Managing Your Supply Chain With an Eye Towards Sustainability
Stories about the fragility and complexity of once-invisible supply chains began splashing across headlines at the start of the COVID pandemic and have surged again in the wake of Russia’s invasion of Ukraine. There is no question now that we ignore them at our peril. In the world of ESG, supply chains are also having a moment. Companies with mature sustainability programs or those with net-zero goals are increasingly looking upstream and downstream of their own operations to minimize negative environmental and social impacts and ensure business continuity over the long term.
From the inception of the corporate sustainability movement, it’s been clear that supply chains present significant reputational risks to companies (think Nike and The Gap and allegations of sweatshop labor). Customers, NGOs and other stakeholders have marshaled their power to urge companies to adopt responsible supply chain practices. Strategies such as boycotts, socially responsible investing and social media campaigns are being used to influence corporate practices on human rights, animal welfare and other social issues.
As the field has evolved, we have come to understand the outsized impact supply chains can have on a company’s environmental footprint as well. For example, a recent study found that supply chain greenhouse gas emissions typically account for 73% of multinational corporations’ total emissions. Thus, the push by investors for companies to disclose Scope 3 emissions places the worlds’ suppliers under heightened scrutiny. But it also provides an opportunity for companies to find a path forward on the journey to a lower carbon future.
It’s not just pressure from customers and investors that is driving the focus on supply chain issues. Regulations in the U.S., Europe and elsewhere require companies to guard against human trafficking and forced labor and to ensure they are sourcing materials such as Tin, Tungsten, Tantalum and Gold (collectively known as 3TG) in a responsible way.
All this pressure means that companies of every size, whether publicly traded or privately owned, whether a buyer or a vendor, will somehow need to be engaged in ESG issues in the coming years.
Challenges and Opportunities
Persuading suppliers to get on board with sustainability goals, especially if your company represents a small part of their customer base, can be difficult. In the past, most supplier audits were conducted for quality control, not social or environmental performance. So supply chain teams are faced with the challenges of integrating a new set of questions and teasing out more information from suppliers on issues they may not be familiar with. Faced with a lack of capacity, many companies rely on supplier self-reporting which may not adequately address the risks the company faces in its supply chain. Yet paying an independent third party to help with monitoring and auditing can be expensive and beyond the reach of small to mid-size enterprises.
Some Examples
Our SustainabilityNext clients are certainly experiencing their share of challenges in the supply chain area. Pre-pandemic, one of our clients relied on a combination of vendor self-reporting and periodic in-person audits by their supply chain team, primarily to monitor quality and overall performance. Those in-person audits were disrupted by COVID-19 travel restrictions. Over the last two years, the team and the CSR director have been working together to revamp the process to integrate environmental and social topics in the supply chain monitoring. It’s not always easy to align the teams and timing, especially in the midst of massive supply chain disruptions and challenges, but slowly they are embedding their CSR goals into the supply chain processes.
Another client shared with us that, like many companies, during the pandemic they were forced to build in costly redundancies to their supply chain. And while they had developed a fairly sophisticated system to manage and monitor vendors for ESG performance, if vendors weren’t meeting their expectations on ESG issues, they often didn’t have other supplier options. This meant there was more work and engagement to help a poorly performing supplier improve its ESG performance, and that takes time and resources they hadn’t allocated. At the same time, during our stakeholder engagement activities, we spoke with some of the client’s vendors who felt they sometimes received mixed messages about whether to prioritize lower cost or greener product inputs, depending on which person at the company they were talking to.
Solutions and Resources
Fortunately, there are some practices and resources companies can turn to when faced with supply chain challenges, including:
Companies can put ESG targets directly in Supplier Contracts. A World Economic Forum report notes that contracts with suppliers are starting to incorporate specific emissions targets, such as Net Zero targets validated by the Science Based Targets Initiative or having to sign onto the United Nations’ Race to Zero campaign.
The Responsible Minerals Initiative (part of the Responsible Business Alliance) offers tools, support and auditing for companies wanting to “green” their mineral supplies.
The CDP Supply Chain Group is another source of training, support and advice on sustainable sourcing.
To Conclude…
In our work, we have seen companies pressing their suppliers for sustainable practices, but also suppliers leaning on their customers to do the same. Wherever your work lies along the value chain, there is no question that now is the time to pay attention to supply chain impacts. We recommend collaborating across departments, including legal, procurement, quality and compliance and discussing what training and resources can be shared with suppliers or customers to move the needle. And as always, reach out to SustainabilityNext if we can be of service as you measure and disclose your supply chain footprint.