But in moving from purpose to action, many businesses risk falling into the trap of focusing solely on what lies directly in front of them. For example, supply chains create on average up to four times the greenhouse gas (GHG) emissions of a company’s direct operations, with further impact on air, water, biodiversity and resources. The severity of the pandemic’s impact has shown that businesses need to map and understand their end-to-end supply chains, and then focus on how sustainability and resilience issues can be addressed.
Global value chains developed with the primary focus on driving down costs in the supply chain. However, the pandemic has highlighted that supply chain resilience is hugely important – and in addition to this, both climate change and increasing public awareness of environmental and social issues has heightened awareness of supply chains – pushing risk management to the top of the agenda for corporate decision makers. At the same time, customers, regulators, investors and the public increasingly expect businesses and their suppliers to adhere to social responsibility principles.
Businesses must contend with a wide range of ESG risks affecting supply chains:
- Policy & legal risk: climate policies to reduce GHG emissions or to halt land degradation can require rigorous measures, to which every supply chain member will have to comply and act upon or can result in additional costs (including taxes) along the entire supply chain. At the same time, multinational companies are exposed to country-specific regulations in the regions where their suppliers are located.
- Climate change risks: these can have a huge effect on the resilience, quality and costs of supply chains, impacting the availability of raw material and energy supply to a company and its suppliers, or leading to acute physical risk through extreme weather events.
- Global health risks: it may seem obvious in a post-COVID world, but global health risks can be hugely disruptive. Lockdowns can force suppliers to cease production, disrupt logistics providers and prompt ad-hoc border closers.
- Market risks: changing customer and investor preferences can result in large shifts in demand for products and / or investment demand. Investors or lenders may start to demand a higher coupon or even turn away from companies if they can’t show that their supply chains are ESG-compliant.
- Reputational risks: these can arise when suppliers do not comply with a company’s sustainability principles, or when companies don’t “practice what they preach”.
Creating and maintaining a sustainable supply chain can require significant investment and time – from drawing up initial sustainability frameworks for the entire supply chain to continuously engaging with suppliers on an ongoing basis.
Successful companies tend to follow a similar four-point process: (1) establish a vision for sustainability and define expectations for suppliers; (2) determine the scope of efforts by identifying the greatest actual and potential risks in the supply chain; (3) work directly with suppliers to improve their sustainability performance, or source new responsible suppliers that fit the bill; and (4) track performance against agreed goals.