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Benefits and Scepticism of Ecolabels as Accountability Mechanism

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By Joana M. Comas Martí and Ralf W. Seifert

Environmental labelling is an accountability mechanism for firms to satisfy growing demands to prove that value chains are sustainably managed. Although the large variety of ecolabels available today can be interpreted as a sign of their success, it is overwhelming both firms and consumers. In this research, we conducted a broad survey (with over 1,000 responses) and interviewed practitioners to study managers’ perspectives on ecolabelling. We present an overview of the benefits, as perceived by practitioners, which motivate the adoption of ecolabels by firms, as well as the sources’ scepticism that question the overall effectiveness of environmental labels.

1. Introduction
More than three decades after the first ecolabeling program was introduced, what is the verdict on their effectiveness? To find out, we asked managers and sustainability practitioners to share their views with us. We obtained 1052 responses from practitioners in 70 countries and more than 20 industries. In a nutshell, ecolabels have been useful in increasing sustainability awareness and performance, but there are also credibility concerns given the proliferation and fragmentation of such labels. By now the Ecolabel Index lists 432 ecolabels in 246 countries and across 25 industries.1

In our survey concerning the adoption of ecolabels, we asked practitioners about the perceived level of pressure on environmental issues from different stakeholder groups. They noted that the main trigger is regulation, followed by pressure from employees and internal management. Perhaps surprisingly, consumer and non-governmental organization (NGO) pressure were lower down the list (Figure 1). One possible reason for the latter, is that although NGO campaigns may be highly visible, their resources allow them to target only a limited number of companies.

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Overall, 87% of our survey respondents declared that their company’s level of adoption of more sustainable practices had increased over the last five years. Against this backdrop of increasing adoption of sustainability practices, companies must decide whether ecolabeling can help relieve stakeholder pressure and, if so, which labels to pursue. Given the wide range of labels on offer, and considering their limited geographic recognition, this is not always easy. Nonetheless, even for companies that do not adopt them, ecolabels have become more relevant as environmental attributes and are increasingly integrated directly into business-to-business (B2B) procurement and public sector spending. And these attributes often do follow the underlying standards of ecolabels, even if the companies need not apply for corresponding ecolabels as such. In the European Union, for instance, directives on Green Public Procurement (GPP)2 were defined in 2004.

The growth in the number of ecolabels and green procurement guidelines can be interpreted as a sign of success. However, many practitioners believe that the ecolabeling landscape has become overwhelming and confusing for companies and consumers alike. In this article, we look at the pros and cons of ecolabels, which respectively motivate or challenge their adoption by firms.

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2. What are the benefits of ecolabelling?
Why should a firm consider adopting an ecolabel? There are various benefits that firms may derive from ecolabelling. A key benefit, on which 80% of respondents agreed – as Figure 2 shows – is that ecolabels can help firms strengthen their brand. The sustainability message that ecolabels convey help improve corporate reputation, which in turn can help a company obtain certain contracts and result in an increased market share.

Moreover, ecolabels are a means to address customer demands for more sustainable products (78% in agreement). Although, as noted, sustainability pressure from customers is not as high as that from regulation or internal management, it is becoming increasingly relevant, particularly in B2B environments. Private and public procurement criteria are increasingly integrating sustainability aspects and, in some industries, these have become a condition for doing business in B2B environments.

We asked practitioners about the potential of ecolabels as a means of differentiation and a source of competitive advantage, and their level of agreement was somewhat lower (70%). The different levels of regulation, demand for and supply of ecolabelled products over time, mean that each industry sector follows a particular ecolabelling evolution. When the supply of ecolabelled products is less than demand, ecolabels are a source of competitive advantage for early adopters, which may last for a longer or shorter time, depending on competitors’ ability to follow. As Hannu Hyrsylä, Corporate Vice President of Salcomp, explained, “we have dealt with ecolabels for multiple years and they are a clear advantage which differentiates us from low cost manufacturers”. However, as an industry moves towards saturation in adoption, ecolabels become a must-have, a condition for doing business. In the words of Graeme Peacock of Tata Steel: “As with any quality standard, differentiation is only temporary and, if the standard is successful, it becomes a simple hygiene factor”.

Another benefit of ecolabelling, on which 62% of respondents agreed, is their contribution to better managing risks. We can identify two types of risks that ecolabelling can potentially reduce. First, there is the risk of being attacked by civil society organisations or NGOs. Although ecolabels can help reduce this risk, the experience of some firms is that ecolabels do not guarantee prevention from any type of attack. Christophe Boussemart of Nespresso explained that this is mainly because “no label comprehensively covers all aspects of sustainability, specifically quality and productivity”, and noted, “this is why Nespresso adds its company values on top of ecolabels’ criteria and has created its own AAA Sustainable QualityTM programme for coffee sourcing”. Partnerships with ecolabelling programmes can, however, provide valuable support for firms in responding to a possible attack. One advantage of having ecolabel providers – instead of firms – take over the discussion with NGOs, is that it becomes less attractive to the media and coverage tends to decrease.

“The experience of some firms is that ecolabels do not guarantee prevention from any type of attack.”

A second risk that ecolabels can help reduce is the risk of supply chain disruptions. The implementation of ecolabelling programmes may reduce this risk, not so much as a result of the label itself, but because of the changes it triggers, which can contribute to more sustainable practices, which in turn will help ensure long-term access to raw materials and crops. This type of risk is especially important for firms in the food chain, since their long-term performance relies on the state of the environment.

However, there are other risks that ecolabelling does not reduce but potentially accentuate. Managers are particularly concerned about the risk that arises from allowing a brand to be associated with an ecolabel, which somehow leaves important brand values “in foreign hands”. Nina Ruiz, Senior Specialist of Environmental Management Systems at Canon USA, noted: “Organisations must be careful in deciding which ecolabels to subscribe to. Over the past few years, there has been an extreme emergence of a wide variety of labels, many of which are used for a marketing strategy. As such, only reputable, validated and meaningful ecolabels must be used”.

“Although managers recognise many benefits of the adoption of ecolabels, scepticism is also very evident. The credibility of ecolabels and the rigour of the criteria and certification procedures are major concerns.”

An additional benefit of ecolabels is their potential to address investor demands. Practitioners commented that the transparency and stakeholder endorsement from adopting ecolabels, as well as their continuous improvement requirements, are features valued by investors. At the same time, despite being in favour of ecolabels, an investor expressed his scepticism on their reliability to date: “If there were reliable labels, they would be very useful for financial institutions when assessing sustainability-related risks for specific companies”. These mixed views might explain the lower level of agreement among practitioners on the potential of ecolabels to address investor demands (53%).

With regard to operational efficiency, the opportunities for improvement that arise from better control of organisational processes obtained through ecolabelling do not necessarily make up for the additional bureaucracy and traceability requirements. This explains why only 45% of respondents agreed that ecolabels can contribute to operational efficiency improvements.

“Transparency and stakeholder endorsement from adopting ecolabels, as well as their continuous improvement requirements, are features valued by investors.”

Taking a more holistic perspective, beyond that of the single firm, experience with ecolabels has shown another important benefit. These labels have the potential to raise an industry-wide sustainability awareness and performance, and as Markus Scholand noted: “We advise caution; we believe that some marketing-driven expectations from green quality marks or labels are too high. However, it has to be stated that widely accepted minimum standards may foster low performing companies to initiate first steps in the direction of sustainability and by this contribute to mainstreaming the idea of sustainable development”.

3. Sources of scepticism and criticism
Although managers recognise many benefits of the adoption of ecolabels, scepticism is also very evident. The credibility of ecolabels and the rigour of the criteria and certification procedures are major concerns. For example, the time between applying for and being awarded an ecolabel is often less than 12 months, as 63% of respondents in firms having adopted ecolabels noted. In addition, according to respondents, the adoption of ecolabels tends to induce medium to considerable changes in raw materials and supplier selection (Figure 3), which combined with the short time for certification, makes one wonder how rigorous the ecolabelling procedure really is. However, from our survey, we observed that the share of firm revenues from ecolabelled products is quite low: for 64% of firms having adopted at least one ecolabel, it is between 0% and 10% (Figure 4). This could indicate that only low volumes are certified and, therefore, changes in a firm’s supply base could be relatively quick. Therefore, despite the fact that certification usually takes less than a year, ecolabels could be rigorous after all.

The adoption of ecolabels has also been criticised for being short-term- and marketing-oriented. As one practitioner noted, “ecolabels today seem like a marketing topic for easier positioning, when customers ask for it, but they are not relevant for making decisions, they are politically correct”. Considering that 20% of respondents held marketing functions, it is reasonable to think that marketing is closely involved in ecolabelling decisions. This fact in itself is not necessarily negative; on the contrary, marketing expertise can be very valuable in reaching consumers and convincing them to make more sustainable choices.

Practitioners also seemed concerned about potential conflicts of interest experienced by ecolabelling providers. In the words of a Head of Procurement of a global company: “Who polices the policemen? I have a healthy distrust of many ecolabels that launch full of good intent and soon morph into organisations that desire to survive, not serve. Evolution suggests survival of the fittest, but the conflict is altruism vs. self-interest”. Ole Just Sorensen of Grundfos A/S Management also emphasised the competition between different labels in a race to gain market share: “The market for ecolabels is very confusing and, in some areas, it looks more like a new industry of ‘selling stickers’ and where generating money seems more important than the outcome and the importance of the label”.

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An additional criticism of ecolabels is that they can act as technical barriers to trade (TBT), especially when their geographical reach is limited. Tata Steel’s Graeme Peacock explained: “In the construction sector, most ecolabels are national or regional, so for global companies like ourselves, they act as barriers to trade”. Other managers counter that this is not always a drawback, but that it can play in their favour: “Some labels can defend firms in industrialised markets from competition from less regulated markets like China”. As might be expected, the World Trade Organisation (WTO) actively promotes the elimination of these barriers with measures such as mutual recognition agreements (MRA), which aim for mutual recognition of evaluation criteria and procedures in performing product conformity assessments in different countries.

There are perhaps more essential sources of scepticism about ecolabels in terms of their effectiveness in delivering real outcomes and their potential to achieve market transformation. Evidence of their actual impact is missing. Some managers warn that by focusing too much on ecolabels, there is a risk of “missing the big picture”.

We conclude this overview of ecolabels’ scepticism with a comment from a practitioner in the construction sector, who expressed the highest level of discontent with the current state of ecolabelling: “I worked on ecolabelling in the late 1990s and early 2000s. A Brussels bureaucratic delight. Ecolabels are a costly and highly bureaucratic piece of nonsense with a couple of notable exceptions such as FSC and LEED”. We should however note, that none of the other practitioners showed comparable levels of harshness.

“Ecolabels should remain a means and not become an end… Although managers do not necessarily foresee an explosion in the use of ecolabels in the coming years, they do expect greater traceability of products and more transparency in the sustainability performance of supply chains.”

4. Conclusions
Overall, managers feel that as different challenges emerge, the initial momentum of ecolabels, and the high expectations of them being a means of achieving market transformation, are declining.. Although greater efforts are needed in defining standards and in training, other constituents of certification schemes might be less necessary. In particular, external certification and labelling might not always be the most effective means of ensuring sustainability, especially in B2B. Nonetheless, as previously noted, the underlying criteria of ecolabels are increasingly being integrated into organizations’ procurement requirements, so companies cannot afford to ignore them.

Practitioners stress that although ecolabels may be replaceable, sound sustainability strategies and top management commitment are not. Ecolabels can be useful in communicating about sustainability, but they should remain a means and not become an end. Although managers do not necessarily foresee an explosion in the use of ecolabels in the coming years, they do expect greater traceability of products and more transparency in the sustainability performance of supply chains.

About the Authors
Ralf W. Seifert
is Professor of Operations Management at IMD and Professor of Technology and Operations Management at the College of Management of Technology at Ecole Polytechnique Federale de Lausanne (EPFL). Having earned his Ph.D. degree from Stanford University, he worked closely with numerous practitioners and companies to co-authored two books and more than 30 case studies. He continues to actively research issues of supply chain strategy, supply chain finance and technology management and has more than 50 articles and international conference presentations to his credit.

Joana M. Comas Martí currently works as a research associate at the IMD Global Center for Sustainability Leadership. She recently obtained her PhD at the College of Management of Technology at École Polytechnique Fédérale de Lausanne (EPFL) on supply chain approaches in corporate environmental strategies. Prior to this, she worked for Nestlé Nespresso, in the Operations Excellence team. Her expertise covers both sustainability and supply chain management including the assessment of sustainability strategies and CSR reporting,carbon footprinting, ecolabelling, operations management, supply chain network design and forecasting.

References
1. http://www.ecolabelindex.com last accessed October 29, 2012.
2. http://ec.europa.eu/environment/gpp/index_en.htm last accessed October 29, 2012

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