Tag Archives: Nike

CSR Auditing and Toilet Paper

In the 1990s I worked for a large paper company and one of the products we made was a name brand toilet paper. As TP goes, this was nice stuff – 2 ply, thick and soft. We marveled that the product didn’t sell well in markets dominated by products that were thin, had holes and fell apart too easily. It baffled us that so many people didn’t care about what ends up on their hands.

Today there is a surprising demand for third party environmental/safety/social/supply chain audits that are equivalent to cheap TP – thin, single “ply” (i.e., one dimensional) and full of holes.   Yet even in the midst of so much reliance on audits, very few buyers of these audit services seem to be concerned. Its not only us that sees this – a fascinating article published earlier this week called out Amazon, The Children’s Place, Gap, Hanes, J-Crew, JC Penny, Kohl’s, Macy’s, Nike, Pink, Polo, Target, Walmart and Zara for “ineffective … CSR monitoring, corporate codes of conduct and industry ‘social audits’ … in protecting the rights, health and safety of millions of workers in global supply chains.”  This, after a decade of CSR audits, is the author’s conclusion.

The article goes on to discuss related failures and inconsistencies in certifications and audit scopes. Our own experiences support this – all too frequently we have seen companies pursuing various certifications solely in order to have a certificate to frame and hang in their lobby. One unfortunately memorable experience came a week after a client had completed their ISO14001 recertification audit. The ISO auditor passed the site with flying colors and was highly complimentary of their program. However, our compliance audit found – with little effort – criminal environmental violations that resulted in the site environmental manager losing his job and one of the few instances where self-disclosure to EPA was warranted without question. This isn’t necessarily a problem with the standards themselves – the problem rests completely with the auditors responsible for assessing the sites.

This criticism shouldn’t be a surprise to anyone who is familiar with current CSR audits and auditors. Certainly there are excellent and conscientious practitioners in the field, but the pricing model of these audits tends to support minimalism all the way around. In a recent article on this topic, we stated our belief that the pricing of CSR audits is directly in response to severe operating cost pressures placed on the manufacturers by the brands. But that circles back to consumer buying preferences as we pointed out six years ago. If attributes other than price and product performance were truly key buying criteria, then the entire economic ecosystem (eco-ecosystem??) would be different.

We do not offer typical CSR/supplier audits because we flatly refuse to compromise our professionalism in order to be cost competitive in this market. Our respect for clients and concern for the risks they face exceeds our desire to compete for revenue from these services in the current market. But, as evidenced by what the article states is an $80B year CSR industry, many people are okay with using cheap toilet paper and don’t seem to care what will end up on their hands.

A few key things you should do to help prevent continuing CSR audit failures:

  • Ensure the audit scope matches the auditor(s)’ backgrounds.  For example, after Raina Plaza, CSR auditors have been increasingly asked to provide information on structural engineering and local electrical code compliance.  These matters require specific technical knowledge beyond that of a typical CSR auditor.
  • Explore the auditor(s) professional qualifications. Do they hold a relevant third-party certification?  How much continuing education do they require on an annual basis?  What fraud detection training have they had?  What are the audit firm process for ensuring independence of the individual auditors, not just the firm as a whole?  Auditors should consider themselves professionals and hold themselves accountable to appropriate standards for qualifications.  If they don’t, that speaks volumes about their attitude toward their work.
  • Test the auditor(s) technical knowledge beyond their checklist.  Does the auditor understand the applicable requirements beyond what is written in the audit checklist or protocol?  There are few times when reality matches the criteria on paper.  You want a professional who is prepared to apply knowledge and expertise objectively and pragmatically, not just check boxes on paper or a screen.
  • Find out how much time the auditor(s) spend onsite, and on each audit activity.  Generally speaking, one day (or less) total on-site is too little for any credible audit scope.  The auditor should reasonably balance their time between document reviews, interviews and visual observations.  If you don’t feel there is adequate time spent or balance in the activities, make your auditor change their practices.
  • Observe – or get feedback on – the auditors’ bedside manner.  An auditor’s attitude and non-verbal cues have a significant impact on the amount and quality of information they are able to gather from the audited entity, and how that entity responds to the audit and corrective actions.  Interviews conducted by the auditor should be non-threatening.  Using active listening techniques without sounding condescending or like a robot is an art form not easily mastered.
  • Look at audit report findings and the cited evidence.  Are findings based solely on interviews?  While this can be acceptable in some settings/situations, information from interviews should be corroborated with another type of audit evidence such as documentation, recomputation or direct visual observations.  If findings are not based on objective and repeatable evidence, make your auditor change their practices.  Issues based on interviews alone should be brought forward in a mechanism outside the audit report as those don’t meet the requirement for a formal finding.
  • Determine how audit reports are peer reviewed – or are they peer reviewed at all?  Does the review require the auditors’ original notes so the reviewer can confirm that the audit evidence supports the findings?  All audit reports should go through a formal internal quality check.
  • Don’t get swayed by broad company or program certifications such as ISO.  While these certifications can be an indicator of internal process formalization, understanding the reality of auditor performance in your specific need is far more important.
  • When considering an auditor, call client references and discuss their experiences, both positive and negative.  Obviously, references are specifically selected to present a positive image.  Expressly ask the reference to offer comments about matters or situations that are not so positive.

Dark Clouds on the Climate Horizon

In 2009, there was a general sense in the US that some regulatory and economic certainty would finally be established relative to greenhouse gases, and CO2 in particular.  The current administration made highly public moves and statements to that effect, which were mirrored by action in Congress and the Senate.  EPA issued its finding of endangerment.  And there was significant optimism that the COP15 Copenhagen meeting would bear fruit.

Fast forward to February 2010.  There has been quite a shift in direction and now there is arguably more business risk related to CO2/GHG than there was going into 2009.  Among recent highlights:

  • Nike formally announced that they are abandoning the use of carbon offsets and Renewable Energy Certificates (RECs), citing, among other concerns:

there is substantial scrutiny of the use of RECs, in particular related to whether they in fact help create new renewable power, or whether they are simply payment to a project that would have existed anyway. … Moving forward, however, our preference is to achieve climate neutrality through a combination of energy efficiency and the purchase of more direct forms of renewable energy, through on-site applications and other means.

  • The German Emissions Trading Authority (DEHSt) computer system was hacked and fraudulent European Union carbon allowance transactions were completed.  Read a report here.
  • Europol, the European law enforcement agency, reported on December 9, 2009 that

the European Union (EU) Emission Trading System (ETS) has been the victim of fraudulent traders in the past 18 months. This resulted in losses of approximately 5 billion euros for several national tax revenues.

As an immediate measure to prevent further losses France, the Netherlands, the UK and most recently Spain, have all changed their taxation rules on these transactions. After these measures were taken, the market volume in the aforementioned countries dropped by up to 90 percent.

  • The Copenhagen meeting failed to achieve the concrete results that had been expected.
  • The accuracy and veracity of data published by key climate scientists was called into question, creating the “Climategate” scandal.
  • The UK government published a report supporting a fixed price or auction reserve on carbon emissions over the current market-driven cap and trade.
  • National-level climate bills in the US are no longer getting the support they enjoyed in 2009.  Read more.
  • Arizona declined to participate in a regional GHG trading program, citing the difficult economy.

However, in contrast to the overarching trend, the US did see two important developments.  First, EPA promulgated its CO2 emissions reporting regulation in October 2009, which is effective calendar year 2010.  Second, SEC issued Interpretive Guidance on the inclusion of climate risks in financial disclosures.

There continues to be significant  uncertainty related to the financial value/risk of climate-related activities.  And that is not likely to change in the near future.