Supply Chains & The ESG Imperative: The Buck Stops with the C-Suite

April 19, 2021
Jennifer Bisceglie

Nike and Chipotle tied executive compensation to sustainability goal achievement. Mary Barra of GM allocated $27B to the development of electric and self-driving vehicles through 2025. Citi recently added circular economy and sustainable agriculture focus areas for its $250 billion Environmental Finance Goal, which it expanded from the original $100 billion goal that it met four years early. Environmental, Social, and Corporate Governance (ESG) is a top concern for today’s businesses and it’s not going away.

This said, there are plenty of businesses still grappling with the challenge. Whether it’s unethical child labor practices in China creating business concerns for H&M or environmental recklessness in the Amazon region creating problems for McDonalds, Walmart, and Costco, these days the C-Suite is working hard to gain real visibility into risks lurking deep in the supply chain that could cause serious negative repercussions back at HQ.

Let’s call it the new ESG imperative. The movement towards embracing ESG responsibility as a core corporate value has been some time coming. 2000 saw the launch of the Global Reporting Initiative, which redefined corporate governance to include sustainability measures. Today, these standards have been adopted by more than 80% of the world’s biggest corporations.

Sustainable Investing & Regulations Drive Adoption

ESG has risen to even greater prominence today as a form of sustainable investing, whereby investment into new ventures is evaluated through a more holistic lens that looks at the environmental sustainability and societal impact of the funded project and not merely at its projected raw financial performance.

To be sure, there is a growing sense that ESG-funneled investments will perform better than most, as the global community begins to place increased priority on ethical behavior, fair labor practices, combatting human rights abuses, diversity, inclusion, and climate change. In 2018, a survey on climate and sustainability services found that just 32% of investors conduct a structured review of ESG performance. By 2020, that number had jumped to 72%. The pandemic has added fuel to this argument, where sustainable equity funds withstood early pandemic market dips, better than non-sustainable counterparts.

Let’s be clear. There are laws and regulations that will force us to take responsibility for certain aspects of our supply chain. Here in the United States, for instance, the Securities & Exchange Commission (SEC) is promulgating an effective ESG disclosure system – one that would require publicly traded companies to elucidate their broader ESG exposures in their extended supply chain, as part of their annual 10K filings, beyond some existing mandatory disclosure requirements in the area of board membership diversity.

The SEC’s John Coates, Acting Director of Corporate Finance, said on March 11, 2021: “The SEC is well equipped to lead and facilitate a discussion on when and how ESG risks and data must be disclosed, and how to create and maintain an effective ESG-disclosure system that would promote the disclosure of decision-useful, reliable and, where appropriate, globally comparable ESG information.”

“There remains substantial debate over the precise contents and details of what ESG disclosures might or should encompass. Part of the difficulty is in the fact that ESG is at the same time very broad, touching every company in some manner, but also quite specific in that the ESG issues companies face can vary significantly based on their industry, geographic location and other factors,” Coates added.

This isn’t mere posturing. Last Friday the SEC put out a risk alert, citing instances of misleading claims, inadequate internal controls, and weak policies found in an examination of investment advisors, companies, and funds.

 

Flipping the Script

Clearly, this is only the beginning of what is to come from a government mandate perspective. Even without strong compliance drivers, there are ample, solid business reasons for executives to move proactively to 1) understand/visualize their ESG profile in their extended supply chain and 2) optimize how they position their ecosystems to be operationally resilient and to yield top performance by being “ESG-forward.” It’s short-sighted to see this in defensive or even cynical terms, or to think that real hard-nosed business execs don’t really take ESG seriously. But implementing that desire can be difficult. As I recently told the Financial Times, said businesses want help identifying their exposure but struggle with the many tiers of suppliers on which they depend.

What if we can flip the script? Go beyond what is merely the minimum (the basic “compliant” level) and actually find and reward positive behavior. The power of transparency means the right thing to do is a massive business opportunity. This goes beyond the investment world; this goes straight to the core of the corporate world and the myriad extended supply chains of finance, manufacturing, energy, aerospace and defense, pharma, automotive and beyond.

Done right, we can encourage the creation of a better, healthier, safer global economy. We help re-build trust in the global supply chain. We can reveal and reward the good, as well as see the bad and put a higher cost of doing business in pursuing those out-of-fashion ways of operating.

Likely Changes for the Future

To be sure, there have been a number of self-correcting moves along these lines of late. The large solar-power industry here in the U.S., repped by the Solar Energy Industries Association, resolved to eschew solar-panel product components from a region of China reportedly involved in unethical child labor. The SEIA has been urging its members to move supply out of the Xinjiang autonomous region following reports of forced labor among the local Uighur ethnic-minority population.

Relatedly, numerous international companies involved in sourcing components from the same region – making a range of products from footwear to consumer electronics – are reevaluating their sourcing from Xinjiang in western China as reports surface of forced labor in factories located in this remote region.
In sum, when speaking of resilience in supply chains, more and more companies are realizing that we all have a shared responsibility to upholding our values, protecting the environment and finding a visible seat at the table for ethics. More and more boardrooms, rightly so, are focused on exposure to ESG risk, if you will, of a business. It’s a matter of improving your top and bottom line and of securing your brand’s global reputation.

The following hypothetical scenarios, where improved visibility into your extended supply chain and a will to change into an ESG-forward posture is the new normal, could prompt businesses to:

  • Not source lumber from native forests that are not being replenished… in the case of a worldwide home-goods producer
  • Refrain from using products tested on certain species… a CPG giant focused on personal care products
  • Eliminate the use of child labor at cobalt mines in Congo… a global electric-car/hybrid automaker
  • Ensure diversity in your supplier base to increase innovation and economic impact in various socioeconomic demographics

At Interos, we enable companies to monitor that risk in real time based on automated models that look at relationships and events around the globe. Our customers are able to see their commitments, as well as their risk, down to five or more tiers in their supply chain when it comes to environmental damage and protection, gender inequality, governance, labor practices and unethical sourcing. The rising prominence of ESG reflects the moral imperative that faces us as business leaders to hold ourselves accountable for the future of our planet and future generations.

Jennifer Bisceglie, founder & CEO, Interos

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