Compliance Squeeze: The Polluter Pays

Countries around the world are struggling to deal with environmental degradation, resource scarcity and waste streams. As a result, they are issuing more and more regulations around environmental sustainability – covering areas such as waste stream control, packaging, greenhouse gas emissions and extended producer responsibility. “Legislative and cost imperatives are pushing companies to think about waste and recycling,” notes Simon Potter, Business Director, Envirosolutions Europe at DHL. “It’s only going in one direction: reduce waste as much as possible.”

The world is awash in waste – things that people throw out. The European Commission (EC), for example, estimates a total waste burden of 1.3 billion tons per year, or 530 kg annual average waste production per person. The EC has set aggressive targets for landfill waste reduction by 2016. Electronics waste (e-waste) is of particular concern – primarily because of its exponential growth. In the United States, recycling industry leaders estimate that 50 to 80 percent of all electronic waste collected is not really recycled at all. Rather, it is exported via container ship to developing countries, particularly in Asia and Africa. The same holds true for the EU.

According to United Nations data, about 70 percent of electronic waste globally generated ends up in China. The UN StEP (Solving the E-waste Problem) Report from 2013 concluded that e-waste is the world’s fastest-growing waste stream. Left unchecked, this e-waste stream will develop into what the United Nations calls “an environmental catastrophe.”

In an effort to gain some control over this problem, countries are issuing regulations governing e-waste disposal. Unfortunately, there is no consistency or standard format for these regulations, further adding to the complexity of the problem.

Packaging is another area seeing a rise in regulatory requirements for sustainability. For example, the UK’s latest packaging waste directive (94/62/EC) requires:

• Packaging to be minimized

• Packaging be designed for recovery and reuse

• Companies to meet waste recovery targets

• Restrictions on use of heavy metals in packaging

Many differences also exist in environmental packaging design requirements and material restrictions (or bans) worldwide. For example, some countries have specific empty space and layer limitations for certain types of packaging (such as Taiwan and South Korea), while others entirely ban, or restrict, certain materials in some, or all, types of packaging, such as PVC restrictions in South Korea and EPS bans in the U.S. Japan instituted a recycling tax for all packaging at the source on a per kilo basis.

The heavier the packaging (e.g. more plastic in the bottle), the higher the tax. Human activity generates annual greenhouse gas emissions of about 50,000 megaton CO2e globally. The logistics and transportation sector contributes an estimated 2,800 megaton – or 5.5 percent of the total. Logistics and transport emissions are 5 percent to 15 percent of product lifecycle emissions.

Declining air quality and other environmental issues are prompting developed nations to require significant cuts in greenhouse gas emissions. For example, the European Union’s Energy Policy stipulates a 20 percent reduction in greenhouse gas emissions by 2020. And China’s newest Five-year Plan on Greenhouse Emission Control calls for reducing the amount of carbon emitted per unit of GDP by 17 percent by 2015, compared with 2010 levels.

Perhaps the most significant change in the compliance picture is the adoption by a growing number of countries of extended producer responsibility (EPR) rules. Under EPR, a producer’s responsibility for a product is extended to the post-consumer stage of its lifecycle. An EPR policy is characterized by: (1) the shifting of responsibility (physically and/or economically; fully or partially) upstream toward the producer and away from municipalities; and (2) the provision of incentives to producers to take into account environmental considerations when designing their products.

Simply put, the ‘polluter pays’ principle is spreading across the globe. Companies will be responsible for what happens to products at end of life, and must observe regulations regarding material collection, recovery, recycling and destruction/disposal. Non-compliance with environmental regulations poses business risk – in the form of fines, negative publicity and a potentially adverse impact on sales.

Closed-loop Supply Chain Management

Maximizing the collection of recyclable material helps execute on the ‘four Rs’ of sustainability. (See: Essentials of the Green Supply Chain). It enables companies to regain control of important raw materials or components – toward the end goal of resource reclamation and value harvesting. At the same time, it provides tangible benefits in the realm of corporate social responsibility. Beyond the obvious benefits of reducing overall carbon footprint, and reducing energy and resource consumption, there are many other reasons why embracing supply chain sustainability makes good business sense:

• Improved bottom line. Sustainability eliminates waste and cost throughout the supply chain, delivering cost savings benefits. It also offers potential for a new revenue stream – from recovered value. Forward-thinking companies are already turning waste into cash and this is likely to be recognized more widely as a significant business opportunity.

• Consumers and investors recognize the importance of green practices and sustainability. Increasingly, they will make buying and investment decisions influenced by their perception of a company’s sustainability strategy.

• Governmental initiatives provide tax and investment incentives to companies that employ sustainable practices. Sustainability equates corporate social responsibility and stewardship with being a good global citizen. The positive public relations exposure from identifying and implementing sustainable supply chain practices can yield numerous benefits.

• Companies increasingly make supplier selection decisions based on the sustainable practices of the vendor. With a focus on efficiency and value creation, leading companies and their supply chain partners are taking a proactive, rather than reactive, approach to supply chain sustainability. They are innovating to create new revenue streams, anticipating and mitigating material or energy volatility risk, operating ahead of the regulatory compliance curve, reducing costs, and streamlining operations – all while benefiting the environment. In so doing, they are gaining a first-mover competitive advantage. This is the definition of adaptability, creativity and resiliency in business.

This is the face of the next-generation environmental supply chain.

Lisa Harrington, President, LHarrington Group, LLC

Lisa Harrington is associate director of the Supply Chain Management Center and Faculty Lecturer on Supply Chain Management at the Robert H. Smith School of Business, University of Maryland. She is also President of the lharrington Group LLC, a firm providing strategic consulting services across global supply chain strategy, operations and best practice. This report was excerpted from a new study written by Harrington titled “Closing the Loop: Building the Environmental Supply Chain.” The report was sponsored by DHL. Click here to download the full report.