This piece was published in the Washington Business Journal.
Over the past 21 months, we have seen COVID-19 disrupt all facets of business, with few disruptions as visible as the current supply chain crisis. From endless lines of ships at ports across the world to consumers facing delays and shortages this holiday season, it is more than evident that supply chain management must now be integral to discussions in every C-Suite and board room.
Focusing on the environmental, social and governance (ESG) factors of supply chain management is no longer “just” a communications strategy but a strategic necessity and a coming regulatory requirement for business to thrive in our rapidly changing and increasingly transparent global economy.
ESG benchmarking is increasingly prevalent to measure corporate leadership on sustainability and social responsibility. More recently, from a climate perspective, companies and asset owners are delving further into their global supply chains to reduce emissions. For many sectors, Scope 3 supply chains account for 80% of its greenhouse gas emissions, putting their overall ESG strategy at risk when the supply chain disruptions occur, fundamentally shifting their chances for emissions reductions.
Step one: Mapping the supply chain
To understand supply chain exposure, it is critical for companies to measure what matters–and what matters now are ESG criteria. Going forward, companies will map the full scope of their supply chain (traceability) and report on outcomes and milestones (transparency). In doing so, companies are building resilience as they can better anticipate potential opportunities and disruptions.
- Traceability: To mitigate disruption risk, find efficiencies and actively shift towards stronger ESG metrics, companies must understand their supply chains, extensively mapping out not just their suppliers but also their suppliers’ suppliers. This mapping can allow companies to identify weak points in their value chain and become more efficient. With more data, it is easier to reduce risk by diversifying the supplier base for key materials or reduce the number of suppliers. These measures can safeguard companies from relying too heavily on one part of the supply chain and make them more resilient to unforeseen events like a global pandemic.
- Transparency: This includes identifying and tracking to a set of milestones – an internal approach to materiality for ESG, metrics for performance against external standards and certifications, and disclosure to investors, customers, consumers, and employees.
Mapping the environmental impact of a company’s supply chain includes not only emissions, but also water, air and nature-based solutions from agriculture and forestry. As we are in a pre-compliance environment, Scope 3 emissions are often underreported given that there is little incentive – and it can be challenging – to account for emissions from the supply chain. At this stage, only 19% of companies in the manufacturing industry and 22% in the service industry disclose their Scope 3 emissions. As the EU continues to consider Carbon Border Tax Adjustments starting in 2023, the U.S. SEC increases its requests on disclosure and investors demand disclosure to better understand the financial risk posed by climate exposure, companies will work through their Scope 3 emissions – their supply chain – to drive to net zero. This also enables process improvements and other innovations to continue to drive to a zero-carbon economy, creating greater efficiencies and competitive differentiators. Under development are standards and tools to facilitate supply chain engagement to jointly capture data and set goals.
Understanding the impact of a business on people and communities is another key aspect of ESG benchmarking. Here too it is critical to understand how your supply chain extends your impact – both positively and negatively. Every company decision can have a ripple effect on its own employees and those of its supply chain partners. We have seen ports extend their hours during this pandemic, and people across the supply chain work overtime to keep this system flowing – in a talent-constrained environment.
For companies committed to meeting ESG benchmarks, employee well-being must be top-of-mind. This extends to workers in your supply chain and ensuring that your business partners’ actions are reflective of how you measure good, consistent labor practices and working conditions.
Developing effective governance structures to comply with ESG criteria makes companies significantly more attractive to investors, as there are often higher corporate equity returns and reduced risk. Some companies are committing to ESG throughout their supply chain. It is reasonable to expect regulations to come soon for the U.S., EU and UK – putting pressure on companies that sell goods into these markets.
Building good will
The pressure on companies to be more transparent about their environmental footprint and commitment to employees and communities has made extending a company’s ESG strategy to its supply chain a must-do. Companies with demonstrated commitment to ESG attract and retain better talent and have high customer loyalty.
Today, 86% of global consumers expect CEOs to lead on societal issues and to reflect those issues in their corporate policies and practices. Supply chain leaders are now squarely in the C-Suite and can influence corporate-wide policies and practices. The pandemic exposed fundamental flaws in the global supply chain while also presented an opportunity to build a more sustainable and resilient supply chain that will hold up to the next unforeseen disruption.