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In supply chain, ESG and sustainability risk is a visibility problem

In supply chain, ESG and sustainability risk is a visibility problem

Supply chains change lives, create livelihoods, and make life as we know it possible. They lift millions out of poverty, ensure the delivery of critical materials, and support our consumer needs (wants!) in the form of clothing, home goods, video games, toys, cars, and more. While overall a source for good, there is still a cost to keeping our supply chains running, and that price is often paid by the impoverished, the desperate, and the environment. Recently the prevalence of mobile phone footage, social media, and NGOs have brought the dark side of supply chains to the forefront, and, for companies, the days of plausible deniability are over.

From a supply chain risk standpoint, visibility, transparency, and traceability are mandatory; this is where ESG and sustainability assessments, monitoring, and screening come in. As supply chain and procurement experts, we need to make sure our supply chains are clean and clear; that there are no labour, safety, or pollution violations, or conflict of interest that could negatively impact the brand or lead to legal trouble. Think about it: a single violation or compliance issue at a supplier can lead to serious supply disruptions including factory shutdowns, business licenses getting revoked, materials being held up at customs points, fines, or worse.

Take what happened to Top Glove, the world’s largest producer of latex gloves (the company exports to 195 countries from its 47 factories). In March 2021, after finding evidence that the company used forced labour in the production of disposable gloves, US Customs and Border Patrol in the U.S. instituted a ban on Top Glove products and seized shipments of the company’s products. This resulted in Top Glove having to delay its planned June IPO in Hong Kong.

Supply chain compliance for ESG in particular is gaining steam and more regulation and requirements around it are anticipated for organizations. For example, The European Union’s Due Diligence Act that comes into effect at the beginning of 2023, means that companies are going to be required to conduct due diligence – not only at their own factories – but also at their suppliers’ locations (and their suppliers’ suppliers locations). And, it won’t be enough to collect a supplier’s office address. Companies are going to be required to identify all factory locations and assess them for labour and environmental business practices. To be effective however, the assessing, screening, and monitoring must go beyond high-volume, tier-one suppliers (a crucial element considering 80% of supply chain issues originate with sub-tier suppliers).

So, where to start? The journey begins with multi-tier supply chain mapping (ideally down to third-tier suppliers). This type of multi-tier visibility provides a complete picture of the entire supply chain, including what countries and factories you source commodities, parts, and materials from.

Let’s take a pair of jeans as an example: long before they get to a retail shelf, the cotton used to make them is grown and harvested by labourers on a farm. From this first touch point, there are likely three to four additional touch points (fabric production, assembly, warehousing and distribution, etc.) prior to the jeans hitting retail store shelves. Knowing about how all these suppliers are connected, across tiers, and what is happening at each of these touch points, is important from a sustainable sourcing and ESG risk management perspective.

If supply chain mapping is the foundation of risk management and mitigating ESG and sustainability risks, then screening and monitoring represent the walls and roof. Knowledge about 1) how your suppliers stack up when it comes to ESG and sustainability risks and 2) what is happening across your supplier network allows for an understanding of potential issues and the ability to offset any brand, legal, or logistical trouble.

When it comes to monitoring and screening for supply chain risks related to sustainability and ESG, some common principles and best practices should be applied:

  • Ensure to monitor your suppliers 24/7 across key risk areas. Some examples include health and safety issues; unpaid wages; under-age labor; illegal overtime; pollution violations; bans; warnings; and investigations.
  • Survey and score suppliers specific to their ESG, CSR, and sustainability practices.
  • Highlight or note which suppliers have strong sustainability and ESG policies and practices. This way you can single out those suppliers that may be more vulnerable and potentially cause legal, brand, or supply issues.
  • 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 may make sense to terminate the relationship and find a new supplier.
  • Be sure to maintain active tracking of and report on whatever mitigation plans you have in place to close gaps.

A final key to offsetting risk is to have a real-time pulse on any events that could cause a potential issue or supply disruption. There are a handful of technology-based supply chain risk-monitoring services available that monitor millions of news and social feeds across hundreds of countries and languages, and then issue alerts related to events that may cause trouble. Resilinc’s EventWatch supply chain monitoring system for example monitors across 40+ events and issues alert almost every day about Environmental Hazards, FDA/EMA/OSHA Actions, and Labour Violations at suppliers around the world. In the first half of 2021, we saw a 10x increase in Labour Violations alerts compared to the first half of 2020.

Many of these caused mild to severe supply chain disruptions in the form of production halts, investigations, lawsuits, and regulatory action.

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 value 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 prioritise visibility and transparency into our full supply chains.

Sahil Kothadia is Managing Director, EMEA of Resilinc, the leading provider of supply chain mapping services and risk-monitoring data.

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