Over the past few years, organizations around the world have made environmental innovation and disclosure a key part of their business models. The reasons are varied: Some companies care deeply about the climate change crisis and how it is rapidly changing human existence. Others realize that consumers today are more concerned about the environment – with many saying they are more likely to support businesses that exercise ethical environmental practices. Some governmental regulators have created stricter thresholds for businesses, such as emissions reduction or the proper disposal of waste. And stakeholders, including major shareholders, have a vested interest in companies disclosing their environmental impacts.
According to an October 2020 research article in ASCM’s Journal of Operations Management, “Environmental disclosure has been shown to impact firms’ reputation, value and performance.” In this context, environmental disclosure includes all information a business makes available about its environmental impacts and practices. Further, the study, “Administrative environmental innovations, supply network structure, and environmental disclosure,” finds that administrative environmental innovations (AEIs) are directly correlated with environmental disclosure. AEIs typically refer to plans or policies for the organization that quantify environmental impacts and create goals for managing effects, investing resources, tracking progress and course-correcting as necessary.
The incentive to increase environmental disclosure does not just affect consumers and shareholders; employees, managers and leaders are motivated to improve their organization’s environmental impact by the level of transparency. This, in turn, leads to greater disclosure. “AEIs can be expected to promote actions among organizational members through a combination of incentives, training, positive reinforcement, and corporate mandates … [which enhances] the tracking and reporting of environmental data and — coupled with external pressure from investors, regulators, and the public — can be expected to lead to greater environmental disclosure,” the study notes.
Investing in internal and external AEIs
The most important takeaway Bellamy, Dhanorkar and Subramanian advise for supply chain managers is to invest in both internal and external AEIs. They describe administrative innovations as new ideas that “involve significant changes in the routines used by the organization to deal with its tasks of internal arrangements and external alignments.” In this way, internal and external innovations are separate practices. Investing in either internal AEIs (within the business) or external AEIs (throughout the supply chain) resulted in increased environmental disclosure, but investing in both resulted in a more pronounced improvement in the level of disclosure due to the overlap in the capabilities needed to be cost-effective.
Some organizations may be more inclined to focus on internal innovations, so they can “demonstrate their environmental proactiveness without having to burden their supply networks or having to deal with the need to coordinate with external entities.” But this view is shortsighted. In fact, when organizations implement both internal and external forms of AEIs, there is a greater increase in environmental disclosure. Some of the capabilities required are complementary, such as “resource consumption and the volume and toxicity of waste and emissions.”
Additionally, implementing AEIs shapes attitudes within the organization, improving the opinions of employees, managers and leaders about the importance of practicing environmental sustainability and what kind of impact the business makes on the environment. According to the study’s authors, internal and external AEIs may be implemented by a top-level company to
- manage compliance and costs of ever-changing governmental regulations
- increase efficiency and resource productivity to improve the supplier’s cost structures
- take advantage of any business opportunities and market share created by increased demand by customers, the public, and supply chain partners
- prevent negative outcomes and risks from poor environmental practices, which damage both the business’s bottom line and its reputation with the public
- improve the business’s branding and image with corporate partners and increase legitimacy with the public, government regulators, the media and industry associations.
Broader implications for supply chain management
What does all of this mean for supply chain managers who want to do what’s right for the environment — and their businesses? In the study, variables in the supply chain network that led to improved AEIs — accessibility, control and interconnectedness — are examined. From that, there is some key advice for supply chain managers aiming to increase their focus on the environment and sustainability: “The supply network for a typical consumer product accounts for more than 80% of the associated greenhouse gas emissions and more than 90% of the associated impacts on air, land, water, biodiversity and geological resources,” the study concludes. Working to reduce those numbers is a way for everyone, from CEO to management to employee, to make a positive impact on the environment and reduce climate change. Here’s how:
1. Relocate suppliers in the network. To start, managers can analyze the structure of their networks. The first variable of the supply chain network that the study authors examined was the network flow accessibility. They found that, the closer two firms or businesses are in the chain, the better the communication between them. This led to more environmental disclosure: “Firms with smaller geodesic distances in their supply network have greater network flow accessibility because they are more directly exposed to sources of information than firms with larger distances.” Essentially, businesses with fewer intermediate links between them and their suppliers are in a better position to learn environmental data faster and with fewer filters or constraints. So, managers who have the power to change a supplier to a business that is more closely aligned to their needs may have another incentive to do so.
2. Reevaluate suppliers in the network. The second variable that improved AEIs was supply network flow control. When determining whether a supplier is close enough within the network, managers will also benefit from evaluating whether the existing supply network characteristics are aiding in the implementation of AEIs and environmental disclosure. In other words, are the businesses within the network attempting to improve environmental practices? Organizations at the top of the supply chain can obtain information about environmental practices within their network, such as carbon emissions, hazardous materials use, and recycling and disposal of wastes, and act as “gatekeepers.” Gatekeeping firms can access “non-redundant environmental information across their upstream network” and have “greater leverage to extract pertinent information from diverse sources.” Managers might also identify more influential suppliers within the network that can augment environmental practices within the system.
3. Account for a broader array of stakeholders. When making decisions about the extent of environmental disclosure, any business is going to consider the major shareholders and investors. However, managers should broaden the stakeholders they consider when making decisions about the type of AEIs and the level of environmental disclosure. Stakeholders should include employees, customers, suppliers, industry leaders, communities, activists, government agencies and non-governmental organizations. The study authors point out that more than 80% of companies in the S&P 500 publish an annual sustainability report, demonstrating the importance of that information to a wide audience. And stakeholders do not differentiate between the businesses within the supply chain network when it comes to environmental implications; buyers and suppliers are given equal responsibility for ethical practices, which is an even greater reason for managers to examine their relationships up and down the chain.
4. Collaborate with suppliers. The third variable that increased disclosure was supply network interconnectedness. Supply chain managers can do more than just implement internal practices to improve environmental compliance; they can also collaborate with suppliers to establish environmental policies and systems to ensure both parties benefit from sustainable protocols. Similarly, network learning from the diversity of experiences of suppliers can be leveraged to generate knowledge and further environmental disclosure. In fact, as the study states, “research has shown that network learning can effectively complement and sometimes even substitute for an organization’s own lack of technological or managerial experience.” Great communication between the organizations leads to increased trust and a faster flow of information, leading to “knowledge spillovers” within the network. However, the authors warn that excessive interconnectedness can lead to the opposite effect, describing a “U-shaped” curve.
5. Communicate with the entire workforce. Implementing AEIs requires cooperation from employees at all levels throughout the organization. Leadership must implement environmental goal setting, training and auditing to ensure the company is following the guidelines set forth in the administrative plan. Communication must be consistent to work, and the communication of the policies, by its nature, affects employees’ willingness to follow the initiatives. Additionally, consistent communication inspires employees to share the values of the environmental implications, and internalize the importance of the results.
6. Incentivize management to engage employees. Management has a motivation to involve employees at every level of the planning process; in fact, if AEIs are integrated into quantifiable environmental goals in the managerial job descriptions, then management is incentivized to “involve employees in the accomplishment of these goals and provide related training, feedback, and recognition.” Incorporating environmental innovations into every task that employees carry out will increase the likelihood that those practices will become integrated into the jobs of everyone within the organization. Widespread adoption will potentially make environmental sustainability — and disclosure — an administrative habit.