Today, it’s not enough for business leaders to echo their company values across social media. Regulators, investors and consumers alike are often just a click away from environmental, social and governance (ESG) reports and breaking news of scandals, thrusting potential issues into the spotlight.
While ESG efforts have long aimed to increase transparency, many leaders are realizing that we’re moving past bare-minimum standards into an era of full visibility, where demands for accountability extend all the way across organizations and their supply chains.
For years, activist investors and concerned consumers have demanded that executives take public stances on contentious social issues and make explicit commitments to address ESG concerns. Socially engaged employees have joined the chorus. Leaders must understand that accountability has a major impact on the bottom line and brand reputation and must therefore become a key element in risk management.
While many companies have made strides in enhancing visibility in governance and operations, supply chains remain a significant pain point. Global disruptions spurred by the COVID-19 pandemic have shined a spotlight on the fragility of supply chains, underscoring the pitfalls that companies can fall into when their monitoring efforts fall short.
One supply chain dilemma arose over Shake Shack’s hamburger bun supplier, Martin’s Potato Rolls. Customers engaged in heated discourse over the fact that Shake Shack pushed a promotion in which their milkshake proceeds benefited the Trevor Project, a nonprofit funding suicide prevention among LGBTQ+ youth, while the owners of Martin’s made over $100,000 in donations to a far-right candidate for Pennsylvania governor. Irate customers viewed this misalignment in values as a sign of bad faith on Shake Shack’s part, and while the effect of their social media–driven boycott remains to be seen, the reputational damage is tangible.
Hyundai Motor Company faced its own ESG risk after it was accused of using child labor at an Alabama parts plant — a serious allegation with international regulatory ramifications. The plant operator, SMART Alabama LLC, declared that it was in compliance with federal, state and local laws, and pushed the blame onto temporary work agencies.
Together, these examples demonstrate the two-fold risk associated with managing a supply chain. Shake Shack, which has declined to drop Martin’s as a supplier, is a good example of how choices in a visible supply chain can result in “soft” consequences like a dip in social sentiment. The SMART allegations, which imply dramatic social and governance failures, may result in disastrous regulatory consequences. Examples like these illustrate how companies can be held responsible for the actions of third-party partners, even several degrees removed.
Intermediary and Supplier Risk
Historically, intermediaries have posed a higher risk to corporations because these businesses act as distributors, resellers, agents and more. Intermediaries that represent your business must be screened to ensure they’re abiding by anti-bribery and anti-corruption standards.
To appropriately assess your potential supplier’s risk level, analyze them from multiple ESG angles, including human rights adherence, sanctions, emissions and toxic waste disposal.
Customers didn’t always have insight into these parts of the supply chain. Boycotts then were more often sparked by bombshell revelations — for instance, the Global Labor Justice Department report exposing slavery in the fast fashion industry, which prompted H&M to become the first major fashion chain to publicly list its suppliers.
While the established risk of intermediaries and distributors remains high, leaders must acknowledge the fact that investors and consumers are now reaching further down the supply chain to evaluate companies, and a comprehensive strategy that monitors the entire chain is necessary to remain compliant and competitive.
Embracing Responsible Relationships
As old and new risks are increasingly falling under the banner of ESG, the bottom line is that companies and their leaders must do more to create a comprehensive supply-monitoring ecosystem. Action is crucial as regulations tighten, and the public expects companies to take responsibility for their supply chain partners, from upstream suppliers to downstream intermediaries.
Now is the time to invest in tools that promote visibility down the supply chain and hold suppliers and distributors accountable. The ability to maintain relationships with responsible suppliers will continue to be key in making meaningful ESG progress and creating real impacts, one third party at a time.
Leas Bachatene is founder and chief executive officer of ethiXbase.
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