Challenges Met

‘Diehard Capitalist’ and Avery Dennison Chairman and CEO Dean Scarborough shows how CR can be good business

By Bill Hatton

Avery Dennison manufactures pressure-sensitive adhesives, and packaging and labeling materials for a variety of B2B customers. As a B2B company positioned in the middle of the supply chain, it has the kind of experience in corporate responsibility and sustainability issues that CR Magazine’s readers face every day. To improve its paper sourcing, Avery Dennison has worked closely with the international non-profit organization Rainforest Alliance.

The Rainforest Alliance recently hosted a conference where it shared some of the Avery Dennison story. After the conference, I had an opportunity to sit down with Dean Scarborough, Avery Dennison Chairman and CEO, and Alicia Maddox, Avery Dennison Vice President, Community Investment and president of the Avery Dennison Foundation.

Bill Hatton: Dean, you have spoken about how you saw Avery Dennison as an ethical company, but you weren’t quite where you needed to be in terms of corporate responsibility when you were confronted by Greenpeace.

Dean Scarborough: Right. At Avery Dennison, values and ethics are in our DNA. So when Greenpeace challenged our paper sourcing, specifically through a pulp company in Asia, we used it as an opportunity to improve and take a closer look at our sourcing practices.

Bill: What happened?

Dean: We received a letter from Greenpeace, one that was probably sent to a number of organizations. I was surprised, since Avery Dennison sometimes sits under the radar as a B2B company, but I knew it was important to respond. We reached out to the Rainforest Alliance to help us strategize, then we decided to introduce a paper sourcing policy. Avery Dennison didn’t previously have a policy, just out of benign neglect. We always assumed we were sourcing responsibly, but never verified it with our suppliers.

I discussed this with my team and asked how they would feel if we were sourcing paper made from illegally harvested logs in the rainforest. Well, the answer was unanimous. Everyone agreed that we needed to gain a clearer understanding of where our paper comes from. The Rainforest Alliance was really helpful in this regard and introduced us to a tool that enables our suppliers to show us where their pulp is sourced. That was a big win, and Greenpeace was the catalyst in making it happen.

Bill: Were your customers asking about sourcing?

Dean: No, not really. In rare cases, our customers were interested in the chemical compliance issues that come up when you make self-adhesive issues, as we do. And sometimes they were interested in safety compliance. But I can’t recall an instance where our customers were specifically asking about how we source paper or pulp; it just wasn’t on their radars.

Bill: So this was a question of doing the right thing, as well as having your attention brought from an external source.

Dean: Absolutely, yes.

Bill: Okay, what has the response been from your customers? Are they happy about it? Are they not happy about it?

Dean: The customer response depends on the markets where we do business. There are two core businesses within Avery Dennison.

One business makes self-adhesive materials and sells to thousands of printers across the globe. Those printers sell to all types of end-users, in industries ranging from durable goods to food and beverage to automotive. Our products really are everywhere you look. Our other business makes packaging and labeling materials for retailers and brands in the apparel industry.

Not surprisingly, the apparel side has responded positively to our sustainability efforts. Most apparel companies have adopted sourcing standards and they care where their materials come from. That’s in part because the places where they make and purchase their clothes can often be controversial. It’s been a greater challenge to make the connection with the labeling and packaging material side. In that business, we’re several links removed from the end customer, because we sell our products to converters. And it can be difficult to convey to them that sustainable sourcing is valuable. We had to make a choice: Do we follow our customers’ lead on sustainability, or do we get out in front and do this because we believe in it and because it has strategic value for us? And we decided that, while customer response is incredibly important, we’re focusing on sustainable sourcing because it’s the right thing to do for our company —and the environment. Avery Dennison has been in business for 80 years and paper is an important commodity for us. It’s critical to have enough paper supply to last the next 80 years and sustainable sourcing is one way to help ensure that happens. This is a bit of the long view, but it informs how we operate today.

Bill: Is there a social responsibility aspect to this?

Dean: Definitely. Avery Dennison is working with the Rainforest Alliance to promote sustainable forestry in Honduras. We’re supporting a three-year effort to teach timber producers how to manage their land in a way that’s profitable, yet still preserves the health of forest ecosystems. As part of that effort, we’ve taken a number of field trips into the rainforest. In fact, earlier this year we traveled to Honduras and met with some of the local cooperatives who are benefitting from our work.

Intellectually, I’ve always understood that sustainable forestry is good for the environment. But when we visited the cooperatives, I was able to see first-hand how communities are using the forest sustainably to improve their lives. That was powerful because it helped me realize that supporting sustainable forestry isn’t just charitable work; it serves the important purpose of developing a supply chain, and local economies, that can last for the long run. In the communities we’re helping to support in Honduras, the indigenous population has ownership of the land and they’re taught how to properly manage the forests. But even more valuable, they learn to operate these enterprises in a way that sustains their culture and betters the lives of their families.

It’s rewarding to see how the work you’re doing as a company can foster something like that. I get the same feeling when I visit our site in Bangladesh and observe how we’re operating our factory. Our Bangladesh employees have access to a life skills training program, they’re paid fair wages, and there’s an emphasis on family life. The way Avery Dennison supports our employees and their communities is pretty incredible. I believe there’s a more purposeful vision for people who work at our company. It’s not just about making money; our decisions, such as paper sourcing, can ripple outward to create change that goes beyond our business.

Bill: To take a step back a little bit, is there some personal experience that established your values when it comes to corporate responsibility?

Dean: Yes, though, for me, it came later in life. Believe it or not, when I went to college, my goal was to become the CEO of a Fortune 500 company.

Bill: You did it.

Dean: Yes, I did. But I attended a liberal arts college, so, even though I majored in economics and math, I also had exposure to many other areas. Having a liberal arts education is fantastic because it nurtures a lifelong curiosity and love of learning. This is something that has stuck with me throughout my career and has been pretty fundamental to the way I think about the world.

I also went to the University of Chicago for business school. See, I’ve always been a diehard capitalist and I believe strongly in the power of markets. At the same, I believe businesses should behave responsibly—and this juxtaposition caused some internal conflict. As a CEO, my main objective is to deliver shareholder value. I personally subscribe to charitable giving, but I struggled to see where social responsibility fit within a business.

A corporation’s money is essentially shareholder money, so how do you reconcile giving a portion of it away? I wanted to be a good corporate citizen and do right by the community, but I also wanted to stay true to my core purpose of delivering shareholder value. As you can imagine, it was a bit of a dilemma.

Then a couple of things happened, like our work with the Rainforest Alliance, which helped me understand how a company can serve as a force for good and still run a successful, profitable business. I realized several years ago that my “dilemma” was simply a framework issue. I used to put corporate social responsibility in its own separate box that wasn’t necessarily tied to our business strategy. But that’s not the right way to approach it.

Issues like resource conservation, climate change and human rights are business issues. We have to address them, not only because it’s the right thing to do, not only because it helps our reputation, but also because it’s essential to the viability of our business. We live in a changing world with a burgeoning population, shrinking supplies of raw materials, and increasingly warmer climates. If we don’t take those challenges into account, we’re not doing our job.

Also, transparency has become the new normal. Stakeholders expect it. They want to know what you’re doing about these environmental and social challenges. And if something bad happens in one of our factories in Indonesia or Bangladesh, everyone across the globe could read about it online within minutes. So when you’re operating in a world where transparency is expected, it’s important to be flexible and evolve your business strategy as you continue to deliver shareholder value.

That’s how I framed up our move toward responsible paper sourcing. If deforestation eventually reaches the point where we can’t purchase paper, we’re going to go out of business. Figuring out how to responsibly source paper today makes our company more resilient for the future. I also realized Avery Dennison has a real opportunity to spark change, given our industry- leading position in the supply chain. Our decisions about sustainability could have an influence on how an entire industry approaches sourcing. This understanding made it easy for me to embrace corporate social responsibility. It’s not necessarily “altruistic;” it’s connected to our core purpose and very much a part of what we should be doing as a business.

Bill: That was a great answer. So corporate responsibility doesn’t become a program?

Dean: No, it’s not a program. We like to say that sustainability isn’t something we do; it’s how we do everything. We’ve really evolved our approach to corporate responsibility, starting with the Avery Dennison Foundation. Our Foundation used to provide donations primarily to large projects in Southern California, where we’re headquartered. While they were worthy projects, their reach was very localized. When Alicia Maddox joined Avery Dennison six years ago, she launched a global grantmaking initiative that now enables us to fund important projects all over the world. We’ve tripled our investment in emerging markets like like China, India, and Brazil. The projects we support are strategically aligned with education or sustainability, and they offer employees an opportunity to make their mark in the community. Alicia, maybe you can share more.

Alicia Maddox: I’d be glad to, Dean. The strategic focus areas of the Avery Dennison Foundation are education and sustainability, both defined very broadly as each area can look different in our more than 100 sites around the globe. When it comes to sustainability, there’s an emphasis on forest ecosystems, which is reflected in the work we’re doing with the Rainforest Alliance. We’re also looking at how we can support women’s empowerment because it has a strong link to sustainability too. Women play a central role in keeping the family together and providing for the community, particularly in impoverished countries.

Bill: How does that work?

Alicia: Last year, we made a grant to an organization, called Business for Social Responsibility (BSR), to support a project called HERhealth and HERfinance. These programs empower women who work in factory environments by educating them on health and finance topics. This work is very important because it enables women to become peer educators, which has a powerful trickle down effect. If you can inspire women to take charge of their own livelihoods, it benefits the entire community.

Bill: Can you give me an example?

Alicia: Although we just began funding this program last December, the success stories we’ve seen from BSR are really encouraging.

We also witnessed the positive effect of women’s empowerment through the grant we made to the Smile Foundation in India, last year. The grant enables women living in slums to receive education on reproductive health issues. This education is often their first interaction with a health professional, and they go on to share their learnings with friends and neighbors. Additionally, our support helps to provide scholarships to promising young women in the community. It’s life changing when a woman can pursue her education and when you see how proud the families are, especially the mothers, you know it’s a really big deal. These educated women will serve as role models for other women with similar aspirations.

As a company, we also have a complementary focus on diversity and women in the workplace. Specifically, Avery Dennison is working to increase the number of women in management level positions worldwide.

There’s nice alignment between our corporate initiatives and the projects supported by the Foundation. We’re investing in the women in our organization, and the women in the communities where our employees live and work. It’s a win-win.

Bill: Terrific. Turning to paper sourcing, what are the major obstacles and approaches you are taking?

Dean: We’ve seen a lot of success in Europe with our face paper, the part of a self-adhesive laminate that is printed on and applied to products. I’m proud to say that more than 60% of our face stock in Europe is FSC-certified and available at cost parity. It’s pretty phenomenal that we were able to reach that number so quickly. Worldwide, that number is around 30% and we’re continuing to raise that percentage.

We do face some challenges in Asia, where getting FSC- certified pulp and paper is more difficult due to the lack of availability in those markets. Surprisingly, we also face some challenges in the U.S. In the northern states, it’s pretty easy to get FSC-certified feedstock, but it’s incredibly hard to find it in the southeast. In that region, most of the trees are owned by small family landholders who have shown little interest in pursuing FSC certification.

To help change that, a number of large companies— Avery Dennison, Domtar, Columbia Forest Products, and Staples—are investing in a three-year project with the Rainforest Alliance to incent small landholders in the southeast U.S. to adopt FSC certification. We plan to look at how we can lower the cost of FSC certification so it’s not so burdensome, and we’ll help small landholders understand there are viable markets for sustainable products. FSC certification can improve the health and longevity of their businesses, so we want to share that story.

The first year of this project will be laying down the groundwork to understand the obstacles small landholders face with FSC certification. The Rainforest Alliance will put resources against this effort to identify the needs of these landholders, then we’ll set some specific goals around increasing the amount of FSC certification sign ups. We hope more landholders in the southeast part of the U.S. will be able to sustainably manage their land and offer FSC certified pulp at price parity.

Bill: Well, you mentioned lowering the cost for the landowner. How can you do that?

Dean: Currently, the FSC certification process requires a lot from the individual landowner in terms of time and costs. The Rainforest Alliance is going to figure out how groups of landowners can connect and share some of the costs, or eliminate certain steps that may not be necessary. Again, part of our discovery process will be understanding how we can best lend our support to these small landowners.

Bill: Okay. Your company has a set of five year sustainability goals that last through 2015. How do you feel you have done so far? What was the biggest win, what was the biggest challenge?

Dean: I feel very encouraged by the progress we’ve made so far. We met or exceeded every goal, and we did so sooner than expected in some cases. I’m especially pleased with our success in reducing greenhouse gas emissions. Our greenhouse gas goal is an index goal, and the ratio of greenhouse gas to our production volume is down 35 percentage points since the base year of 2007. In terms of absolute emissions, we held our increase to 3 percent between 2005 and 2014 while posting a 22 percent increase in sales. Our team has worked hard to make that happen. Greenhouse gas reduction and efficiency go hand-in-hand, which really excites our engineers.

Bill: So, you said to the engineers…

Dean: We challenged our engineers to figure out how to make our products using less energy. The global team gathered together and came up with a really wide range of solutions—everything from implementing correct shutdown procedures for idle equipment to replacing metal-halide lighting with fluorescents and LEDs. It turned out to be easier to achieve our goal than I expected.

Another one of our key sustainability goals is reducing manufacturing waste, and I’m proud to say that today Avery Dennison is over 90% landfill free. And at the heart of our operations is safety, which is an important measure for us. Our worldwide recordable injury rate is 0.4%, well below industry benchmarks and considered world-class. I’ve never seen anything like the sharp focus of our global Environment, Health and Safety team. I always tell new plant managers that the easiest way to get fired is to run a plant with a lousy safety record. If you can’t operate a safe plant, you can’t work at Avery Dennison. That’s how much we value the safety of our employees, our facilities, and the communities where we do business.

Our other sustainability goals are related to product innovations that help make our customers’ businesses more sustainable.On the retail branding side, we’ve done a good job investing in new product development for the apparel industry. We offer garment care labels made from recycled polyester bottles, and it’s completely cost-neutral.

With our materials business, we developed a product called CleanFlakeTM that allows the label and adhesive to separate from plastic bottles for easier recycling. The adhesive we invented has a specific gravity of less than one, which lets the labeling materials rise to the surface during the removal process. Recyclers love CleanFlakeTM because it makes the waste stream more valuable and enables them to make brand new plastic bottles from the old ones, rather than using “virgin” plastic—and increased bottle-to-bottle recycling is kind of the Holy Grail of recycling.

This year, Avery Dennison will announce a new set of sustainability goals for 2025. And we set a pretty bold vision and pushed our thinking around these goals. The exciting thing about ten-year goals is that so much can change a decade from now, so it forces you to be agile and innovative in your approach. One of the new goals I’m really excited about is our goal for greenhouse gas reduction: 3% a year compound, absolute.

Bill: Period?

Dean: Period.

Bill: No matter how big you get?

Dean: No matter how big we get, that’s right. Avery Dennison will continue to grow; our overall growth goal is 4-5%. Again, our engineers are up for the challenge and they said “okay!”

Bill: They are? They’re like okay –

Dean: Yes, they love to solve problems. All of the answers aren’t clear yet, but it’s something we’re working toward. We’ll keep energy efficiency as the foundation of our approach, but we’re going to have to consider other options as well, like renewables and fuel switching. We do know we’ll have to adjust our capital allocation and change our mentality. When you invest in a project that has a more certain outcome and is going to last 30 years, you can use a lower cost of capital. It’s less risky, and the investment makes sense. We plan to allocate some capital differently for longer payback projects, like exploring the use of wind power in our factories.

In terms of sourcing, we’re going to increase our goal for FSC certified paper to 70%. We’ll need to work as a team to understand what it will take to get there, but we have the next ten years to figure it out. There will also be very specific 2025 sustainability goals around the responsible sourcing of chemicals, which are used in our adhesive and film products. I’d like us to consider bio-based sources that aren’t food, because I think using food for industrial products is a bad idea. Finally, our goal to innovate products that make other supply chains more responsible is on my radar because I want to reduce the waste streams that our product creates, such as liner waste. These are a handful of the issues we’re looking to tackle over the next decade.

We’ll officially announce our new goals this September along with our biennial sustainability report. I’m excited about the stories in the report, which demonstrate how we’re working inside our company, our communities and the industries we serve to help build a more sustainable future. When I take a step back and consider the work ahead of us, I know it won’t be easy. The problems we’re facing are hard ones, and obstacles are inevitable. But all of us at Avery Dennison love a good challenge. We’ve been around for 80 years and have grown into the company we are today by innovating and solving problems. It’s what we do. Developing new ways to bring sustainability to our business and to the world is just one more opportunity to create value for everyone with a stake in our company. I’m excited to see where we go from here.
Posted August 13, 2015 in 25115