Over the past few years, businesses have increasingly recognized the vulnerability of supply chains. Due to the pandemic, ongoing conflicts, and natural disasters, they’ve realized that they have limited insight into and control over their global supply chains. On top of that, they lack a thorough understanding of their supply chains’ adverse impact on the environment, employees, and society at large. But they are under high pressure to take responsibility for ESG impacts and ensure they’re doing business in a sustainable, ethical, and fair way.
And when it comes to how ESG impacts are being seen, there’s a shift happening. Until recently, ESG issues in supply chains were mainly tackled to mitigate reputational risks. Today, however, companies consider ESG as an important source of value creation. It attracts talent, motivates employees, and improves customer relationships. Moreover, it opens up opportunities in terms of new technologies and alternative sourcing routes. That’s why many have prioritized managing ESG in supply chains.
Legislation: theory versus a complex reality
Despite an increased awareness of the importance of ESG, let’s not forget that building it into your supply chains is an absolute must: new legislation and enforcement bodies require you to do so. More and more (Western) countries introduce new laws or double down on existing regulations. Their goal is to protect human rights and force companies to take responsibility for the social and environmental impact of their operations, as well as those of their suppliers and these suppliers’ suppliers. Most laws and regulations impose more obligations on companies and include mandatory due diligence processes as well as stricter sanctions.
If a company observes any violation of human rights or social and environmental regulations committed by a supplier — either directly or indirectly — it should perform a risk analysis and respond accordingly.
But in reality, taking responsibility for ESG issues in global supply chains is not that easy. Most supply chains cover multiple countries, each of which has its own legislation and human rights practices. This also means they’re dealing with many suppliers and an intricate web of relationships. With supply chains growing more complex, transparency suffers, and the likelihood of violation increases.
Tackling the twofold ESG challenge: an effective approach
How should companies deal with this predicament? How to tackle the twofold challenge of meeting new legislation and embedding ESG into the heart of their operating models?
First, transparency is key. Companies should actively try and gain insight into the entire supply chain. It’s crucial that they develop an in-depth understanding of all steps in their sourcing processes. There are different ways to go about it. For example, you can use company data and publicly available information from global databases to trace supply flows. Or, leverage country-specific import and export data to trace materials and services back to their source countries.
Once you’ve gained thorough knowledge of all countries and suppliers involved, you can identify and assess potential ESG risks throughout the supply chain. It’s also possible to rank the risks, define the potential impact on your business, and predict the probability of occurrence. When identifying and assessing risks, you should work closely with your suppliers. For assessment purposes, try and use a standard template or toolbox, including mitigation actions.
More importantly, you should create a culture of openness. Encourage all business units to report instances of possible supplier misconduct, and have them follow processes similar to those you’ve implemented for dealing with (internal) safety risks. To protect these business units from any retaliation, develop alternative sourcing routes in advance.
Finally, it’s paramount that you clearly communicate about your ESG approach and (the importance of) risk factors throughout the RFP process. You can even include these elements in your contracts’ liability clauses or use them as selection criteria to evaluate suppliers during the RFP process. If possible, provide suppliers with support on evaluating, selecting, and monitoring their suppliers’ ESG scores and risks (following the same standards, scores, and mitigation actions).
The benefits and necessity of a refined operating model
If you consistently follow the above approach, you’ll develop a refined operating model, including clearly defined roles and responsibilities for all units in the organization. It will help you account for ESG issues and catalyze internal collaboration. After all, you’ll set guidelines, share best practices, track performances, and provide toolboxes for supplier risk assessment, supplier engagement, and risk mitigation.
Furthermore, you can provide mandatory training on ESG issues to all employees and in-depth training to teams that deal with high-risk suppliers.
You’ll also be able to realize a new ESG ecosystem. How? By implementing (digital) systems for monitoring, (self-)assessment, and auditing — supported by in-person interviews, surveys, training, and supply chain wide communication platforms.
So, is it worth the effort? In one word, definitely. It’s high time that companies join forces with their suppliers to create increased transparency around their global supply chains and display more accountability when it comes to tackling potential ESG issues. Gone are the days when companies merely focused on ESG issues to comply with laws or protect their reputations. These days, most have come to realize that it’s simply the right thing to do.