can serve as a laboratory for how to address sustainability. Since the standards are voluntary, industry groups can essentially compete to see which approaches reso- nate best with shippers and carriers. Regulators can benefit from studying the results flowing from these initiatives. On the other hand, voluntary groups face certain limitations inherent in their role, as follows: • They have no power to require any shipper or carrier to adhere to the norms and metrics developed. These groups

120 therefore tend to attract progressive companies interested in improving their sustainability performance and may not directly influence those who are less interested and therefore do not join the group. • They are fragmented in their membership. Some are more European, others more U.S.-oriented; some are focused exclusively on issues affecting a single industry vertical; and others are united around a specific mode of transportation. This means that while each group advances some aspect of sustainability, there is no clear, cohesive solution develop- ing at this time from the many sustainability organizations. Shipper Initiatives Shippers active in the United States (especially large com- panies) are without exception paying attention to supply- chain sustainability. Each of the shippers studied was able to recite an impressive list of supply-chain sustainability objec- tives and achievements. The questions that raise concern (1) which types of companies are most actively involved in sustainability efforts and (2) what can small companies rea- sonably be expected to do, even if they can devote only lim- ited resources to green efforts? These points are addressed by analyzing Nike and Stonyfield Farm. These two companies are at two very different points on the size spectrum and are both consumer goods companies. Nike Nike is a footwear and apparel giant, with revenues of $25 billion. As a leading consumer brand associated with athletics and healthy living, the company is naturally focused on sustainability. Nike’s supply-chain sustainability pro- gram is evolving to encompass a more complete, end-to-end supply-chain view that is transparent to consumers. The company has developed a list of supply-chain expectations that includes environmental footprint analysis, publishing a corporate responsibility report on a consistent basis, pro- actively investing in research and development of alternative materials, understanding their supplier footprint, ensur- ing traceability of materials throughout the supply chain, and integrating environmental standards, certifications, and traceability systems to ensure integrity throughout the supply chain (Nike, 2012). Each segment of the supply chain is measured via a common denominator (grams of CO2 per unit processed). This allows Nike to conveniently roll up the impact along each leg of the product’s journey. With the company’s continued double-digit annual growth, many opportunities to simply “do things more efficiently” have been exhausted. This means that Nike must work on doing things differently, such as shifting transport modes (Nike 2012, pers. comm., May 18). These transportation initiatives complement manufactur- ing process improvements (e.g., Nike Flyknit’s manufacturing process changes to reduce waste in knitting together the upper part of a shoe) and exploring new materials and manufactur- ing processes through the company’s Sustainable Business & Innovation Lab. A Manufacturing Index was introduced in 2012 to evaluate sustainability and other performance ele- ments in Nike supplier factories as well. Each plant is rated on quality, delivery precision, cost competitiveness, and sustain- ability (lean implementation, environment/energy and labor, health and safety), with 25 points going to each of the four factors. Overall scores are then compiled leading to red, yel- low, bronze, silver, or gold performance and corresponding action requirements. Nike recently refreshed all of its environmental targets to FY15 (baseline FY11) as follows: • Achieve 20 percent reduction in CO2 emissions per unit from FY11 levels through FY15. • Source all products from factories that have achieved bronze or better on Nike’s Sourcing and Manufacturing Sustainability Index by the end of FY20. • Accelerate the adoption of cleaner fuels and vehicle tech- nologies by transport and logistics partners (Nike, 2012a). Nike also promotes its Nike Better World image by creat- ing products with low environmental impacts. The company recently launched sports apparel made from recycled PET plastic bottles. For example, the U.S. men’s and women’s soc- cer teams are outfitted with complete kits made of 13 recycled plastic bottles each. The shorts are made of 100% recycled polyester and the shirts are made of a minimum of 96% recy- cled polyester (Nike Inc., 2012). Stonyfield Farm This New Hampshire-based organic yogurt maker places significant emphasis on sustainability and on educating con- sumers about its environmental efforts. Sustainability was one of the founding principles of the company and is cen- tral to its brand as the consumer understands it. Over time, Stonyfield has concentrated its sustainability efforts on the hot spots of its supply chain: milk (largest and most difficult impact area to fix), transportation, packaging, and facilities. Although sustainability is central to the Stonyfield brand, the company has found that most consumers rate price, nutrition/health, and taste above sustainability. The com- pany’s research has shown that consumers do not necessarily wish to pay for sustainability. Thus, a sustainable brand is not a guarantee of consumer demand or loyalty. Stonyfield therefore aims to meet its own sustainability goals while also fulfilling consumer needs. The company is focused on

121 educating consumers about why they should choose a sus- tainable brand. Stonyfield expects the level of consumer green awareness to rise in coming years, thanks to the com- pany’s own efforts and those of its competitors (Stonyfield Farm, 2012, pers. comm., June 15). Stonyfield’s main sustainability target is to achieve a 5 per- cent annual reduction in CO2 emissions per ton of product delivered. Reaching this goal implies a 75 percent decrease by 2015 (from a 2006 baseline). A 50 percent reduction was already achieved by 2010. All the company’s individual sus- tainability projects tie into this 5 percent annual reduction in GHG (the company does not directly address CAP). On the transportation side, Stonyfield looks at miles in network, vehicle utilization, and mode to reduce the CO2 footprint. The company became a certified EPA SmartWay transport shipper and measures its GHG impact using EPA SmartWay’s FLEET performance model. Stonyfield also requires that all trucking companies moving its products be SmartWay-certified carriers. A transportation mission action program (MAP) was created, under the direction of Stony- field’s director of logistics, to craft cross-functional environ- mental goals covering shipments from the main plant and distribution center in Londonderry, New Hampshire, where 99 percent of the company’s outbound volume originates. Significant progress has been achieved. Between 2006 and 2008, for example, Stonyfield reduced transportation CO2 emissions by more than 40 percent while also growing the business. This is equivalent to taking 1,700 automobiles off the road for a year (Stonyfield Farm, 2012, pers. comm., June 14; Stonyfield Farm, 2012; Cooke, 2009). In terms of advice to other small companies seeking to make sustainability a core part of both the company’s image and its operations, Stonyfield’s director of logistics advises, “the biggest thing is getting [sustainability] into the day-to- day. It’s not top to bottom, it is at the employee level” (Stony- field Farm, 2012, pers. comm., June 14). Lessons from Shipper Initiatives Nike and Stonyfield Farm are examples of a large and small consumer products company, each with a progressive record in supply-chain sustainability. Many other shippers are active as well—companies like Wal-Mart, Home Depot, REI, Sta- ples, Timberland, and ConAgra Foods. The findings from interviews and secondary research suggest that shippers are devoting significant efforts to improve the sustainability of their supply chains, often driven by consumer and competi- tive pressures more than by specific regulations. These efforts typically include the following: • Naming a senior executive to lead sustainability efforts, often chairing an internal sustainability council; • Joining one or more of the voluntary industry sustainabil- ity groups; • Working with suppliers and carriers to ensure sustainable practices at all stages of the supply chain; • Establishing teams focused on supply chain or transporta- tion sustainability; • Setting annual and medium-term goals for sustainability, focused primarily on CO2 reduction; CAP emissions are rarely the explicit subject of shipper sustainability objec- tives; and • Publishing an annual report on sustainability, based on the format and metrics developed by one of the leading sus- tainability councils. Shippers most focused on supply-chain sustainability appear to be those making or selling consumer products. Although all companies are required to meet regulatory standards, companies in industries such as apparel and food are particularly sensitive to their sustainable brands and make special efforts to reduce their emissions and com- municate their efforts. In other cases, corporations report that having an active sustainability program is essential to winning competitive procurements in a business-to-busi- ness environment. Small companies face special challenges in mounting an effective supply-chain sustainability effort. There are steps that all firms can take, however, even though the benefit-cost equation will vary from case to case. These include • Naming an internal champion for sustainability; • Analyzing the environmental footprint of the company’s end-to-end supply chain, including activities by suppliers, carriers, distributors, and retailers; and • Joining an appropriate industry consortium to learn more about the issues and solutions. These are practical steps that manufacturers and retailers can take to become more informed and proactive in driving their supply-chain sustainability. Carrier Initiatives Carriers are the most directly impacted by air emissions regulations. Although shippers are interested in their overall supply chains, as part of their corporate sustainability efforts, carriers are required by local, state, federal, and international regulations to implement new technologies and operations in order to limit their GHG and CAP emissions. As such, car- riers were found to be highly attuned to air emissions issues (primarily in respect of GHGs but, in some cases, focused on CAP emissions as well). This section highlights the efforts of two leading parcel carriers, UPS and FedEx.

122 UPS UPS has paid great attention to its sustainability programs and made these efforts a part of its brand. The company is highly focused on helping its customers reduce the carbon footprint of their supply chains. UPS set some impressive overall objectives for sustainability in its transportation activ- ities, as follows: • Increase average in-service MPG for package cars in the U.S. domestic package segment by 20 percent (from 2000 to 2020). • Reduce global CO2 emissions by 20 percent (from 2005 to 2020). Supporting initiatives include reduced aircraft flight speeds; computer-optimized flight plans; computer- managed aircraft gate departure, arrival, and taxi times; bio-diesel in ground support equipment; environmen- tally friendly paint that reduces drag; and cleaner engines (“Sustainability at UPS,” 2010). For the U.S. line-haul trucking operation (UPS Freight), the company has emphasized optimizing its network opera- tions and fleet using technology, as well as shifting to lower- emissions modes and experimenting with alternative-fuel vehicles (UPS Freight, 2012, pers. comm., June 27) as follows: • UPS Freight created a package plan/routing system and database that allows customers to view package details, data, and options. The basis for the delivery route is the service commitment or requirement. Planning technology is then used to build a route that requires the least number of miles. This approach has been the basis for the reduc- tion of the carbon footprint, using many fewer miles to deliver freight than in the past. • The other part of the package plan system is reduction in idle time. For each driver, UPS Freight has been able to reduce idle time by 50 minutes per day. • These efforts have driven a 28 percent reduction in fuel use to move a ton of freight (2006-2011). The savings equate to 400,000 gallons of fuel and a corresponding tonnage of CO2. • The next aspect of reducing emissions is the rolling labora- tory approach, focusing on vehicles, fuel, telematics, and differences between rural, urban, and long-haul heavy freight movement. • Shifting freight from truck to intermodal rail is a key ele- ment of UPS Freight’s plan for long-haul lanes. The com- pany enjoys strong relationships with all of the major railroads. UPS is currently working to develop an inter- modal solution for 2-day delivery work, which currently can only be met by road solutions. Intermodal rail reliabil- ity is at an all-time high, as the railroads focus less on coal and more on their intermodal product. UPS has actively experimented with alternative-fuel vehicles—it has 2,600 in its global fleet today. These vehicles have traveled over 200 million miles since implementation. UPS’ first alternative vehicle was an electric one in the 1930s. Current alternatives in use include LNG, CNG, propane, hybrid electric, electric, hydraulic hybrid, biomethane, and composite vehicles (that yield 40 percent fuel savings). UPS recently took a decision to add 150 of the composite vehicles to the fleet (UPS Freight, 2012, pers. comm., June 27). One of the ways UPS has extended its sustainability brand is to offer customers a carbon-neutral shipping option (using carbon offsets) and eco-friendly packaging. This is offered in many countries and is widely available, though actual volumes are still low. The carbon-neutral product has been third-party validated. UPS expects demand to grow as con- sumers become more aware of the sustainability advantages. To encourage demand, UPS initially matched customer cost (up to $1 million, by 2011). The carbon offsets are viewed as a cost-effective way to address carbon in the supply chain. (UPS 2012, pers. comm., May 11; UPS, 2012). FedEx FedEx presents its sustainability efforts to customers and partners in an annual Citizenship Report. This emphasizes the “simple goal” of connecting “the world in responsible and resourceful ways.” Environmental and efficiency goals are highlighted, such as aircraft emissions, alternative energy vehicles, recycling, and electricity generated by solar facilities. Ambitious targets have been set, such as improving fuel efficiency and CO2 emissions of the FedEx fleet by 20 percent by 2020 (from a 2005 baseline). One of the main levers to achieve this goal is to increase the electric and hybrid fleets by 20 percent. By the end of FY2011, FedEx had 408 electric and hybrid vehicles in operation, saving substantial fuel and reducing CO2 emissions. FedEx Express vehicles’ fuel effi- ciency has improved by more than 10 percent annually for the past 3 years. FedEx Express and FedEx Freight have each received an EPA SmartWay score of 1.25, rated outstanding (FedEx, 2011). FedEx expanded its sustainability brand by launching, in April 2012, a worldwide carbon-neutral envelope-shipping program. FedEx purchases the equivalent amount of CO2 offsets from BP Target Neutral for all global FedEx envelopes shipped, at no extra charge to customers (a first in the indus- try, according to FedEx). As of April 10, 2012, every Express envelope that moves through the system is being offset. FedEx is currently exploring opportunities to offer a similar program for non-envelope packages. Customers like the idea of carbon- neutral shipping and are asking FedEx, “What is our carbon footprint?” With the new program, FedEx can show customers

123 that their carbon emissions are now effectively zero for enve- lope shipping (FedEx, 2012, pers. comm., May 21). Lessons from Carrier Initiatives Carriers in all modes are highly focused on sustainability in their equipment and operations. This is partly due to the direct correlation between GHG and fuel consumption, pro- viding a strong environmental co-benefit to measures essen- tially aimed at fuel savings. Sustainability practices by carriers are driven by regulations in a more clear fashion, since regula- tors have required carriers to introduce cleaner engines, other equipment upgrades, and operational changes to improve air quality and address global warming concerns. Why do some carriers go above and beyond the existing envi- ronmental regulatory requirements? This appears to stem, as it does for progressive shippers, from a desire to differentiate the company and its service in the eyes of its customers, whether consumers or corporate users. Parcel carriers, in particular, are highly sensitive to sustainability issues, which can be attributed in part to the nature of their business, involving daily contact with many thousands of consumers, often in busy urban and suburban areas. Other carriers (Maersk or Con-Way, for exam- ple) appear to believe that proactive environmental practices will help qualify them for the business of shippers who are sen- sitive to sustainability, or that they will in some indirect fashion gain favor with the public by their actions. The main issues from carriers involved situations in which, reputedly, regulators did not sufficiently solicit or heed the advice of the private sector. Carriers can become frustrated when (in their eyes) ill-considered rules are imposed. The practical solution appears to be the involvement in policy discussions and rulemaking, early on and in a meaningful way, of carrier representatives. Carriers are often eager to be consulted. They bring a wealth of knowledge based on their own experimentation with different solutions, which can be leveraged by regulators to hone in on the best win-win alternatives.