Corporate supply chains are growing in complexity with the increasing need for goods and services that uphold customer values as well as the ever-advancing technological progressions. With some businesses spending over 70% of their total spend in the supply chain, it is clear this is where the real impact can be made. Sourcing materials, managing suppliers, and navigating the way through emerging economies are common practices in the global business market. With this in mind, supply chain issues are bound to arise especially in the case of upholding important ESG (environmental, social, and governance) criteria, now of critical importance to consumers and investors.
As Latham and Watkins Counsel Sara Orr references at the 2019 Sustainability Investment Leadership Council Conference, when not managed correctly, supply chains can impact ESGs varying from its environmental practices to human rights conditions. However, when upheld correctly, the supply chain can become an integral part of successful ESG goal completion as well as adding overall value to all stakeholders.
What Role Do ESGs Play in Supply Chain Issues?
Before unpacking the role corporate supply chains have in ESGs, it’s vital that the ESG standards are thoroughly understood. Our article on the ESG criteria can be found here and it’s advised that these models are kept in mind throughout any supply chain management strategy.
As an overview, a supply chain can impact the following ESG factors:
Climate impact, greenhouse gas emissions, energy efficiency, air and water pollution, water scarcity, biodiversity, and site restoration.
Human rights (such as safe labor conditions), local community impact and employment, child labor, health and safety, and anti-corruption.
Alignment of interests, executive compensation, board independence and composition, and shareholder rights.
While these impacts may vary for countries and industries, it’s common that an organization may face a number of the above ESG obstacles. It’s for this reason that organizations are implored to source and operate ethically in order to achieve a sustainable supply chain.
Allianz provides a succinct case study outlining the importance of ESGs in the supply chain with reference to the clothing industry. The case study refers to the 2013 collapse of the Rana Plaza building in Bangladesh that resulted in the death of over 1,100 workers. These poor safety standards placed high public pressure on international clothing retailers to question their supplier conditions and their outsourcing methodologies.
Furthermore, popular corporations like H&M and Gap are constantly under scrutiny for their poor factory standards. As safe labor conditions are an important tenet of the ESG criteria, it’s inevitable that such public scrutiny has occurred. Foundations such as Global Citizen and publications like the Guardian have since added to the public unrest causing outrage from customers and investors around the world. Both H&M and Gap have consequently been put under investigation to tackle the current working conditions.
Of course, such issues can be avoided when implementing a maintainable and ESG compliant supply chain. When supply chains start supporting ESGs, CDC’s ESG toolkit provides the following advantages and opportunities for businesses to enjoy.
Alleviating Supply Chain Issues with ESGs:
- Reducing costs through enhanced efficiency and productivity
- Encouraging process and product innovation
- Decreasing the barrier for entry into new markets
- Improving working conditions that can reduce staff turnover, increase quality, and ensure the reliability of delivery
- Increasing company value and opportunities
- Creating long-term business and shareholder value
The Risks of Not Upholding the ESG Criteria in Supply Chain Management:
Traditionally, supply chain considerations were mostly revolved around quality, cost-effectiveness, speed of delivery, and the reliability of the process. However, with sustainability and an increasing call for corporate global action, more pressure is being put onto business to act responsibly. Should the ESG criteria not be upheld, they could be facing the following consequences:
- Environmental pollution contribution
- Poor public image
- Minimizing access to raw materials and natural resources
- Workforce related health and safety incidents
- Scrutinized labor disputes
- Corruption and bribery
When these risks aren’t correctly managed, organizations can increase their chances of facing major supply chain and operational disruptions. Not to mention, consumers and investors will waiver in terms of support and loyalty should unethical operations be publicized. Once this trust has been broken, reduced sales and funding may become obstacles that no business wants to face.
The Bottom Line
When asking yourself whether or not supply chain issues are fundamental to ESGs, the answer is yes. Having a sustainable supply chain doesn’t just cover micro operational practices but it extends to an organization’s macro influence too. Each level of the supply chain plays a vital role in maintaining ethical and sustainable ESG goals that effectively result in stakeholder buy-in as well as a stronger triple bottom line. Furthermore, implementing an ESG compliant supply chain isn’t just beneficial for a company’s public image but ultimately results in a strategic business sense.