Analyst Insight: Environmental, social and governance (ESG) regulations continue to proliferate and take on dimensions of complexity that are creating challenges for global organizations to even comprehend, let alone comply with. The common thread, however, is that, regardless of your geography, industry, and the size of your business, having a unified, transparent, compliant and, ultimately, resilient supply chain is more important than ever.

Taking a three-dimensional approach to risk is critical to developing a holistic compliance program that delivers cost benefits and strategic value today, while setting the organization up to meet the ESG disclosure requirements of the future. Elements include:

• Regulatory: Protect the organization from global trade compliance risks to avoid fines, penalties and withheld shipments.   

• Reputational:  Protect the organization’s reputation and image. Are suppliers associated with forced labor, environmental degradation or political corruption? Are suppliers’ actions aligned with the values of the organization and the commitments made to staff and stakeholders? 

• Resilience: Ensure a resilient relationship with suppliers. Will these relationships stand the test of time? While suppliers may meet standard due diligence, are they vulnerable to, for example, climate change disruptions or geopolitical instability that could impact the ability to meet obligations long term?   

Building and maintaining this type of framework mitigates risk by driving more transparent, visible and compliant supply chain practices. In turn, this will not only help organizations with fewer shipping delays and less exposure to supply chain disruptions, but will also create the internal mechanisms to shorten the time needed to respond to different types of ESG reporting disclosures, as new policies are ratified and reporting structures and guidelines are made available.

For each dimension of supply chain risk management, what are the tools and capabilities that organizations need to have in place to drive a more compliant and sustainable supply chain? They include:

• Regulatory due diligence and screening: Denied, restricted or sanctioned parties; export controls; forced labor and other emerging controls, and embargoes; 

• Reputational risk assessments and monitoring: Political exposure or corruption; partner ownership and financial viability; adverse media coverage; ESG or corporate social responsibility elements, and

• Resilience: Geographic and climate exposure; transportation  infrastructure, raw material access; utility infrastructure; and  labor pool, including unions and required skills.

The full spectrum of these capabilities encourages organizations to build a cohesive risk mitigation strategy that’s  not confined to the compliance department. With a more collaborative approach, organizations will have a platform to establish greater visibility into, and management over, all parties and products within their supply chain, to enhance strategic and operational resilience. 

Additionally, companies will reduce overall business risk with a more holistic view of financial and non-financial risks related to the movement of goods and services across international borders. They will also be better positioned to increase supply chain resiliency with the ability to identify and model alternative supplier, jurisdiction and trade lane options for more informed decision-making. These capabilities will provide value in enhancing stakeholder management and investor relations practices by helping companies sharing more granular supply chain partner and performance insights. And, as government-mandated disclosure activities are required, organizations can draw on data and insights to facilitate compliance. 

The bottom line for global organizations: As new ESG regulations take shape and come online, they will be prescriptive in nature. Companies must establish supply chain risk-management processes and report on due-diligence activities and outcomes in annual reports and other types of  regulatory disclosures. There’s no clear path to automation and enablement. It will take iteration and experimentation for companies to navigate the complexities. And more intense public and media scrutiny of sustainability actions will elevate the performance of companies that take ESG compliance seriously.