Supply chains can have a tremendous impact on the environment — scarring landscapes, emitting greenhouse gasses, and draining aquifers. Building a greener supply chain is certainly the socially responsible thing to do but can you afford it? A recent study published in the journal “Business Strategy and the Environment” suggests the question business leaders should be asking is whether you can afford not to.
Green Manufacturers Make More Money
Researchers in Rome and Austria analyzed environmental, social, and governance (ESG) scores provided by finance company MSCI to quantify the Green Supply Chain Management (GSCM) practices of 317 manufacturing firms in the U.S., all of which had international supply chains. The researchers also checked whether these firms had implemented a certified Environmental Management System (EMS).
They found that manufacturers who implemented strong GSCM practices saw, within a year, a statistically significant boost in financial performance as measured by both return on assets (ROA) and return on equity (ROE).
Even better, firms with a certified EMS as well good GSCM practices maintained those gains in ROA and ROE, and they also enjoyed increased market valuations relative to their assets.
So both backward-looking accounting measures and forward-looking market measures indicate that GSCM paired with a certified EMS improves financial performance for manufacturers. These results correspond with other recent research findings.
For example, a joint Mexican-Spanish study in 2021 found that sustainable supply chains correlate to better financial performance for auto makers in the Latin American country. Similarly, another 2021 study of Chinese firms concluded that companies with proactive environmental policies improved their market performance, while firms with reactive policies — motivated by regulation — did not.
How It’s Done
There is no universally recognized criteria to define precisely which measures count as GSCM practices. But in general these measures minimize a firm’s environmental impact.
For the “Business Strategy and the Environment” study, the researchers broke down GSCM practices into two types: Internal (such as a firm reducing waste or pollution in its own facilities) and external (such as a firm purchasing from green suppliers). GSCM means being green at home as well as up and down the supply chain.
Firms can find guidelines for implementing a certified EMS through a third-party organization, such as ISO. EMS certification requires companies to weave environmental planning and assessment into the fabric of their business plans. For EMS-certified firms, green business should be more than a side hustle. It should become an inextricable element of their identity.
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Why It Works
Building a green supply chain is good business for at least three reasons. First, GSCM practices tend to reduce waste, and efficient firms are more profitable.
Second, the requirements for EMS certification improve communication, both internally within a firm and externally between links in the supply chain. EMS requires businesses to work together to fulfill environmental standards
Third, consumers prefer to support green businesses, and in many cases they are willing to pay premium prices for products that are produced by the greenest means possible. Moreover, firms that wish to go green will tend to partner with other green companies. GSCM practices and EMS certification open up a company to a growing market of green business-to-business relationships.
Do It Your Way
The researchers emphasize that firms that set themselves apart will maximize the benefits of building a green supply chain. Anybody can begrudgingly scratch environmental requirements off a checklist but when green business practices work their way into a firm’s identity, that company will begin to offer environmental benefits specific to their own unique approach to business. They will attract business that other firms cannot, and build a strong reputation among consumers and peer companies that share their values.
So go green, and do it the way that only you can.
