Prioritizing ESG Issues Across Complex Supply Chains

The World Economic Forum’s 2020 Risk Report saw a rather massive shift. The business community now considers the climate crisis and natural resource depletion as top priority — both in likeliness and impact. So if 2020 was the year chips all fell into place, we believe 2021 will kickstart action against the 2030 Global Agenda.

If the past year demonstrated the impacts of interwoven climate, social and digital crises, 2021 should deliver actionable tools for the decade to come. It is also likely to be a year of greater sovereign engagement across ESG risks, Human Rights and corporate accountability commitments. It should spell out high-level ambitions and find all-around greater levels of scrutiny.

Companies must increasingly anticipate the corresponding managerial implications. In this article, Ksapa shares a low-down on cross-supply chain ESG prioritization. First, we delve into the extent to which the Covid-19 pandemic crystallizes ESG Risks. Then we will outline key solutions to better strategize engagement and sourcing activities.

Covid-19 Crystallizes Cross-Supply Chain ESG Priorization

Long-Term Resilience

That businesses are expected to better understand and manage their risk exposure is nothing new. This is even truer in their supply chains than in direct operations, given the mounting pressure they face to address sensitive ESG issues with their suppliers.

In the context of the Covid-19 crisis, cross-supply chain ESG prioritization somewhat makes or breaks a business. Climate-centric stocks outperformed others by 7.6% from December onwards and by 3% since February. ESG shares beat all others by 7% in both periods. The pandemic shock could indeed favor the world’s most powerful firms, based on their ability to navigate volatile operational contexts. According to The Economist, the share prices of the 100 most powerful indeed fared better amid Covid-19, falling by a median of 17% in March, compared to 36% for the bottom 100.

Economic Impact

That said, cross-supply chain ESG prioritization is not merely a tool for long-term resilience, it actually pays. Should companies aptly anticipate the change, there is major opportunity in ESG management. For the rest, the greater risk is no longer being the first mover, but loosing relevance altogether.

In a 2020 McKinsey survey, 83% estimated ESG programs would contribute more shareholder value in 5 years than today. They went on to estimate bold ESG performance creates value both over the short and long term. Not only that, the long-term value of socio-environmental programs could likewise match or even exceed that of governance programs. Finally, strong ESG credentials could materialize in a 10% premium in terms of company acquisitions.

Regulatory Compliance

Beyond clear reputational implications, cross-supply chain ESG prioritization is also becoming a matter of regulatory compliance. Often cited as reference, the French Duty of Vigilance law demands multinationals implement cross-supply chain ESG due diligence plans. Now China too enforces mandatory ESG disclosures. The European Union likewise requires companies to disclose corporate policies on socio-environmental issues. This includes due diligence processes capable to identify, prevent, and mitigate existing and potential risks across supply chains.

A narrow vote on a sustainable corporate governance initiative by the European Parliament signaled unexpected resistance, however. Business organizations are indeed likely to have weighed in on the ongoing consultation. Action 10 was intended to push sustainable governance to counter short-termism.

While Covid-19 brought forth the long-awaited business case, this opposition shows cross-supply chain ESG prioritization still has ways to go. Corporate voluntarism and legally-binding enforcement mechanisms must indeed both be stepped up.

Identifying Key Challenges in Cross-Supply Chain ESG Prioritization

Practitioners stress cross-supply chain ESG prioritization so much because it directly impacts businesses overall. It can clinch supply flows – especially raw materials and other key components. Lengthening delivery can similarly translate into customer dissatisfaction.

Thinking more broadly, cross-supply chain ESG prioritization ties into a suppliers’ ability to deliver quality materials in a timely fashion. The unhappy alternative? Shouldering the cost of redirecting flows to circumvent unsatisfactory suppliers. What ultimately is in the balance is a company license to operate. This hinges on its ability to uphold a strong reputation, itself tied to its socio-environmental, Human Rights and integrity performance.

Bearing in mind the underpinning business impacts, cross-supply chain ESG due diligence equals businesses plan, document and chart their progress. This allows them to determine their current level of visibility over their supply chain, the nature of their supply relations, the reach of their auditing campaigns and quality of their stakeholder engagement across ESG issues.

That, in any case, is the theory. In practice, procurement managers often cite the following 4 challenges to stepping up their cross-supply chain ESG performance:  

Complexity in Numbers

Most companies typically work with tens of thousands of suppliers. Beyond the challenge of managing dense supply chains, this means potentially addressing diverse ESG risks linked to multiple supply categories. An independent investigation into Boohoo indeed pointed to the difficulty of controlling outsourcing. Among other infringements, the Group was found to rely on 500 suppliers… much more than the 50 disclosed first-tier suppliers.

Cost

Procurement officers are essentially mandated to streamline cost and efficiency. From strict optimization standpoint, ESG performance introduces a somewhat unwelcome new layer of complexity. A key example lies in cost-intensive audits to reference new suppliers or assess the alignment of their social practices with corporate policies. Conversely, rapid advances in technology make supply chain monitoring both a comprehensive and competitive solution. For the time being, however, few companies effectively disclose their supply chain GHG emissions. A recent CDP report in fact claims less 20% environmental disclosures among 504 companies from the FMCG sector fully account for their supply chain climate impact.

Influence and Leverage

Though a growing number of companies have come to understand their Human Rights risks extend well beyond the scope of their direct operations (or even Tier 1 suppliers), few enjoy tangible influence beyond that. To address growing stakeholder expectations, companies must find new solutions to address their diluted responsibilities and allocate resources. This could notably start with boosting due diligence procedures and improving their overall impact across complex supply chains. Meanwhile, a report pointed to this difficulty, identifying forced labor in the supply chains of 83 leading brands. This only reinforces the call for an industry-wide collaboration to address sensitive issues. Among others, Human Rights violations among ethnic minorities comes to mind.

Time Management

Procurement teams are often understaffed and underfunded. More sophisticated supply chain ESG performance implies allocating more time for supplier management and more tools to address growing complexity. The accumulation of supply chain-related scandals would go to show there is no perfect solution. Dire impacts can be (and are often) overlooked for lack of proper control points.

The best way forward is therefore to focus cross-supply chain ESG prioritization on the most material issues. Here is how.

Assessing ESG Materiality Across Spending Categories

A materiality matrix allows companies to structure topical sustainability strategies. It likewise supports cross-supply chain ESG prioritization. In short, this methodology aims to identify hotspots, prioritize ESG issues and manage the resulting risks and opportunities across the entire supply chain.

As such, the Ksapa team combines numerous supply chain sustainability risk assessments and due diligence credentials. This brought us to develop such a matrix on behalf of a client in the consumer good industry. The result is summarized in the table below. The visual helps teams focus their efforts on critical ESG risks for each priority procurement category.

A supply chain materiality matrix allows companies to better focus their supplier engagement efforts and action plans on critical ESG risks for priority procurement categories.
A supply chain materiality matrix allows companies to better focus their supplier engagement and action plans on critical ESG risks for priority procurement categories.

The first category sports a well identified risk profile and a sound understanding of the related social risks – including child labor. This warrants closer attention in screening and awareness-raising program for flagged suppliers to better mitigate risks. This can also trigger additional decision-making to end business relations. This is particularly helpful should a supplier not make a valid attempt to demonstrate clear improvements on their social performance. A top tech company for instance can mitigate its risk exposure linked to conflict minerals by comprehensively mapping its purchases. It can likewise publish the results of its auditing campaign and the number of terminated contracts linked to concerning practices.

The same table shows certain categories are subject to contextual risks. These include an above average exposure to pandemic and climate-related risks. This calls for greater attention to strategic suppliers’ crisis management plans. This can also trigger a business decision to diversify sourcing and define thresholds to cap activities with related suppliers.

For instance, logistical platforms found certain materials favor the spreading of Covid-19, including cardboard. This in turn demanded greater scrutiny in their safety protocols with regards to safeguarding the health of their employees. Much in the same way, a rubber business will know used tires harbor disease-spreading mosquitoes. It is therefore expected to adapt its end-of-life processes accordingly or redirect flows to less exposed plants.

Conclusion: Strategizing Engagement and Sourcing Activities

Few are the supply chain leaders with the know-how to conduct systematic ESG profiles across complex sourcing activities.

Our team at Ksapa can support companies by tapping into robust methods and data to define and calibrate their risk profiles, as well as trigger the necessary business decisions. Our methodological input indeed allows us to streamline complex sourcing activities, to support category managers through cross-supply chain ESG prioritization. Only then may companies strengthen their supply chains in highly uncertain times. They can then address stakeholder expectations of long-term resilience and non-financial regulatory compliance.

As a sustainability and corporate responsibility consultant, Margaux joined Ksapa with international experience in public, private and non-profit organizations. She had previously worked for the Deloitte and Quantis sustainability consultancies, lobbied for environmental research on behalf of the INRA and contributed to Total’s extra-financial reporting.

A Franco-American citizen, Margaux holds sustainability certifications from the IEMA and Centrale-Supélec on top of a Masters degree in History, Communications, Business and Internal Affairs.

She is fluent in French, English and Spanish.

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