Yesterday, the world’s largest retailer and its cadre of sustainability advisors released the 61-page Walmart Supplier GHG Innovation Program: Guidance Document.
Elm has read through this document and provides a brief overview of what we think are several important points. What follows is a combination of excerpts from the document combined with Elm comments. Not all of these points are implementation “how-to’s”. Some of our comments reflect potential problems that should be evaluated by suppliers who are impacted by Walmart’s supplier sustainability initiatives.
The program will initially focus on the following product categories:
Animal feed, apparel, candy, cheese, frozen food, fruit, grains, household detergents, meat, media, milk, motor oil, pharmaceuticals, produce, sanitary paper products, snacks, soap & shampoo, soft drinks & beverages, televisions, and vegetables.
GIVING CREDIT WHERE CREDIT IS DUE (TO WALMART)
In past articles, Elm discussed our view there is a true business risk – rather than competitive advantage – to first-mover adoption of GHG reduction programs. We had anticipated that such risk would be rooted in regulatory requirements. While that may still be a concern in the longer term, it appears now that the more significant risk relates to Walmart suppliers. The retailer has specified that no credit will be given to reductions that are not directly related to Walmart’s GHG program, such as reductions required by law or reduction programs that began prior to 2010.
Further, to get a sense of how little the supplier appears to be in the overall process, take a look at the graphic on page 9. Of the 6 steps in the Opportunities Identification, Prioritization, and Engagement Process, only one (Step 5 – Engage & Implement) includes the suppliers as an “actor” in the process.
Generally, for a project to count towards Walmart’s reduction goal, it can either be a carbon reduction for a product that Walmart sells or a reduction at a facility/process that supplies Walmart.
The reduction achieved must also be “additional” and beyond business as usual (BAU) in terms of emissions accounting. Specifically, the activity must:
1. Demonstrate that the initiative is truly additional, meaning that the action would not have otherwise happened without Walmart’s influence, and
2. That the initiative represents performance beyond BAU, indicating that the improvement is well beyond existing business trends and has the overall impact of emissions reductions within a product category.
Walmart is accounting for carbon reductions that occur by comparing a new product, or change to a facility, to a baseline. The baseline is determined by an assessment of the “business as usual” (BAU) case. BAU is defining what would have been the carbon emissions of a product or a facility if Walmart had not encouraged, introduced, or catalyzed the implementation of an innovation. It is important to note that the carbon reduction claims, rules for quantifying reductions, and monetization within this document are written under current regulatory standards in the U.S. If Federal or other laws change that effects the guidance prescribed in this document, they will be re-assessed at that time. This includes, but is not limited to: public reporting on carbon emissions regulated by the SEC, regulations set by FTC for marketing claims, carbon tax or cap and trade legislation or regulation by EPA, or carbon reporting by EPA.
MORE COOKS IN THE KITCHEN
As if manufacturing sites don’t already have enough folks wandering the production floor and telling them how to make product….
Generally speaking, Walmart can reduce product life cycle emissions by either influencing the development or design of the products them selves and/or by improving the facilities and processes used to make and transport products.
UNDER THE INFLUENCE
The document speaks in terms of Walmart’s “influence” on suppliers in order for GHG reductions to qualify. The use of such a loose term may create potential conflicts in the future.
For a project to qualify, it must have happened because of Walmart’s influence, showing additionality. This does not exclude projects that were also influenced by other entities, programs, incentives, etc.
The Walmart Project Champion must be able to prove that the project would not have happened at the time it did without Walmart’s involvement. In this project, Walmart’s influence on the project is deemed as “additionality.” Additionality for products means that for a lower-carbon product:
- Walmart directly influenced the development or redesign of the products, or
- Walmart influenced the increased sales of the product.
Influencing the product directly means that Walmart engaged with a supplier to design or influence the design of a new product that is more carbon efficient. For instance, if Walmart encouraged a supplier to re-design laundry detergent to have a lighter-weight package than is currently offered, this would be influencing the redesign. If Walmart sought out a new detergent that was concentrated or eliminated specific raw materials that are more carbon intensive to extract, then this would also be an influence of the redesign.
And to further the point above about Walmart’s attempt to become involved at the production floor level:
For facilities and processes, additionality means that:
- Walmart directly contributed to the improvement of a facility or process, or
- Walmart influenced energy management.
GET A LIFE (CYCLE)
Product-based reductions require that a complete lifecycle analysis (LCA) be executed by either the supplier or as part of an industry effort. To claim a reduction, the LCA must be compared against a defined baseline of a reference product. And of course that reference is selected by WalMart.
Reductions may be identified in any phase of a product’s life cycle. A product’s life cycle includes the following primary stages:
- Raw material extraction
The WalMart Champion must identify a reference product against which to benchmark this product. The reference product may be another product that serves a similar function. As a reference product may vary significantly from the product in question in terms of technology, materials, or size, it is important to compare them on this basic level of function, also known as a “functional unit”. This is particularly crucial for products whose impacts greatly depend on how they are used at the consumer level.
For each product, the Champion must define and describe the methodology used to calculate the baseline and forecasted reduction potentials. The Champion may use a methodology that is best suited for the calculation, but documentation and an explanation is required. Suggested life cycle and corporate accounting methodologies include ISO 14040 and ISO 14064 standards, WRI/WBCSD ’s GH G Protocol Corporate and Product Life Cycle Reporting and Accounting Standards (currently in draft form), and British Standards Institution’s PAS2050 (see Part 5 for additional information).
ClearCarbon will quantify the difference between a “BAU” case and the impact of the project from a product improvement perspective solely. The difference between the two, or the delta, will be calculated at the initial submittal based on projected trends for five years or until December 31, 2015, whichever comes first.
BAU in this context would appear to include any existing GHG programs – or those that become regulatory requirements between 2010 and 2015 – and therefore become incorporated into the baseline, so no credit is given for those reductions.
SHOW ME DA MONEY
Walmart will not resell, retire, or trade carbon reduction claim s under this Program. Additionally, the carbon reduction claims may not be “exclusive” to Walmart. It may be the case that Walmart will help a supplier, through this Program , to achieve a carbon reduction project that the supplier also wants to report publicly. In this case, both parties (Walmart and the supplier) may state a claim of reduction. Since the reduction is not being sold or traded there is no legal claim over the reduction that would make it exclusive to Walmart or to the supplier. The supplier may monetize (sell, trade, etc) carbon reductions at their discretion, though Walmart will not be involved in these transactions.
But per comments from CEO from Mike Duke, the supplier should expect Walmart to demand that the economic benefit from monetization be reflected in the product pricing to Walmart.
GHG reductions that come from facility or process based projects require different financial value accounting than product GHG reductions. Quantifiable financial value to customers may include savings to the customer on energy or resource consumption during use of the product, resulting in lower energy bills and lower carbon emissions.
Financial value to the Walmart supplier might include the following:
- Fuel or electricity savings at a factory or facility level translated into cost savings through industry averages (e.g., average price of kWh x total kWh saved), or
- Material savings from reduced input purchases or a switch to cheaper materials/inputs.
In some instances either product or project based initiatives will result in a savings to the customer or a benefit to Walmart that are not financially measureable. In these cases, a qualitative description of the positive impact should be included in the worksheets. Benefits to suppliers and businesses may include:
- Improved business conditions,
- Public relations opportunities, or
- Increased positive stakeholder engagement.
The document contains no recognition of or reference to the economic value of EHS risk reductions for WalMart or the supplier. But beware about claims of financial benefits – as indicated above WalMart intends for those savings to be passed on to WalMart by the suppliers. Suppliers may find benefits in claiming “savings to the customer or a benefit to Walmart that are not financially measureable.”
THE BIG HOLE
The guidance is written in a manner suggesting that all suppliers manufacture their products at their own facilities. A massive gap seems to exist relative to contract manufacturing. Fascinating, given the astounding number of products sold by Walmart that are manufactured in China on behalf of a Walmart supplier. Perhaps the company has lost sight of the fact that overwhelming cost pressures they impose on their suppliers has driven much of the actual manufacturing off-shore to third party contractors over which the Walmart supplier has no direct operational control. And what about the overall supply chain GHG impact of the consumer having to more than 1 of a particular item after the initial item breaks/fails prematurely due to poor quality (like my daughter’s new $1 calculator that broke after less than 24 hours after purchasing it at WalMart)? I wonder if the retailer will take responsibility for something like that.