Sustainability Leakage Debate Looms On The Horizon

Friday, 08 July 2011

Carbon leakage has been debated ad infinitum in the context of the EU Emissions Trading Scheme. The concept refers to the risk that by imposing additional costs on CO2 emissions within the boundaries of a country or region, business activity will be displaced to other regions and CO2 emissions will continue as before. The risk is real. Many firms in Europe have used Marginal Abatement Cost Curves (MACCs) to identify the optimal approach for relocation of industrial plants to countries like Turkey and the Ukraine.

Now the broader issue of “sustainability leakage” looms on the horizon. This time the boundary is defined by the operational control of firms. Increased use of product life-cycle assessment (LCA), led by pioneers such as PE International, Quantis and WSP Environment & Energy, has helped firms understand which economic actors in the value chain account for which environmental impacts. Often, product LCA reveals that as much as 90% of environmental impacts result from decisions made outside the boundaries of the firm. Who should be accountable for these environmental impacts?

InterfaceFLOR, which has conducted product LCA to achieve product transparency, has made itself jointly accountable with suppliers and customers. This drives the firm to collaborate with suppliers resulting in innovative products like Biosfera and Microtuft. But other firms, often in the retail sector, argue that without direct operational control they are not accountable for impacts outside the boundaries of the firm. Verdantix defines this as “sustainability leakage” because value chain giants evade accountability for impacts outside their boundaries.

From a raw financial perspective pursuing a “sustainability leakage” strategy may make sense. It reduces complex operational change projects. It reduces supply chain management headaches. It obviates the need for capital expenditure. In a purely cost driven sector like low-end retail this may make sense. But for other sectors it will not deliver competitive advantage.

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