Why ESG and Sustainability Risk is a Visibility Problem

Multi-tier visibility provides a complete picture of the entire supply chain, including what countries and factories you source commodities, parts and materials from.

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Supply chains change lives, create livelihoods and make life as we know it possible. They lift millions out of poverty, ensure the delivery of critical materials and support consumer needs and wants in the form of video games, toys, cars, clothing and home goods. While overall a source for good, there is still a cost to keeping supply chains running, and that price is often paid by the impoverished, the desperate and the environment. Recently the prevalence of cell phone footage, social media and non-government organizations (NGOs) have brought this dark side of supply chains to the forefront, and for companies, the days of plausible deniability are over.

From a supply chain risk standpoint, this is where environmental, social, governance (ESG) and sustainability assessments, monitoring and screening come in. Supply chain experts need to make sure supply chains are clean and clear and that there are no labor, safety or pollution violations that could negatively impact the brand or lead to legal trouble. A single violation or compliance issue at a supplier can lead to serious supply disruptions, including factory shutdowns, business licenses getting revoked, materials being held up at customs points or worse. 

Supply chain compliance for ESG in particular is gaining steam and more regulation and requirements around it are anticipated for organizations. For example, companies are going to be required to conduct due diligence - not only at their own factories - but also at their suppliers’ locations (and their suppliers’ suppliers’ locations). And, it won’t be enough to collect a supplier’s office address. Companies are going to be required to identify all factory locations and assess them for labor and environmental business practices. To be effective however, the assessing, screening and monitoring must go beyond high-volume, Tier 1 suppliers (a crucial element considering 80% of supply chain issues originate with sub-tier suppliers).

So, where to start? The journey begins with multi-tier supply chain mapping (ideally down to third-tier suppliers). This type of multi-tier visibility provides a complete picture of the entire supply chain, including what countries and factories you source commodities, parts and materials from.

Let’s take a pair of jeans for example. Long before they get to a retail shelf, the cotton used to make them is grown and harvested by laborers on a farm. From this first touch point, there are likely 3-4 additional touch points (fabric production, assembly, warehousing and distribution, etc) prior to the jeans hitting consumer hands (or legs). Knowing about how all these suppliers are connected, across tiers and what is happening at each of these touch points is important from a sustainable sourcing and risk management perspective.

If supply chain mapping is the foundation of risk management and to mitigating sustainability and ESG risks, then screening and monitoring represent the walls and roof. Knowledge about how your suppliers stack up when it comes to ESG and sustainability risks and what is happening across your supplier network allows for an understanding of potential issues and the ability to offset any brand, legal or logistical trouble.

When it comes to screening for supply chain risks related to sustainability and ESG, some common principles and best practices should be applied:

●    Monitor your suppliers across key risk areas. Some examples include health and safety issues; unpaid wages; underage labor; illegal overtime; pollution violations; bans; warnings; and investigations.

●     Survey and score suppliers specific to their CSR, sustainability and ESG practices.

●     Highlight or note which suppliers have strong sustainability and ESG policies and practices. This way you can single out those suppliers that may be more vulnerable and potentially cause legal, brand or supply issues.

●     Work with at-risk suppliers to develop joint plans to close gaps and ensure limited exposure to any trouble. If the risk is too great, it may make sense to terminate the relationship and find a new supplier.

●     Maintain active tracking of and report on whatever mitigation plans you have in place to close gaps.

A final key to offsetting risk is to have a real-time pulse on any events that could cause a potential issue or supply disruption. There are a handful of technology-based supply chain risk-monitoring services available that monitor millions of news and social feeds across hundreds of countries and languages, and then issue alerts related to events that may cause trouble.

According to a recent report from Proxima, 85% of investment managers believe that businesses that do not implement supply chain sustainability initiatives will see share prices fall as a result over the next decade. The report also found that investors are concerned about inaction. In fact, 84% stated that issues with supply chain sustainability and ESG standards are a risk to their investments. For these monetary reasons - in addition to reputational and ethical reasons - now is the time for supply chain practitioners to prioritize visibility into our full supply chains. Now is the time to invest in ESG and sustainability risk monitoring and screening. Your reputation and supply chain depends on it.