Michigan State University

21st April 2014

Understanding the impact of the supply chain

Dr. James SaloSENIOR VICE PRESIDENT, NORTH AMERICATRUCOST

INTRODUCING TRUCOSTTrucost has been helping companies, investors and cities to understand the environmental impacts of their supply chains since 2000

Trucost has analysed the environmental performance of >500,000 suppliers representing $100B expenditure

Trucost wrote environmental reporting guidelines for business for the UK Government and Shanghai Stock Exchange

Trucost models are supported by an International Academic Advisory Panel

Risks and opportunitiesUnderstanding the impact of the supply chain

SUPPLY CHAIN OPPORTUNITIES

REDUCE THE COST OF MATERIAL INPUTS

AVOID PASS THROUGH COSTS

ENSURE A CONTINUED SUPPLY OF RAW MATERIALS

AVOID SUPPLY CHAIN DISRUPTIONS

ON AVERAGE, TRUCOST SUPPLY CHAIN SERVICES HAVE IDENTIFIED $1.8 MILLION IN POTENTIAL SUPPLY CHAIN ENERGY COST SAVINGS PER PROJECT.

SUPPLY CHAIN RISKS

"In the next 40 years we need to produce as much food as we produced in the past 8,000." WWF

3bn more middle class consumers by 2030

40% water shortfall by 2030

>100% increase in real commodity prices since 2000

3X increase in volatility of commodity prices since 2000

THE BIG PICTURE

lMEASURE RISKS MANAGE RISKS

Natural Capital Analyzer

Supplier Engagement Portal

Procurement policies, programs & projects

Reportinge.g. investors, customers,

CDP, NGOs

Annual Supplier Scorecards

Set & Track Performance Targets

MATERIALITY & MAPPING

HOT SPOT IMPACT SPEND

ANALYSIS

SUPPLIER ENGAGEMENT

QUANTIFY AND VALUE

RISKS

EEIO Model & Trucost Environmental Register

FOREST OR TREES

YOUR COMPANY

Raw material suppliers

Tier 3 to n suppliers

“TRUCOST REGULARLY FINDS THAT JUST 10 – 20% OF SUPPLIERS ACCOUNT FOR 80 – 90 % OF SUPPLY CHAIN IMPACTS.”

‘SEE’ THE FOREST

WHY CARE: RISK OF PASS THROUGH COSTS Potential risk of water pass through costs (magnitude + likelihood based on regional water scarcity and regulatory scenarios)

29% of profit warnings by FTSE companies due to rising raw material prices

(Ernst & Young 2011)

Water Use (m3)

Water Intensity

(m3/$)

Water Market

Price

Water Shadow Price (True Value)

Risk of Cost Increase

Potential Water Pass Through

Costs

Direct OperationsManufacturing Facilities

Facility 1 22,500 35 $ 2.00 $ 6.50 3.3 73,125$ Facility 2 35,001 82 $ 4.00 $ 5.50 1.4 48,126$ etc

Supply Chain Supplier Supplier A 15,345 14 $ 3.00 $ 10.40 3.5 53,196$ Supplier B 1500 73 $ 4.00 $ 8.00 2.0 3,000$ etc

Spend Category Logistics 22,300 23 $ 1.50 $ 5.50 3.7 81,767$ Utilities 128,000 85 $ 1.20 $ 4.10 3.4 437,333$ Prof Services 46,000 46 $ 1.00 $ 1.40 1.4 64,400$ etc

Commodity Sugar 38,000 35 $ 2.00 $ 12.40 6.2 235,600$ Wheat 23,000 8 $ 2.60 $ 5.60 2.2 49,538$ Corn 126,000 24 $ 1.70 $ 4.30 2.5 318,706$ etc

Michigan State University 2013 Assessment

Understanding the impact of the supply chain

MICHIGAN STATE UNIVERSITY – 2013 ASSESSMENT OBJECTIVES

Inform supply chain strategy development

Identify greatest areas of risk and opportunity for GHGs & Water

Progress since initial assessment

in 2010

Expand analysis to include water consumption

Include additional suppliers beyond 2010 assessment

Quantify potential financial risks

associated with supply chain

environmental impacts

Continue to involve suppliers in

assessment and joint performance

improvement

RESEARCH PROCESS

Quantify Footprint Supplier Outreach and Impact Management Value Risks

30 – 45 days 2 – 3 months 1 – 2 months

Phase 1 Phase 2 Phase 3

Review of project findingsFood services supply chain

SUPPLIER RESPONSE – FOOD SERVICES

Supplier engagement results – data verification

6 companies completed supplier engagement:

• Michael Foods/Papettis Hygrade Eggs

• Norpac Services• Ken’s Foods• Northern Lakes Seafood &

Meats• Stone Circle Bakehouse• King & Prince Seafood

A further 18 companies were previously researched by Trucost

KEY SECTORS – FOOD SERVICES

The top 3 spend categories account for 97% of the total carbon emissions across the supply chain – manufacturing alone accounts for 79%

The top 3 spend categories account for 97% of the total carbon emissions across the supply chain – manufacturing alone accounts for 80%

GREENHOUSE GAS EMISSIONS

WATER CONSUMPTION

CARBON & WATER DISTRIBUTION – FOOD SERVICES

The top 10 suppliers contribute to 59% of total carbon emissions and 55% of total water useThe top 50 suppliers account for 95% of total carbon emissions and 96% of total water use

KEY FINDINGS – FOOD SERVICES

Number of companies analyzed

Expenditure ($mn)

Total Carbon Emissions (tCO2e)

Carbon Intensity (tCO2e/$mn)

Total Water Use (m3)

Water Intensity (m3/$mn)

FY2009 43 8.02 8,484 1,058 - -FY2012 85 26.73 15,003 561 2,690,959 100,656Performance (% change) 98% 233% 77% -47% - -

0

500

1,000

1,500

2,000

2,500

3,000

Grocery andRelatedProduct

Wholesalers

Bread andbakery productmanufacturing

Seafoodproduct

preparationand packaging

Cookie,cracker, and

pastamanufacturing

MSU FoodSuppliers

Snack foodmanufacturing

Poultryprocessing

Animal (exceptpoultry)

slaughtering,rendering, and

processing

Car

bo

n In

ten

sity

(tC

O2e

per

$m

n)

Supply chain carbon intensity relative to other industries

0

50,000

100,000

150,000

200,000

250,000

Grocery andRelatedProduct

Wholesalers

Bread andbakery productmanufacturing

Seafoodproduct

preparationand packaging

Cookie,cracker, and

pastamanufacturing

MSU FoodSuppliers

Snack foodmanufacturing

Poultryprocessing

Animal (exceptpoultry)

slaughtering,rendering, and

processing

Wat

er In

tens

ity (m

3pe

r $m

n)

Supply chain water intensity relative to other industries

Review of project findingsPurchase ledger supply chain

SUPPLIER RESPONSE – PURCHASE LEDGER

Supplier engagement results – data verification

6 companies completed supplier engagement:

• BD Biosciences• NBS• Douglas Steel Christman

Company• University of Michigan• Fishbeck, Thompson, Carr

& Huber• Integrated Design Solutions• RKA Petroleum• Fisher Scientific• Wesco Distribution• Standard Electric

A further 33 companies were previously analyzed by Trucost

KEY SECTORS – PURCHASE LEDGER

The top 5 spend categories account for 91% of the total carbon emissions across the supply chain – the top 3 alone accounts for 72%

The top 5 spend categories account for 88% of the total carbon emissions across the supply chain – the top 3 alone accounts for 77%

GREENHOUSE GAS EMISSIONS

WATER CONSUMPTION

CARBON & WATER DISTRIBUTION – PURCHASE LEDGER

The top 10 suppliers contribute to 70% of total carbon emissions and 63% of total water useThe top 50 suppliers account for 94% of total carbon emissions and 91% of total water use

KEY FINDINGS – PURCHASE LEDGER

Number of companies analyzed

Expenditure ($mn)

Total Carbon Emissions (tCO2e)

Carbon Intensity (tCO2e/$mn)

Total Water Use (m3)

Water Intensity (m3/$mn)

FY2009 50 204 103,417 508 - - FY2012 113 329 116,110 353 7,124,247 21,676 Performance (% change) 126% 61% 12% -30% - -

Supply chain carbon intensity relative to other industries

Supply chain water intensity relative to other industries

Assessing risk & opportunityUnderstanding the impact of the supply chain

EXAMPLES OF NATURAL CAPITAL RISK

METHODOLOGY: FOUR STEP PROCESS

Quantify environmenta

l impact

Collect environmenta

l data

Apply natural capital costs

Assess & prioritize

measured risk

1 2 3 4

GHGs Water use Water poll’n Waste Total

Impact (% of

Revenue)

Direct Operations

2.04M tonnes CO2$274M

54M cubic meters$63M $59M $29M $461M 8%

Supply Chain 0.95 tonnes CO2$109M

76M cubic meters$89M -- $2M $233M 4%

Total 2.99M tonnes CO2$383M

130M cubic meters$152M $59M $31M $779M 12%

Quantitative, physical & financial metrics

Environmental performance in financial context

Direct operations & supply chain

Environmental impacts in comparable units

METHODOLOGY: FOUR STEP PROCESSExample framework

TRENDS IN NATURAL CAPITAL ACCOUNTINGLEADERSHIP INITIATIVES

CORPORATIONS

SOVEREIGNINVESTORS

NGOs

MULTI-STAKEHOLDER GROUPS

CASE STUDY: PUMA EP&L

PRODUCT CATEGORY

Net benefit of new technologies

Biomass Burner offers

30 - 40% natural capital

savings

Future

NET BENEFIT (WATER)

Why valuing natural capital?

• Business case for environmental initiatives: cost-benefit ROI analysis of intangible issues to support decisions that have historically been value based.

• Environmental context: understand business dependence on nature and identify what is material (e.g., water scarcity).

• Quantify the risk of pass through costs. • Optimize investment portfolios or brand portfolio to manage risk. • Inform sourcing decisions to ensure a stable supply of raw materials.• Grow sales.• Lower cost of capital for a new technology.• Optimize product design.

THANK YOUDr. James SaloSENIOR VICE PRESIDENT, NORTH AMERICAJames.Salo@trucost.com +1 508 769-5053@JamesSalo