Wal-Mart and an Analysis of Sustainability Index Hiccups

 |  Includes: TGT, WMT
by: The Operations Room

By Marty Lariviere

Some time ago we posted on Wal-Mart’s (NYSE:WMT) attempt to lead the creation of a sustainability index. The idea was to provide consumers with clear guidance on the impact of what they bought. Instead of wondering why one product cost a buck more than a different brand, they would have some information on why. Along the way, it was hoped that such transparency would lead to greater competition between firms to drive costs out of the system in a responsible fashion. So how’s that all going? According to Fortune (Jul 13), not so well, forcing Wal-Mart to back off some of its initial goals.

There are several dimensions to the challenges Wal-Mart has encountered. For one, not everyone has gotten on board. Wal-Mart had hoped to create a standard for the retail industry but other big retailers such as Target (NYSE:TGT) have not signed up. Also, the article suggests that some big brands while going along with Wal-Mart to some extent are not overly thrilled. Further, there have been some administrative headaches like finding program directors. However, the biggest problem appears to be just the daunting nature of the task.

The trouble with any consumer scoring systems is that ultimately consumption is about trade-offs. All products — no matter how “green” — impact the planet in some way. The best a consumer index can do is suggest that one product in some particular way might have less of an impact on the planet than another. To achieve this, mountains of data have to be gathered about the impact of thousands of products across every stage of their life cycle, from raw materials and manufacturing to final disposal, while including social factors like workplace conditions. How much waste was generated by the factory in rural China that made that zipper? How much phosphate was used to make this laundry detergent? Were the chips in that Blu-ray disc player manufactured in an energy-efficient way?

It gets even more complicated once such data are obtained: How should various forms of sustainability be ranked? Is soil erosion less important than carbon emissions? Gary Hirshberg, founder and CEO of Stonyfield Farm, now a subsidiary of the food giant Dannon, has been trying to measure the impact of his own organic yogurt products since the early ’90s. “I’m not saying it’s impossible,” he argues, “but it’s very difficult to do in a credible way.” …

It’s enough to make you wonder whether creating a sustainability index is even worth the Herculean effort. Hirshberg thinks not. A company, for example, might earn high marks for using recyclable packaging, but Hirshberg found that Stonyfield reduced its carbon footprint more by switching to yogurt cups that aren’t recycled. It turns out that cups made from plants and then thrown into landfills generate far fewer greenhouse gas emissions than recycled plastic containers. Similarly, a yogurt company might score high for using organically fed dairy cows, but Hirshberg found that a significant source of his company’s methane emissions — a potent greenhouse gas — is cow burps, of all things. (Stonyfield is in the process of reducing those emissions by tinkering with the feed.)

“In the end we realized that to get a real score is a very costly, complex process that’s probably not worth it,” Hirshberg says. Instead he founded a nonprofit, Climate Counts, that does not rate individual products but scores the world’s largest companies on their commitment to fighting global warming and the transparency of their sustainability efforts.

So, what are the alternatives here? One is to get industry groups to agree on standards. The article gives the example of the Natural Resources Defense Council’s Clean by Design program in the textile and apparel industry. The program identifies best practices for things like water usage in the textile manufacturing. Thus, instead of focusing on measuring and allowing the customer compare, the idea is promulgate good systems. The article says that major retailers like Wal-Mart and Target have signed up for the program but it doesn’t say exactly what that means. Has Wal-Mart committed to only stock goods from mills that follow the Clean by Design program? Or has it only endorsed the idea?

There seem to be pros and cons in comparing the standard approach with imposing an index. If the standards are widely accepted (like having an Underwriters Laboratories on small appliances), they spread best practices and assure some level of improvement. If nothing else, the worst offenders must clean up their act in order to qualify in the market place.

But they do not necessarily provide strong incentives for innovation. The key is meeting the standard, not going one step beyond. An index would seem to put greater emphasis on taking things to the next level. To the extent that what gets measured gets managed, having a publicly known index would reward those who find creative ways to reduce the impact of whatever one is producing — or at least those who find clever ways to game the index.

That gets us back to the problems with Wal-Mart’s efforts. If indices are inherently flawed and require an unrealistic amount of data or rely on questionable data, then they are unlikely to result in meaningful guidance to consumers or reward innovators who find new ways of improving sustainability. That would all suggest that sustainability standards are the best we expect for now.