Efficient? Says Who?

Even the most energy efficient U.S. manufacturers and suppliers have room for improvement—especially at a time when sustainability is becoming a more important yardstick for virtually all stakeholders.

But how does one measure sustainability? It doesn’t necessarily mean renewable energy.

Sustainability sus·tain'a·bil´i·ty n.
An approach to business that creates long-term stakeholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.

In the context of this article, sustainability is managing energy risk. It is driven by a number of factors, some of which will directly, or indirectly, impact your company, and even your suppliers. Without an effective risk management plan, a perfect storm could cost many laggard companies dearly.

Some of the drivers of energy sustainability
(in no particular order of importance):

Corporate Citizenship

The evolution of corporate social responsibility (CSR) is a driver. In fact, many would argue it is the chief driver, followed by peer pressure. Companies recognize that chances to shape investor perceptions are strategic opportunities. They are increasingly being judged on parameters other than economic success, such as environmental and social performance.

Sustainability plans almost always include an energy reduction component with measureable goals. For instance, a 20 percent reduction in energy use may be the primary method of meeting an overall corporate CO2—the most plentiful greenhouse gas (GHG)—reduction goal. Lower energy use leads to lower CO2 emissions. And, this is where technology comes into play.

A significant level of energy efficiency is often obtained through the use of energy management systems (EMS). These can be as simple as timers that automatically turn lights or other equipment off, or as sophisticated as software programs that learn how facilities use energy, then automatically adjust usage to meet pre-programmed objectives.

Many energy managers can attest to the fact that a significant number of industrial facilities in this country do not practice good energy management. In fact, as Table 1 shows, there are plenty of facilities that do not participate in any of the generally used methods to manage their energy and emissions risks at all.

According to the Energy Information Administration (EIA), there were 194,733 industrial facilities in the U.S. at the time of their last update (2006). Of those, more than half did not participate in any general energy management activity, and nearly 80 percent had not even conducted energy audits or assessments, the typical first steps of any program. Most apparently rely solely on on-site personnel to manage their energy risks. In today’s risk-averse world, that is simply unacceptable.

How to Measure Efficiency

When the late management consultant Peter Drucker stated that “if you can’t measure it, you can’t manage it,” he could have been referring to actual energy and emissions reductions. Accurate measurement and verification (M&V) have long been the Achilles’ heel of efficiency. Without a good benchmark obtained through initial energy audits, good M&V is impossible.

Without good M&V, either through the use of the proper technology or an accounting system, and the ability to interpret and act upon huge amounts of energy data that is commonly available today, it is difficult, if not impossible, to meet your sustainability objectives. A number of software programs provide M&V, and if your facility participates in demand response programs, the M&V system must be even more robust.

Supply chain reporting is a new trend quickly emerging to extend the reach of company sustainability plans. It pushes climate change-related risks downstream, forcing suppliers to spend the money and take the actions necessary to clean up their operations.

Supply Chain Reporting

Ceres, a non-profit organization that works with some 550 institutional investors representing over $71 trillion in assets under management, found that up to 60 percent of a manufacturing company’s carbon footprint is in its supply chain. For retailers, that figure is closer to 80 percent (Source: www.ceres.org/issues/supply-chain).

If you are a Tier 1 supplier and must meet the sustainability criteria of a customer, it is only natural that you pass the risks and requirements on to your suppliers, and so on. That requires a sophisticated and standardized M&V methodology all the way down the supply chain. But, if you don’t know where you stand, as evidenced by Table 1, how can you meet your objectives? And, what legitimacy do you have to insist that your suppliers meet their objectives?

In 2009 President Obama signed Executive Order 13514, which required all Federal agencies to annually report their energy usage and develop an inventory of their Scope 1, Scope 2 and specified Scope 3 emissions (see Table 2) beginning in January 2011. It also required each agency to establish 2020 GHG reduction targets for each type of emission.

As part of that order, a 2010 General Services Administration (GSA) feasibility report concluded that Federal agencies should use suppliers’ GHG emissions reporting status as an evaluation factor in contract awards. While the plan has not been finalized, the message is clear. If you want to do business with the Federal government, the largest purchaser of goods and services in the U.S., you will have to measure and disclose your GHG emissions, and that means an increasingly sophisticated methodology will be required.

Measure Against What?

The surest method of reducing GHG emissions is through energy efficiency. “By increasing energy efficiency and reducing GHG emissions, vendors recognize cost, energy and risk reductions while improving the overall sustainability of the Federal supply chain.” (Source: www.gsa.gov/graphics/admin/GSA_Section13_FinalReport_040510_v2.pdf)

But, the Federal government is only adopting what has been taking place in private industry for several years now.

According to the Carbon Disclosure Project (CDP), an independent, non-profit organization with the world’s largest database of primary corporate climate change information, more than 3,000 organizations in some 60 countries around the world now measure and disclose their GHG emissions and climate change strategies through its database.

Ceres’ core mission is to promote the disclosure of sustainability performance. In 1997, it helped create the Global Reporting Initiative (GRI), which is the most widely used international standard for corporate sustainability reporting. It requires detailed disclosures, and measures how your company stacks up against others in a variety of areas, financial and non-financial. It also verifies M&V methodologies and the international and national standards to which your company subscribes (for a list of criteria see http://database.globalreporting.org).

The typical International Standards Organization (ISO) guidelines surrounding sustainability include ISO 9001 (Quality Management); ISO 14001 (Environmental Management); and, last but perhaps most important, ISO 50001 (Energy Management).

In its 2011 Supply Chain Report, the CDP found that its 57 international members of the Supply Chain consortium were actively engaged with nearly 1,000 participating suppliers around the world. It also found that the number of companies (including non-members) adopting formal sustainability programs, including supply chain reporting, was increasing rapidly, along with the quality of the data being collected.

Much Work Remains

Data accuracy needs to improve, which means that more sophisticated methodologies and technologies are important. (Source: www.cdproject.net/CDPResults/CDP-2011-Supply-Chain-Report.pdf)

Perhaps the most important finding from that report is the growing number of companies willing to deselect suppliers for failing to meet carbon management criteria.

Many companies mandating supply chain reporting are often working hand-in-hand with their suppliers to improve overall sustainable performance. Companies working with more efficient suppliers find benefits such as cost reduction, higher quality goods, and more reliable and efficient transportation. These companies are also more competitive, both domestically and internationally.

Environmental (including energy) performance is only one leg of a three-legged stool. The other two are economic and social performance, and they cannot be left out. Supply chain worksheets are now requesting information that pertains to all three areas, and weaknesses in any one may lead to supplier deselection. Think of all these reasons when deciding if adopting a formal sustainability plan makes good business sense.