After COP28, social and environmental governance (ESG) remains a central issue, and big brands remain in the spotlight as they solve how to credibly deliver net-zero targets. Receiving less attention, meanwhile, are fast-growing brands.
They should use this time away from the spotlight to prioritise ESG, which will support net zero efforts and at the same time drive business success. As brands grow, so do their supply chains and risk exposure. Managing supplier risks early on, therefore, will keep them robust.
Here are three ways in which growing brands can be ESG-ready.
Prevent Pain by Association
While most brands know better than to breach environmental or social expectations directly, if these issues do occur within their supply chains, their profits and reputations will be impacted. To avoid this, leaders can investigate where potential risks with suppliers may arise, and then define and develop ESG policies to address them.
This includes having internal guidelines on standards that suppliers should comply with. Once in place, they will guide how the procurement team sources suppliers and manages compliance throughout the working relationship.
In addition to developing internal ESG processes and policies, brands should be engaging and working with suppliers who follow similar standards.
Know What You’re Dealing With
Avoiding reputational and financial losses, requires brands to be fully aware of the different types of compliance risks that can arise.
For instance, suppliers sometimes neglect to follow regulations around emissions or waste disposal or use practices that can damage the environment. This can attract widespread media coverage and cause long-term reputational damage. Bad publicity about a supplier related to ESG concerns can also disrupt supply chains and require expensive investment.
As well as not obeying environmental regulations, there can also be risks associated with suppliers not respecting labour laws within their country or even engaging in practices that include exploitation.
As with issues related to environmental standards, brands that fail to research and ensure that potential suppliers are not falling foul of employment laws and engaging in exploitative practices, risk damaging their reputations by association and losing consumer trust.
Take Steps to Manage ESG Risk
There are various steps brands can take to ensure they are avoiding the risks that might arise from suppliers disregarding standards and laws. Here are three practical ways in which brands can remain proactive and take a strategic approach.
- Segment suppliers. Before rolling out a supplier risk program, it’s sensible for brands to segment their suppliers into groups, each of which is likely to pose specific risks. Then, efforts can be applied in line with the risk level. Working this way is especially useful for growing supplier networks because it serves as a base from which to automate and run risk programs at scale. You cannot treat every supplier the same way as the costs of the program would be prohibitive.
- Supplier training. We can never assume that suppliers know every piece of legislation and understand every regulation. So, it’s sensible to inform them about laws, regulations, and ethical standards – and how non-compliance can detrimentally impact everyone involved – through training programs. Ideally, each supplier segment should understand the brand’s compliance needs, specific to them. The idea is that no gaps in legislation knowledge should lead to misunderstandings and ESG issues. Training sessions should be held in the locations where supplier groups are based, and be kept up-to-date, and monitored so that they are always completed. Further, it’s beneficial to match the training approach to the supplier group’s risk profile. For example, low-risk segments can receive low-touch communications, whereas riskier segments would need a high-touch approach, such as a webinar.
- Compliance auditing and contract clauses. Growing brands should also have processes in place to ensure they know about any issues that may arise from the supplier – before they start working together. These involve auditing suppliers to identify all possible compliance risks. The resulting information should be centralized and made available for other business units as appropriate. It's also wise for contracts to have clauses ensuring that suppliers follow relevant laws and regulations that the brand needs to stay compliant. If these are breached and it has reputational consequences, the brand should be able to take legal action. This will keep a growing supplier base compliant and maintain a healthy reputation.
Managing ESG risk with suppliers should be an essential component of any growing brand’s risk strategy. The ever-increasing complexity of global supply chains means that potential disruptions and financial losses are becoming increasingly prevalent.
Growing brands have an opportunity to use their time out of the spotlight to become as robust in handling ESG risk as possible. By being mindful to avoid reputational and financial loss through association with non-compliant suppliers, and by knowing the risks and putting processes in place to mitigate them, brands can build towards ESG. Then, as these businesses grow from strength to strength, they will be in a position to contribute positively towards global efforts to reach net zero.
