From labor and safety issues to unethical sourcing and pollution violations, inadequate monitoring of corporate social responsibility (CSR), environmental and social governance (ESG), and sustainability risks within the supply chain can lead to brand and legal troubles for companies. What’s more, a violation or compliance issue at a supplier can result in serious supply disruptions, including factory shutdowns or materials being held up at customs points.
Virtually all supply chains have a dark side. They’re often exploitative and unsustainable, particularly to the poor or desperate. Take the fashion industry: Well known brands will claim to be sustainable, when in fact the working conditions in factories are unethical. Fortunately, the prevalence of cell phone footage, social media whistleblowers and NGOs has brought this hidden side to the forefront.
The days of plausible deniability are over. Supply chain and procurement experts need to make sure their operations are clean and clear, that there are no violations that could negatively impact the brand or result in business licenses getting revoked. Supply chain compliance for ESG in particular is gaining steam, and more regulation and requirements around it are anticipated for organizations. As an example, companies will be required to conduct due diligence at their own factories as well as those of their suppliers.
This is why the ability to assess, monitor and accurately report on supply chain sustainability and ethicality has become a sought-after capability, and why screening and tracking suppliers for sustainable and ethical business practices should be part of a company’s CSR and ESG program. To be effective, however, assessing, screening and monitoring must go beyond high-volume, tier-one suppliers. Considering that 80% of supply chain issues originate with sub-tier suppliers, supply chain sustainability, CSR and ESG risk is a visibility and knowledge problem.
So how do we solve this knowledge and visibility gap?
The journey begins with multi-tier supply chain mapping, ideally down to third-tier suppliers. This depth of visibility provides a picture of the entire supply chain, including the countries and factories from which you source commodities, parts and materials. Take shea butter: Long before it gets to a retail shelf, the raw material used to make it (shea nuts) is harvested in Ghana by individual or co-operative collectors. From this first touch point, there are likely three to four additional touch points (processing plant, packaging facility, distributor, etc.) prior to the product hitting the store shelf and ultimately consumer hands. Knowing about how all these suppliers are connected across tiers, and what’s happening at each of these touch points, is vital from a sustainable-sourcing and risk-management perspective.
The visibility that supply chain mapping provides is the foundation for mitigating sustainability, CSR and ESG risks. Knowledge what’s happening and where across your supplier network allows a deeper understanding of potential issues and the ability to offset any brand, legal or logistical trouble. Such issues can result in production halts, investigations, lawsuits and regulatory action.
Consider what happened to Top Glove Corp., a global producer of latex gloves. After finding evidence that the company used forced labor in the production of disposable gloves, U.S. Customs and Border Protection instituted a ban on its products and seized shipments in July. This resulted in Top Glove having to delay its planned June IPO in Hong Kong.
Another example is Nestle SA. Last year, the company drew out 58 million gallons of drought-hit California spring water — far surpassing the 2.3 million gallons a year it could legally claim, The Guardian reported. Nestle was sent a cease-and-desist order. Similar accusations follow the company in Oregon, Pennsylvania, Maine and Michigan.
When it comes to screening for supply chain risks related to sustainability, CSR and ESG, some common principles and best practices should be applied:
Monitor. Be sure you are monitoring your suppliers across key risk areas. Examples include health and safety issues, unpaid wages, underage labor, illegal overtime, pollution violations, bans, warnings and investigations.
Quantify. Once monitoring is underway, highlight or note which suppliers have more robust CSR, sustainability and ESG policies and practices. This way, you can single out those suppliers that might be more vulnerable and potentially cause legal, brand or supply issues.
Mitigate. Work with the at-risk suppliers to develop joint plans to close gaps and ensure limited exposure to any trouble. If the risk is too great, it might make sense to terminate the relationship and find a new supplier.
Track. Maintain active tracking and report whatever mitigation plans you have in place to close gaps.
Launching an ongoing supplier risk assessment (survey) program specific to CSR, sustainability and ESG practices is another recommended best practice. This is where working with a supply chain risk management (SCRM) provider that has accumulated years of supplier assessments and risk intelligence data can really help. By going this route, you will:
According to Gartner, supply chain professionals “increasingly see a financial benefit in sustainability, and a majority plan to invest in waste reduction, ethical sourcing, water-efficiency improvements and carbon emission reduction over the next 18 months.” What’s more, EY research shows that sustainable supply chains’ investments can add 12% to 23% to supply chain revenue. But to achieve monetary, reputational and competitive advantages, supply chain and procurement practitioners must go beyond touting organic cotton and shoes made from recycled plastic. We must prioritize visibility and transparency into our full supply chains.
Bindiya Vakil is co-founder and CEO of Resilinc, a provider of supply chain mapping services and risk-monitoring data.
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