Improving Environmental Performance in Your Chinese Supply Chain

Rather than simply monitoring Chinese suppliers’ compliance with local environmental, health and safety standards, leading multinational companies are giving suppliers tools and incentives to independently improve environmental performance.

Image courtesy of Flickr user jurvetson.

Given how much of the world’s manufacturing takes place in China and the damage it has wrought on that country’s environment, most analysts expect that multinational brands’ supply chains will face increasing scrutiny in the coming years. As nongovernmental organizations heighten their monitoring and the Chinese government enforces new laws to increase transparency and accountability, multinational corporations can expect growing pressure to run a clean supply chain.

For companies, the costs of ignoring problems can be considerable. For example, in August 2011, a consortium of five Chinese environmental NGOs focused attention on Apple, the beloved U.S. technology giant, for using Chinese suppliers with outstanding public pollution violations and ignoring the NGOs’ earlier entreaties to redress the problems.1 International headlines soon reported “Apple Attacked Over Pollution in China”2 and “Apple Cited as Adding to Pollution in China.”3 Within a month, Apple was in talks with the environmental organizations to clean up its — and its suppliers’ — act.

And NGOs no longer just scrutinize MNCs’ immediate suppliers. Greenpeace International in July 2011 singled out Nike, Adidas and other major brands for doing business with a big Chinese textile group found to be discharging toxins into a local river. It didn’t matter that Nike and Adidas sourced finished garments from the group’s cut and sew facilities, not from its fabric factories that most likely released the toxins.4

How can MNCs avoid such embarrassments? Even for high-profile companies like Nike and Adidas, which are ahead of industry peers in promoting environmental improvement in their supply chains, it may never be completely possible. But MNCs can minimize risks in China if they heed the sometimes painful lessons that these and other leading companies have learned in recent years about managing their Asian supply chains. (See “About the Research.”) Rather than simply monitoring Chinese suppliers’ compliance with local environmental, health and safety (EHS) standards, leading companies are giving suppliers tools and incentives to independently improve environmental performance. They are helping suppliers use energy, water and materials more efficiently and reaching deeper into their supply chains to where the greatest environmental damage occurs. At the same time, they are overcoming their traditional reluctance as competitors to cooperate in monitoring and fixing problems at common suppliers.

We group the lessons MNCs have learned into two categories based on “the knowing-doing gap” — that is, what you need to know and how you should act on what you know.5

Getting to Know Your Supply Chain

Any sustainability effort in China must start by creating a context that facilitates identification and visibility into the supply chain. Five activities can help foster a “knowing” environment in China:

1. Provide incentives for identifying, disclosing and addressing problems. Many multinational buyers have found themselves in an incessant cycle of auditing for EHS compliance by their Chinese suppliers. They ask the supplier to correct one thing, which it does, only to have to ask it to fix another. As a result, suppliers end up relying on the buyer rather than developing their own desire and expertise to identify and fix problems without prodding.

Chinese suppliers often don’t see the need to disclose an environmental problem to buyers unless they’ve received a direct request for information from a buyer. Take the case of a large Chinese cotton fabric supplier to many multinational apparel brands, which in 2006 had to pay $1 million for dumping contaminated water directly into a river in southern China — a fact that clients discovered from third parties. Executives say the company simply did not recognize the importance of sharing that information. In other cases, factories intentionally obfuscate, treating, for instance, a lower percentage of discharged water than claimed.

The way MNCs currently perform EHS compliance auditing — known as “standing guard” and “the checklist approach” — has done little to change these types of behaviors. Concerned buyers have come to realize that the time and money spent on auditing for both EHS and labor compliance have not yielded the expected returns. A spate of research, mostly focused on working conditions, has underscored the limits of audits alone as a tool for improving supplier performance.6 Press reports in 2006 spotlighted how adept Chinese factories had become at hiding problems from auditors and revealed the growth of an indigenous consulting industry designed for just that purpose.7

Another reason checklist audits sometimes don’t work is that auditors are susceptible to bribery. “Corruption is widespread,” said a former representative of a Walmart supplier in China. “The audit companies have the power to hurt the factories, so lots of bribery goes on.” Using an internal audit team is preferable, although companies need to manage these teams carefully. “Often these people are hired from the local community so the potential for corruption is still there,” he said.8

Faced with those frustrations, MNCs are moving away from relying exclusively on auditing by putting into place practices that encourage Chinese suppliers to take more responsibility for improving environmental performance. While they are not planning to jettison their EHS auditing programs, they are trying to incentivize suppliers to look for and disclose deficiencies themselves. For instance, if a Chinese supplier identifies a problem, it should not be shamed for the problem with a downgrade in its EHS rating, which would discourage self-reporting, says Amanda Tucker, Nike’s director for sustainable manufacturing performance. Nike, therefore, makes negative disclosures reflect positively on suppliers’ records.

Suppliers know that if they volunteer the correct data about a problem, Levi Strauss will not give them a zero-tolerance violation and will work with them to fix the problem.

Levi Strauss normally gives a supplier that provides false or inconsistent records a “zero tolerance” violation. After two or three such warnings, the apparel company usually terminates its relationship with a factory. However, suppliers know that if they volunteer the correct data about a problem, Levi Strauss will not give them a zero-tolerance violation and will work with them to fix the problem.

Luen Thai Holdings, a Levi Strauss supplier with apparel manufacturing operations in China and elsewhere in Asia, finds that this approach works well. Unfortunately, Luen Thai executives complain, not all customers are as “mature” as Levi Strauss. Rather than working with suppliers to solve problems, they say, many buyers simply audit factories and give sanctions for noncompliance.

Leading MNCs have also learned not to push transparency too hard, too fast at Chinese and other Asian suppliers, as doing so can backfire. If a company airs its contractors’ “dirty laundry” in a way that causes them to “lose face” with industry peers and buyers, they may start to hide or falsify information. Financial bonuses for improved performance can also make matters worse by giving suppliers even more incentive to cover up problems. MNCs therefore should take pains to put negative reporting on a supplier in a proper context so that the information cannot be misinterpreted. Tucker’s advice: Proceed, but proceed “thoughtfully.”

2. Collaborate with nongovernmental groups to facilitate monitoring and help Tier 1 and subtier suppliers self-identify problems. To encourage Chinese suppliers to take greater responsibility for improving their operations’ environmental performance, concerned buyers are also working with NGOs. In a shift from previous times when they might have had a solely adversarial relationship, many leading brands now cooperate with monitoring NGOs. For example, Timberland, Walmart, Nike and other buyers collaborate with the Institute of Public and Environmental Affairs, a Beijing-based nonprofit that tracks domestic and foreign companies’ air and water violations in China published by local environmental protection bureaus. These buyers use IPE’s database to screen new and existing Chinese Tier 1 suppliers and to encourage suppliers to fix problems when violations are found. Some MNCs have also started using the database to evaluate and monitor Tier 2 suppliers.

Timberland is one of the buyers that collaborates with the Institute of Public and Environmental Affairs, a Beijing-based nonprofit that tracks domestic and foreign companies’ air and water violations in China.

More than 100 multinational corporations, including Apple, became acquainted with IPE through the NGO’s program of contacting foreign companies directly about pollution violations at their Chinese factories or suppliers as a pressure tactic to spur compliance. In mid-July 2009, for instance, IPE and Beijing-based Friends of Nature, China’s oldest environmental NGO, sent a letter to Timberland CEO Jeffrey Swartz about repeated violations at two Timberland materials suppliers, Shanghai Richina Leather in Shanghai and Falcon Tannery in Guangdong. Neither factory had responded to the NGOs’ earlier communications regarding the infractions. In the letter, the NGOs asked Swartz if Timberland knew about the pollution violations when it chose the factories as suppliers and whether it would take action to stop the breaches. When they did not receive a response, they alerted the press.9 A flurry of correspondence followed in which Timberland attempted to address the NGOs’ concerns and proposed ways to work together.

Contacted by IPE about wastewater discharge violations at some of its Chinese suppliers, Nike now urges current or prospective suppliers that turn up on IPE’s blacklist to post an analysis of the violation’s causes, indicate the corrective actions they took and provide a current environmental performance update. Of the 13 factories Nike found blacklisted since it launched a China transparency program in mid-2009, all have complied with its request, say Nike managers. Nike also encourages its suppliers to use IPE’s database to proactively monitor their own operations and those of their suppliers.

Some first-tier suppliers agree that the IPE database is useful. Hong Kong-based apparel maker Esquel Enterprises says the database helps it decide which subtier suppliers to work with on improvements and which to shift away from. The company has had some successes in using the IPE mechanism to drive improvements: At Esquel’s request, Nantong Yiyi Interlining Co. in Jiangsu province contacted IPE in July 2008 about a 2006 violation of water discharge standards posted on IPE’s site. In 2009, an IPE-monitored factory audit confirmed Nantong Yiyi had spent about 850,000 yuan to improve its wastewater treatment facility and upgrade its environmental management.

Multinational electronics manufacturers are collaborating with NGOs as well. Ten member companies of the Electronic Industry Citizenship Coalition (EICC) recently submitted their Chinese supplier lists to the nonprofit Business for Social Responsibility (BSR), which then searched IPE’s database to identify water pollution violations among the suppliers.10

3. Make use of improving Chinese government data to augment internal supply chain transparency efforts. In addition to getting suppliers to self-identify problems, brand owners should pay attention to the Chinese government’s recent efforts to measure more accurately environmental problems and progress. For example, China’s central government last year issued the results of its first official nationwide census on pollution sources, which revealed that twice as much polluted water was discharged in 2007 as was previously reported.11 If the quality of government data continues to improve, buyers will do well to use that as a second source of information about partners and potential partners.

4. Work with multibrand forums to standardize Chinese supplier audit data at Tier 1 and subtiers. Rather than going to the trouble of developing their own environmental audit process, MNCs are working together in multibrand forums to create standardized social and environmental audit protocols. Similar to efforts in the electronic industry,12 the Fair Labor Association, for instance, is creating a standardized audit for labor and basic EHS compliance and developing a database to capture that information. According to FLA CEO Auret van Heerden, member companies look in the database to see whether a factory has been audited. If it has, then they can either conduct another audit using the same questions and scoring to update the old audit, or they can just add more information about an outstanding remedial item.

5. Encourage environmental transparency as an efficiency tool. In most businesses, the things most likely to get done are those that directly impact the bottom line. Now, a number of MNCs have found that besides the other advantages, a closer look at the supply chain can reveal opportunities to cut costs. Take Walmart’s efforts over the last two years to pinpoint the ingredients, country of origin and suppliers’ suppliers for its 6,000 private brand products. Scrutiny of its organic cotton supply chain led Walmart to purchase and ship cotton directly from Turkey to Guatemala for processing and final garment assembly rather than processing the cotton in China and then shipping to Guatemala — a change that lowered CO2 emissions and Walmart’s costs. Ultimately, buyers who arm themselves with better knowledge can design a supply chain that is not only cleaner but cheaper.

Act on Knowledge From Improved China Transparency

Once buyers have created an environment that provides visibility into their Chinese supply chain, they need to respond effectively to what they now know. To accelerate this process in China, companies should follow seven courses of action:

1. Encourage the training of more Chinese environmental professionals. China may enjoy an abundance of factory labor, but it suffers from a severe shortage of sustainability professionals. Not recognized as important in China until recently, the discipline was not taught at Chinese universities, and few Chinese entered the profession. Moreover, Chinese suppliers often appoint people with the wrong skills for environment-related jobs. They tend to select EHS staff not on the basis of their expertise in environmental engineering or manufacturing processes, but for their communication and English language abilities, in order to enable them to interact with MNC corporate responsibility departments.

This means buyers often cannot find a qualified point person at Chinese suppliers to drive environmental initiatives. Not that the auditors are necessarily the best people to judge their expertise: Buyers’ EHS auditors, both internal and third-party, are often not much better on technical issues. EHS auditors know what suppliers need to achieve, but they often cannot instruct suppliers how to do it, says Nigel Bennett, engineering director for garment manufacturer Yuen Thai Industrial, a subsidiary of Luen Thai Group, in southern China.

Concerned buyers try to fill the gap by training staff at their Chinese suppliers. Once trained, however, these employees are difficult to retain. Buyers do not control how much a supplier pays its newly minted EHS professionals, who are often poached by other suppliers, lured away by the prospect of a higher salary.

This paucity of EHS professionals and environmental engineers in China limits the potential for self-reporting and improving environmental performance in general. Chinese suppliers are often reluctant to disclose problems that they do not know how to fix. When combined with other barriers to environmental transparency and sustainability in China, such as relatively low fines for environmental violations, spotty enforcement of regulations, unsophisticated factory management and high capital equipment costs, Chinese suppliers often find paying pollution fines easier than fixing problems.

Some brands are trying to overcome China’s human resources conundrum by banding together. Adidas, Timberland, Walmart, Nike and GE are among the multinationals participating in a new EHS academy in Guangdong in collaboration with the Chinese government and the Institute for Sustainable Communities, a U.S.-based nonprofit organization. Together with a planned sister school in Jiangsu, the academy will eventually train 4,000 managers a year.

2. Put skin in the game. Prospects for ownership of environmental improvement are greatest at Chinese factories where concerned buyers have invested time and money. Consider the case of Nike. Over the last six years, the Beaverton, Oregon, athletic shoe and sports apparel brand has implemented an intensive environmental engineering program at some 40 footwear suppliers located primarily in China, Vietnam and Indonesia. The program, which establishes performance baselines and sets improvement targets, focuses on increasing the efficiency of materials use, reducing the use of hazardous waste and petroleum-based solvents and maximizing scrap utilization. Benefiting from the efforts of seven full-time Nike environmental engineers and close collaboration across technical functions, the footwear factories now generate one-third less nonhazardous materials waste and have reduced hazardous waste by almost 40% per pair of shoes manufactured since the program started. Their use of solvent-based chemicals has also fallen dramatically, by 96% from a 1995 baseline.

Nike has implemented an intensive environmental engineering program at some 40 footwear suppliers located primarily in China, Vietnam and Indonesia. Those footwear factories now generate one-third less nonhazardous materials waste and have reduced hazardous waste by almost 40% per pair of shoes manufactured since the program started.

Image courtesy of Nike.

Nike environmental engineers spend more than 80% of their time driving environmental initiatives at these suppliers, rather than simply auditing them for EHS compliance. Nike enjoys the lion’s share of the factories’ production output, which makes factory management more willing to follow up on Nike’s recommendations for environmental improvements and avoids the problem of other buyers free-riding on Nike’s efforts. Nike’s other active contract suppliers, which number more than 130 in China alone, can be less amenable to Nike’s requests. Most of them are apparel suppliers, for whom Nike is a small account. With less leverage, Nike has found it more difficult to capture their hearts and minds.

Nike’s recommendations to apparel factories may have lacked teeth for another reason too: Created in the late 1990s, Nike’s corporate responsibility department, which oversaw EHS compliance at suppliers, did not have an equal say in making factory sourcing decisions with traditional Nike business functions. CSR officers tended to enter the decision-making process late in the game, when momentum in favor of a supplier was too strong to redirect. Recognizing this dysfunction, Nike in 2009 set out to embed its sustainability function into design, manufacturing and marketing decisions from the get-go.

3. Learn from your suppliers and facilitate learning among suppliers. A nascent movement among proactive Chinese suppliers to share environmental data and plans with buyers is beginning to grow. One company, Esquel, with multiple textile and garment manufacturing sites in China and operations ranging from cotton growing to garment assembly, is part of a small group of suppliers to multinational apparel and footwear brands that is proactively taking measures to improve environmental transparency and sustainability. Besides monitoring its Chinese suppliers for pollution violations using IPE’s database, Esquel has implemented energy and water conservation programs and is developing a comprehensive framework for measuring its products’ carbon footprint. It also voluntarily publishes discharge data and plans to publish its own corporate social responsibility report.

Proactive suppliers such as Esquel can teach concerned buyers lacking in operational expertise how to fix environmental problems. Buyers, in turn, can transfer best practices to other suppliers. Yuen Thai Industrial, for instance, instructed the EHS auditors from its most important multinational buyer on its methods for recycling water and reducing emissions from coal-fired boilers. At a stakeholder meeting in the spring of 2009, the buyer invited YTI and other suppliers to teach the buyer and the other stakeholders about their environmental projects.

Similarly, Walmart’s private brands organization is bringing together representatives from approximately 15% of its supply base in noncompeting groups to share experiences and find environmental sustainability and other supply chain efficiency gains. Patagonia has created a forum for exchange through The Footprint Chronicles, its interactive website that includes video, supplier profiles and chat groups that track the impact of specific Patagonia products. Company quality director Randy Harward believes that more has been accomplished within Patagonia’s supply chain by suppliers viewing what other suppliers are doing than by almost anything else that Patagonia has done.

Proactive suppliers in China see their environmental initiatives as enhancing their competitiveness. Pressure from multinational buyers, the Chinese government and NGOs has ignited action. Walmart, for example, ratcheted up pressure on its suppliers to improve transparency by requiring them to disclose the name and location of every factory they use to make the products Walmart sells. All had done so by mid-2010, according to the company.13 Proactive suppliers believe the market for eco-friendly products will grow and see their efforts as good for business over the long term. Luen Thai executives, for instance, say they look forward to winning more business from customers as a result of the company’s environmental initiatives.

4. Collaborate with other buyers to drive change in your common suppliers. To get the many more unenthusiastic suppliers to take requests for environmental improvements seriously, concerned buyers are working together in China to boost their collective leverage. Brands have collaborated on labor compliance at Chinese suppliers for some time, but joint efforts on EHS and deeper environmental issues are just getting off the ground. Nike began working with like-minded buyers, such as Levi Strauss and Adidas, on EHS audit report sharing, monitoring and remediation of their common Chinese apparel suppliers in 2007.

Leading companies are also extending collaboration on environmental work further into their multitiered supply chains — to their suppliers’ suppliers, where previously they had little presence. Although most pollution occurs in the manufacturing of the materials that go into final products (Tier 2), buyers traditionally concentrated efforts on their Tier 1 suppliers, which do final assembly and with whom they have direct relationships.

Besides gaining more leverage to drive environmental improvement through collaboration, buyers can gain more reach by sharing monitoring costs, which are considerable given the complexity of fixing environmental deficiencies and the sheer number of suppliers. Walmart has nearly 20,000 Tier 1 suppliers in China alone. Adidas has nearly 400. Through collaboration, buyers expect to derive better environmental performance information more systematically from suppliers than they garnered in the early days of labor compliance evaluation, when they developed monitoring programs on their own.

Some Chinese suppliers are only too happy to work with the auditor for a group rather than multiple auditors. They say the explosion in the number of audits can divert their attention away from actually fixing problems. Luen Thai managers, for instance, complained of having to spend more time attending to audits and writing corrective action plans than focusing on correcting issues found in previous audits. Executives say each factory is audited once or twice a month, in most cases seeking repetitive information. Esquel puts the total number of EHS audits it fields at 170 per year.

While some suppliers welcome collaborative auditing, others are uncomfortable with it, at least at first. The experience of having a group of auditors simultaneously poring over a factory’s records can be intimidating for suppliers. As a result, it pays to start off brand collaboration slowly to accustom suppliers to the concept and see its benefits. This may mean simply sharing findings about a factory in the beginning rather than immediately conducting joint on-site audits.

5. Find like-minded buyers with whom to build collaborative auditing and remediation processes at shared factories. Striking up collaborations on EHS audits with one or two other brands, however, can be complicated. For one thing, concerned buyers often do not share Chinese factories with brands that put as many resources toward EHS auditing as they do, which limits the number of suppliers at which concerned buyers can attempt to collaborate. For another, when they succeed in finding an equally committed brand at a shared factory, the EHS standards, priorities and competence of the two audit teams may differ greatly: A globally accepted environmental accountability standard does not exist yet. Buyers tend to use audit instruments and methods of collecting information developed on their own.

These differences can make integrating one brand’s findings into another’s factory EHS rating system dangerous, especially if sourcing decisions are based on those findings. Companies need to make sure they are comparing apples with apples so as not to inadvertently treat a factory unfairly, which could cause it to hide problems. When choosing partners, Nike determines the degree of similarity of the buyer’s audits with its own. Rather than seek agreement on all aspects of its counterpart’s environmental checklist, Nike tries to focus more on identifying a critical problem that both buyers see as a priority at a particular shared supplier, such as poor wastewater management. They then work together to encourage the supplier to upgrade its wastewater treatment capability.

Breaching antitrust laws during collaborations is always a concern for buyers. But the brands most involved in environmental collaboration, such as Adidas and Levi Strauss, do not see it as an insurmountable impediment. Under U.S. antitrust law, companies cannot share or act on privileged information that influences consumer prices or creates some other anticompetitive situation. They also cannot take joint action against a supplier. Rather, they must make their own decision about what to do if the supplier does not follow through with their requests to fix a problem.

For instance, Levi Strauss and Adidas could agree that a Chinese supplier should put in a wastewater treatment plant. What they cannot do is jointly decide to cut off the supplier if the supplier decides not to do it. If properly managed by the brand collaborators, antitrust concerns should not impact on sharing factory-level environmental performance data. Antitrust is more of an issue for collaboration on labor compliance because of the potential to discuss wages, which can influence pricing.

6. To reach Tier 2, you need friends. Given resource constraints and the complexity of having all the conditions in place for successful buyer-to-buyer collaboration on environmental monitoring and remediation, collaboration via multi-stakeholder forums led by NGOs or industry groups may offer greater hope for environmental improvement, particularly further up the supply chain. Groups such as FLA, BSR and Organic Cotton Exchange can bring more buyers and suppliers to the table and help concerned buyers find like-minded counterparts with similar capacities and supply chains to monitor shared Chinese suppliers.

Buyers in BSR’s Apparel, Mills and Sundries Working Group, for instance, share two types of audits of participating materials suppliers: a labor and basic EHS audit from agreed-upon external monitors and, more significantly, an audit focusing solely on environmental issues from third-party monitors with proven environmental expertise. To increase buyer leverage and supplier motivation, BSR also encourages brands to sign group letters from their sourcing and procurement departments stating that the recipient can expect more business if it makes environmental improvements.

Buyers and suppliers with operations in China are also rallying around industry-led efforts, such as the Leather Working Group, a cross-brand collaborative organization started in 2005 to improve environmental performance at the tanneries that supply buyers’ contract footwear manufacturers. Multinational brands such as Timberland and Nike, U.K.-based leather advisory company British Leather Consortium, and leather suppliers together developed an environmental assessment protocol. LWG-sanctioned auditors with leather industry expertise use the protocol to monitor and rate qualified tanneries as bronze, silver or gold.

LWG suppliers support this industry-led forum because they receive fewer audits, and LWG-sanctioned auditing companies understand leather-manufacturing processes and can provide recommendations. They also like that the audit is specific to the tanning industry and promotes comparison of environmental performance solely among tanners rather than with software and other less-polluting industries. LWG has also initiated collaboration among the tanners themselves. “Before the Leather Working Group came around, you’d probably never find the tanners sitting around the table together and discussing their energy numbers, and their water numbers, and what their environmental practices are,” says David Wright, chief environmental officer for PrimeAsia Leather, which operates tanneries in China, Taiwan and Vietnam. Now, they share information on better waste disposal options and other issues.

Multinational buyers support LWG because they share auditing costs via a member fee, have a standardized platform for comparing tanneries and get tanneries moving in the right direction. They credit collaboration through LWG with improving greenhouse gas emissions and water consumption by more than 15% between its member tanneries’ first and second audits, which took place 18 months apart. Timberland wants all of its leather suppliers to be LWG silver-rated by the end of 2010.

That being said, buyers need to keep a close eye on third-party monitors hired via environmental collaborations like LWG. This was a lesson that LWG and its members learned the hard way when one of the two Chinese tanneries that IPE flagged in its 2009 imbroglio with Timberland turned out to have received LWG’s silver rating. Following the incident, participating buyers leaned on LWG to strengthen its auditing protocol.

Whether choosing to audit materials suppliers in collaboration with other buyers or not, buyers will have to rely on third-party monitors with expertise in environmental issues to carry out Tier 2 assessments in China, rather than relying on in-house auditors. Few buyers on their own are sophisticated enough or have the resources to monitor Tier 2, which is often more complicated environmentally than Tier 1. For this reason, Patagonia, which assesses Tier 1 suppliers itself, is working with Switzerland-based Bluesign Technologies to monitor Tier 2 in China and elsewhere. Again, the challenge for most buyers will be to find third-party monitoring companies in China that have the environmental expertise needed to work effectively at Tier 2. NGOs can help. BSR, for instance, is helping buyers set up mechanisms for sharing information about which third-party monitors are credible.

7. Tailor programs to local realities. Similarly, buyers may run into problems finding credible technical service providers in China to work with their suppliers. China’s energy service companies are a case in point. The list of services an energy service company offers in China is normally more limited than in developed markets, according to BSR, which helps buyers with their energy efficiency programs at Chinese suppliers. Moreover, poor contract enforcement in China and uncertainty about the survival of many small and medium-sized enterprises there mean suppliers and energy service companies are not normally willing to enter into the same sort of long-term energy performance contracts as in developed markets.14 This lack of maturity in China’s energy service industry was just one of the issues that Walmart had to work around when it started planning its energy efficiency program, announced in 2008, for its top 200 suppliers in China.

Ultimately, concerned MNC buyers have learned that environmental programs implemented successfully at home cannot necessarily be rolled out the same way in China. They now understand they must tailor programs to meet human resource constraints and other local conditions, while providing incentives that encourage suppliers to take ownership of environmental initiatives. Tailored correctly, energy efficiency programs are proving a great first step toward helping Chinese suppliers take charge of environmental improvement and self-reporting. It is relatively easy for buyers to encourage suppliers to implement them because they promise cost savings.

Environmental compliance or even working on wastewater quality can be a harder sell, since these programs do not offer suppliers immediate economic rewards. Once suppliers see improvements and savings from an energy efficiency program, they may be more willing to move onto bigger projects and take more ownership. Walmart reports that 119 factories participating in its China energy efficiency program achieved a more than 5% increase in efficiency as of 2010.15 Such progress can lead suppliers to ask, “What’s next? What else can we do?”

Halfway Up the Mountain

None of this will be quick or easy. Unlike with earlier initiatives, buyers and NGOs alike are under no illusion that Chinese supply chains — indeed, any emerging-market supply chain — can be brought into environmental compliance overnight. Instead, concerned buyers now see improving transparency and environmental performance as a gradual process that requires thoughtful engagement with suppliers.

As Andy Ruben, Walmart’s vice president of private brands and former vice president for sustainability puts it, “We need to push what we and our supplier base are comfortable with, but at the same time we realize that if we are halfway up the mountain and our supply base is not with us, we’re not really halfway up the mountain at all.”