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Supply Chains: A Hotspot for ESG Risks

By June 1, 2022September 8th, 2022No Comments

Supply Chain Complexity

Supply chain optimisation is key to a business’s success and increasingly, its reputation. As the number of consumers and businesses worldwide grow exponentially, supply chains are becoming more obscure and complex. Falling outside of direct operations, they often extend to multiple sectors, countries, and continents, and consist of numerous interdependencies.

While outsourcing production to suppliers in countries with a cost advantage can deliver significant economic benefits, complex and bigger supply chains are prone to increased risks. More specifically, increased environmental, social and governance (ESG) risks.

ESG Risks in Supply Chains

The supply chain is a hotspot for ESG risks and impacts. According to a report by McKinsey & Company, as much as 90% of greenhouse gas emissions and other environmental impacts are the result of consumer companies’ supply chains. According to the International Labour Organization, 16 million people are exploited in corporate supply chains.

Other ESG risks in supply chains include:

  • Biodiversity loss
  • Shortages of raw material and natural resources
  • Workforce health and safety incidents
  • Corruption and bribery
  • Geopolitical considerations

ESG related supply chain risks can carry significant reputational and operational costs. For example, several fashion brands, including Boohoo, H&M and Nike, faced intense public backlash in 2020 due to the alleged use of forced labor by their suppliers.

In addition to these costs, insufficient management of ESG risks can disrupt the entire supply-chain.

Supply Chain Disruptions

Disruptions in the supply chain can impact businesses, such as revenue loss, higher operational costs, loss of jobs, product shortages and damaged reputation.

Historically, supply chain disruptions have been single events in one location for a short amount of time, such as in the case of a fire or a strike. However, recent events such as the COVID-19 pandemic have seen multiple global interdependencies along a supply chain fail, creating major business headaches.

For example, the covid-19 pandemic and its resultant lockdowns exposed the critical weaknesses in the automotive industry’s global supply chains, sending shockwaves through every facet of the production process. As a result, vehicle plants and workforces were closed, and global production fell precipitously by 10 million vehicles through 2021.

These widespread and significant disruptions are not going to ease up due to imminent changes in weather patterns, increased global disease outbreaks, changes in demand, and regulatory updates.

Increasing Regulations

Pressure is mounting on companies to ramp up and disclose their sustainability efforts. The U.S. Securities and Exchange Commission recently proposed regulations requiring public companies to disclose extensive climate-related information. The European Union recently introduced mandatory sustainability reporting for large companies, including due diligence reporting on their supply chains.

Compliance to the proliferation of regulations and reporting requirements may prove to be a challenge for many companies. Not only are supply chains vulnerable to ESG risks, the obscurity and the numerous interdependencies in supply chains can also be difficult to control and manage.

Therefore, progressive participation of businesses in their supply chains is needed to identify and avoid or mitigate risks, as well as report on the sustainability efforts of the supply chain.

ESG Engagement

Integrating ESG management into the supply chain strategy ensures traceability and transparency throughout the supply chain network. Next to managing the company’s reputation, the risk of ESG issues causing supply chain disruptions can be reduced. Furthermore, by taking a proactive stance on management of ESG risks, compliance and regulatory risk can also be mitigated. Engaging with and analysing one’s own supply chain may also uncover potential opportunities and market differentiation.

Below are a few suggestions on how to manage ESG related risks in your supply chain:

Policies and business processes: Work within preventative contexts, such as explicitly stating in contracts the company’s ESG goals and what is expected of the suppliers. This builds a level of commitment from your supply chain.

Supplier engagement: Companies need transparency on quality data on end-to-end operations to ensure risk avoidance and compliance with regulations and reporting requirements. Strong, frequent communication with the supply chain can build dialogues and stakeholder buy-in, and improve transparency, data collection, and management of suppliers’ ESG performance.

To start building dialogues with your suppliers, engage with your direct supply chain in the form of an ESG survey. On one hand, the survey can provide ESG education, and on the other hand, gather crucial data. In this way, you not only start mapping your supply chain for the next steps, but also open communication with the stakeholders along your supply chain.

Mapping: By extensively mapping your supply chain, and revealing weak points that may go otherwise undetected, you can put ESG strategies in place to mitigate or quickly react to risks and disruptions. These safeguards can also make your supply chain more resilient to unforeseen events, such as the COVID-19 pandemic.

Setting metrics: As you outline your ESG strategy, identify and create a set of metrics to measure your supply chain’s ESG performance. Benchmark your metrics against external standards and best practices, such as the The GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard, which helps companies understand, manage and report on the greenhouse gas emissions along their supply chain.

Get in Touch

Are you interested in a customised step by step approach to managing the ESG risks and identifying the opportunities in your supply chain? Get in touch.