What You Don’t Know Can Hurt You: Getting to the Bottom of Supply Chain Risk

Posted on January 18, 2022

Francesca Placa
Francesca Placa
Commercialization Lead, Sustainalytics Corporate Solutions

Organizations are under increased pressure from investors, customers, and regulators to mitigate environmental, social and governance (ESG) risk exposures within their supply chain. Numerous industries, especially those with longer supply chains, tend to be exposed to more risks, including labor disruptions, workforce health and safety incidents, human rights issues, and shortages of natural resources. 

What’s Driving Business Toward Supply Chain Sustainability?

Investors are pressing companies to move beyond their own operations to address potential ESG risks from their suppliers. Similarly, employees and customers are becoming more engaged with companies that prioritize corporate social responsibility. Supply chain transparency has been proven to significantly drive purchase decisions.i

As well, many voluntary reporting standards are integrating supply chain disclosure requirements. The European Union is expected to adopt new due diligence rules to limit environmental and labor risks in corporate supply chains.ii With regulation expected to accelerate in the coming decade, companies should begin to collect relevant data now. 

Building a Sustainable Supply Chain: How to Start

Developing a sustainable supply chain starts at the top. Corporate procurement has traditionally been incentivized to find suppliers with the lowest cost. In a sustainable supply chain, business leaders need to broaden their procurement lens to consider ESG impacts, in addition to traditional metrics like cost and reliability. By considering a more comprehensive range of factors in choosing and maintaining suppliers, a corporation effectively reduces its overall risk, improves brand equity, and attracts new customers and top talent. 

For example, the Principles for Responsible Investing (PRI) reports that 98% of the financial sector’s environmental impact is in its supply chain, compared to direct operations.iii For industries in transition, like oil and gas, the estimates range between 44-64% for supply chain operations vs. direct. As a result, making changes in your corporate supply chain can move the needle on meeting ESG objectives much faster than making ESG-related changes to your internal operations alone. 

Understand Your Supply Chain Risks: Look Beyond Direct Suppliers

The next step is to go deeper, looking into the companies that your direct suppliers work with. The greatest potential risks are with lower-tier suppliers – that is, your suppliers’ suppliers – because companies have less visibility into their operations. As well, there’s often limited data available on these suppliers, particularly about their environmental and labor practices.iv

Conducting ESG research and getting ratings on your entire supply chain will benefit your company in a number of ways. With this information, you can identify the outliers, prioritize your spending on top performers, and help those suppliers with the greatest ESG risk to improve. 

A version of this article originally appeared in ESG Today.

 

 


 

 

Sources

i Choudhury, S. (2021), “Consumers Want Supply-Chain Transparency. Are Food Brands Listening?” SupplyChainBrain, accessed (13.01.2022) at: https://www.supplychainbrain.com/blogs/1-think-tank/post/32906-consumers-want-supply-chain-transparency-are-food-brands-listening

ii Zamfir, I. (2020), “Towards a mandatory EU system of due diligence for supply chains,” European Parliamentary Research Service, accessed (13.01.2022) at: https://www.europarl.europa.eu/RegData/etudes/BRIE/2020/659299/EPRS_BRI(2020)659299_EN.pdf

iii Principles of Responsible Investing (PRI) (2017), “Why ESG factors in the supply chain matter,” PRI, accessed (13.01.2022) at https://www.unpri.org/environmental-social-and-governance-issues/managing-esg-risk-in-the-supply-chains-of-private-companies-and-assets/615.article

iv Villena, V. H., Gioia, D. A. (2018), “On the riskiness of lower-tier suppliers: Managing sustainability in supply networks,” ResearchGate, accessed (13.01.2022) at: https://www.researchgate.net/publication/328172620_On_the_riskiness_of_lower-tier_suppliers_Managing_sustainability_in_supply_networks://www.researchgate.net/publication/328172620_On_the_riskiness_of_lower-tier_suppliers_Managing_sustainability_in_supply_networks

 

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