FY2015 Stakeholder Dialogue: Deepening CSR Procurement and Green Procurement Efforts

Adachi: At the G7 Summit held in 2015, the topic of responsible supply chains was raised in the leaders' declaration. The leaders stressed the importance of promoting human rights, labor standards, safety and health in supply chains. I would like everyone to recognize that this issue is so important to the world economy that world leaders have declared their commitment to it. Let us also remember the garment factory building that collapsed in Bangladesh in 2013. More than 1,000 people died in that disaster, and immediately after it happened, the media in Europe and America began to discuss which companies were purchasing the garments that were made in this factory. They also began to ask if the global brands doing business with the factory had taken any measures to prevent this sort of thing from happening. About one month after the accident, the companies set up a fund for investing in protective measures, which reflects the common sense in Europe and America for companies to view problems in the supply chain as the responsibility of their brand.

Moderator: What types of efforts are being made at AEON?

Kanamaru: In 2003, we established a code of conduct for AEON suppliers based on the United Nations Global Compact [1] and SA8000 [2], and we began our efforts to verify the status of labor and human rights in the operations of our business partners. In addition, based on the awareness that our business activities depend on the bounty of nature, such as agricultural and marine products, we established the Principles of Sustainable Procurement in 2014. For marine products in particular, we are working to expand the number of products with the MSC [3] seafood eco-label and ASC [4] certification, and we regularly hold in-company meetings to assess risks. It is not easy to communicate these efforts to customers at self-service supermarkets. However, we have a real sense that if the efforts are conveyed properly, the number of customers who understand and support the efforts is sure to grow.

• [1]

  The United Nations Global Compact is an initiative to encourage businesses and organizations worldwide to adopt and comply with ten principles related to human rights, labor standards, environment, and anti-corruption, within their sphere of influence.

• [2]

  SA8000 is an international certification standard for human rights and labor, developed by Social Accountability International.

• [3]

  The MSC certification program ensures that marine products are obtained through sustainable fishing that is friendly to the natural environment and marine resources. It is also known as the "seafood eco-label"

• [4]

  The ASC certification program ensures that marine products are obtained through sustainable aquaculture.

Moderator: You mentioned the concerns of customers, but there also seems to be growing attention from investors.

Adachi: In Japan, the Government Pension Investment Fund (GPIF) became a signatory to the Principles for Responsible Investment (PRI), and ESG information is having an impact on investment decisions around the world. The PRI promotes the Montreal Carbon Pledge that calls on investors to commit to measuring and publicly disclosing the carbon emissions of the companies they invest in. Investors are forming coalitions to decarbonize their portfolios, in an effort to encourage further elimination of carbon emissions from the companies who receive investments, in line with the COP21 agreement of December 2015. These efforts are also leading investors to divest from companies with high carbon emissions in the supply chain. In most industries, the supply chain of each company has a much larger impact on the environment than the actual company itself. Particularly in the telecommunications industry, the supply chains consume ten times more electricity and water than what the companies use.
Systems related to supply chains are being created in Japan and abroad. Internationally, the ISO 20400 standard for sustainable procurement is being established. In Japan, the Consumer Affairs Agency is organizing conferences to promote ethical consumption that is beneficial to people, society, and the environment.

Kanamaru: By displaying the AEON name on our private brand products, we show our responsibility for the manufacture of the products, and we are subject to increasing demands for accountability of raw materials. If a problem occurs in the supply chain, we cannot sweep it aside by claiming that we did not know about it, and it is perceived as AEON's failure to fulfill our responsibility.

Adachi: From the perspective of sustainable business, the supply chain is the most important factor, as it involves risks that can halt the flow of goods, such as the depletion of raw materials or factory strikes, and risks such as damage to the company's reputation due to consumer mistrust of the manufacturing process for goods.
In addition, your company is expanding its business in Southeast Asia, so you need to pay attention to the problem of child labor. The use of child labor is prevalent in Asia, and it is particularly high in Myanmar and Cambodia, and in the agriculture and construction industries. So, for example, when you are constructing towers in those areas, you need to make sure to educate the local builders.

KDDI: To ensure the stable procurement of products along with quality, cost, and delivery (QCD), we periodically visit the suppliers. Many overseas companies are involved in handset manufacturing, and there are also many Japanese companies that manufacture the components. This makes the manufacturing process very complicated and diversified. Due to limited resources, our challenge is to determine whether to look one, two, three, or more levels into the supply chain.

Adachi: First of all, the primary suppliers are most important. However, for issues such as conflict minerals, some products may require you to go all the way upstream and check the entire supply chain, just to be safe.
There is no end to CSR procurement activities. With new factories constantly being built and suppliers always changing, the issues that need to be addressed are always evolving. It is difficult to immediately get a perfect score of 100. As a first step, I think it is good to aim for a situation in which the large risks have been eliminated.

Part 2: Improving the CSR procurement questionnaire
Clarifying the objectives and asking questions that dig deeper

KDDI: Our questionnaire, which consists of approximately 80 items from the CSR Procurement Check Sheet, was provided to our key business partners representing approximately the top 90% of the total value of orders.

For the previous questionnaire, we had a low response rate of 72% and received some responses that appeared to differ from publicly disclosed information on the subjects' websites. Before conducting the FY2015 questionnaire, we provided clear explanations. As a result, we had a nearly 100% response rate and confirmed that all companies had studied KDDI's CSR Procurement Policy. In addition, after receiving the responses, we conducted interviews with some of the subjects to confirm details about their responses.

Kanamaru: I suggest avoiding vague questions such as "Are you conducting biodiversity protection activities?" I think the questions need to be a little more detailed and specific. At AEON, we conduct briefings for first-time business partners to communicate our basic company philosophy and our approach to CSR procurement, so that they clearly understand the purpose and content of the questionnaire. After receiving their commitment to comply with our code of conduct, we first have an external organization perform a third-party audit. Once they successfully pass the third-party audit, an AEON-authorized auditor performs a second-party audit once every two years. After confirming that they have established favorable management practices, they perform first-party audits themselves.

Adachi: First, it is necessary to clarify the purposes of the CSR procurement questionnaire, such as whether you intend to understand the current situation or discover problems. Then, you can thoroughly examine the contents of the questionnaire according to the purposes. I think that the questionnaires up to now have provided an understanding of the suppliers' current situation, so if the purpose is to discover risk, you should ask questions that dig a little deeper. In addition, you can expect to find many issues in the supply chain, but you need to focus on checking the items that are most important to your company. For example, instead of asking all suppliers about biodiversity or social contribution, you might focus on items that are more closely linked to their operations, such as their environmental assessment when constructing base stations, or their paper procurement process.
The questionnaire is simply a means for discovering problems. The important thing is to decide how to respond to the issues that are identified through the questionnaire.

Protecting the brand and improving competitiveness through CSR procurement

Adachi: For CSR procurement, it is not enough to simply conduct a questionnaire. It is a basic norm to visit all of the factories for audits. However, it is difficult to audit all of the factories at once, so I recommend using the questionnaire results as a preliminary audit.

Kanamaru: If any issues are found through an audit, our approach is to stop the transactions in the case of any legal violations, and work with the business partner to make improvements and advance to a higher level. When this happens, it is difficult to make improvements simply by exchanging documents. To establish the relationship of trust that is required in order to make improvements, it is important to visit the actual sites when providing support.

KDDI: In our case, we try to establish a relationship of trust with the factory and listen to their opinions while pursuing our efforts, instead of forcing them into action. This has been our approach up to now, even for conventional purchasing activities. It takes time to establish the proper relationship. As for the question of how far to go, we recognize the need to base our activities on soft law principles that function as international guidelines, which are more stringent than the legal standards in countries with different cultures, such as China.

Adachi: At the very least, suppliers in China and Vietnam have a pretty good understanding of what soft law is. Suppliers get used to audits, so you have to convey your level of seriousness to ensure that they change the way that they respond. Of course, you need resources for that, and that is an issue that the procurement department should not consider just by itself. If a problem occurs in the supply chain, it has an effect on the entire company, and it becomes a matter of how to protect the company brand. To ensure that CSR procurement is conducted properly, I would like KDDI to figure out what resources are necessary and discuss the issues at the management level.

KDDI: We hold discussions with the factories on how to reduce costs by reviewing the manufacturing processes and improving the yield rate.

Adachi: That is exactly the right approach. CSR procurement is more than a set of rules that need to be followed, and efforts should be made to review the manufacturing processes. Research has shown that the actual implementation of CSR procurement leads to improved productivity and reduces line stoppages at factories, which also leads to improved competitiveness.

Part 3: Green procurement

KDDI: In 2010, we established the KDDI Green Procurement Guidelines. KDDI has implemented a process for proactively procuring energy-efficient power supply equipment and air conditioning equipment, and we have started developing a similar procurement process to ensure eco-friendly communication devices, but it has not been introduced due to high costs. Recently, the growing availability of energy-efficient products makes them more affordable, so we recognize the need to review the guideline standards and make further efforts.

Adachi: It is the responsibility of the company to set the environmental criteria for procured goods. If an individual asks a company to make energy-efficient products, the company is unlikely to make any moves. However, if there are prospects for a certain number of contracts, the supplier is more likely to make efforts in technological development. In other words, the promotion of green procurement can lead to new innovations and stronger competitiveness for suppliers. Of course, eco-friendly products tend to be a little more expensive, but if you can get ahead of other companies in these efforts, you should be able to recover your investments.

Kanamaru: As society changes and the company's situation evolves, the Green Procurement Guidelines need to be updated to boost their effectiveness. We are currently reviewing our guidelines at AEON, too.

Conclusion: Toward the further advancement of CSR procurement and green procurement

Kanamaru: For company management, a common issue is how to ensure that CSR procurement efforts are implemented across the entire company. To ensure consistent awareness among management, I think it is effective to share information about risks and the activities of competitors. To promote the incorporation of CSR procurement into the company's management policy, it is important to deepen the conversation at the management level. I believe that efforts toward CSR procurement will definitely help to enhance the company's standing and improve the brand.

Adachi: What are the reasons that customers choose KDDI? Although some customers may choose KDDI for the technical capabilities or the prices, I think you would be most pleased if they choose you because they feel that they can trust you. If that is the case, what can you do to earn their trust? In other words, what sort of actual activities should you engage in? CSR procurement is the most important factor in creating a foundation that earns the confidence of customers. I think that there are many difficulties involved, but I would like to see further efforts.

KDDI: Your discussion of global standards and trends has been very informative. We recognize the need for management to deepen their consideration of CSR procurement as a company-wide issue, and we have reaffirmed the importance of working with business partners to make continuous step-by-step improvements with respect to each issue, for the actual products at the actual sites.
The CSR Advisory Committee that involves the participation of management will start in March of this year, and our human rights declaration, which also applies to business partners, will be announced in April. Moving forward, KDDI will continue making efforts to thoroughly implement the PDCA cycle, conduct activities to improve daily operations, and steadily resolve issues one by one. Thank you very much.