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Outlook 2014: As strong as the weakest link

Environmental, social and governance (ESG) or corporate social responsibility (CSR) issues have always gone hand in hand with concerns over supply chains. They came tragically to the fore after a factory collapse in Bangladesh caused the deaths of more than 1,000 textile workers in April 2013.

“While global sourcing strategies can secure optimal pricing and quality products, they can also be rife with sustainability blind spots,” says Richard Mattison, CEO at environmental data provider Trucost. “The challenge lies in the lack of information. The only indicators that normally pass between buyers and suppliers are related to price and quality, but the price does not contain adequate information about any underlying [ESG] costs. [That] is why tipping points can suddenly increase supply chain risk and disruption.”

According to Trucost, on average 60% of all environmental impacts are buried deep in supply chains. A WWF-Vigeo study on climate change in 2009 estimated that more than two thirds of the emissions of supermarkets came from their supply chain. This can easily increase to 90% for a food or beverage company or food retailer, and when Trucost analysed the environmental footprint of sports apparel manufacturer Puma it found that 94% of it was in its supply chain.

The story is similar with regard to child labour.

“Child and forced labour is more common in artisanal, small-scale mining, which employs approximately 13m people worldwide of which one million are children, than in listed European and North American mining companies,” says Fouad Benseddik, director of methodology and institutional relationships at ESG ratings provider Vigeo. “Off-shoring of labour to suppliers in countries with less strict labour laws or control systems such as China, Indonesia, Bangladesh and Pakistan increases the risk.”

According to Vicki Bakhshi, head of governance and sustainable investment at F&C, some companies are managing exposure to countries such as Bangladesh by employing their own audit teams locally to properly understand the risks. But while she admits auditing is important, she believes that companies are most successful when they go beyond audits and work pro-actively and directly with their suppliers to mitigate risks.

“While this is time-intensive, if done properly, it can be very productive in helping to build relationships and a much stronger supply chain in the long term,” she says.

“Some companies are entering deeper partnerships with their suppliers, perhaps fixing longer-term contracts, setting up exclusive agreements or offering more training directly with the suppliers in order to gain more control over the supply chain and collaborate to manage environmental risks,” notes Mattison. “This may also be better from a cost perspective because it reduces the volatility of prices, enabling the companies to forecast more easily.”

EIRIS looks for evidence that a company has a comprehensive supplier code of conduct in place, which at a minimum covers the ILO core labour standards along with the internationally recognised core labour rights. The company should also be able to demonstrate global communication of its supplier code, while ensuring effective monitoring and auditing systems are in place to ensure compliance.

But the many tiers that make up a modern, globalised supply chain certainly make CSR a difficult to address.

CDP works with 65 large global corporations to collect climate change and carbon data from their suppliers. “At the moment it is primarily tier-one suppliers,” says Dexter Galvin, head of CDP’s programme for supply chain management. “An organisation like Walmart, for instance, has 60,000 suppliers at any given time so they are not going to work with all of them but only with the key suppliers.”

Relatively few companies and investors look beyond the first tier, agrees Mark Robertson, head of marketing and communications at supply chain platform Sedex, even though risks increase further down supply chains. Sedex connects buyers with suppliers in a multi-tier environment, which Robertson says allows visibility in the supply chain and enables companies to identify where what risks lie.

“Top-down approaches are a good place to start but they are not enough in themselves,” he argues. “Real progress in addressing supply chain issues will only be made when more companies start to cascade down their supply chain. One of the ways of looking beyond the first tier is through collaboration. Post-Bangladesh, for example, clothing retailers signed up to the North American Alliance of Retailers and the Accord in Europe to raise standards.”

As a result, one could assume that the trend towards near-shoring would have some positive impact from the ESG/CSR perspective. Near-shoring is often perceived to reduce the carbon footprint of a supply chain because the lesser distance a product needs to travel, the less fuel is used, for example. However, things are not that clear-cut. Transport, for example, might not be the main source of emissions. And any environmental benefits of suppliers closer to the home market could be offset if they have less efficient production processes.

“Sourcing tomatoes from water-stressed Spain rather than South Africa lowers the carbon footprint but this is overshadowed by the higher water impact, which is why companies and investors need to balance the equation,” Explains Mattison. “Often it is more sustainable to bear more carbon emissions but save a lot on the water impact.”

Galvin at CDP emphasises the different environmental impacts of shipping and driving. “Ships can carry a lot more goods so may be more carbon-efficient than trucks that will transport goods into neighbouring countries,” he observes. Benseddik adds that in the supermarket sector, emissions related to agriculture, livestock, production of fertilisers and the transformation of products account for significantly more emissions than direct emissions from supermarket buildings or transport.

From a social perspective, while Oliver Jackson, senior research analyst at ESG research provider EIRIS, says that companies should certainly address the labour issues in their established supply chains as opposed to moving production elsewhere, he notes that near-shoring appears to be “primarily concerned with cost saving rather than ESG management”.

Besdies, as Bakhshi at F&C points out, the allegations of labour exploitations that have been made in Mexico and about California’s agriculture industry.

“Very diffused supply chains cause greater problems, as they make it difficult for companies to have an overview of where the risks lie, and some companies have responded by simplifying supply chains,” she says. “Near-shoring, particularly in the food industry, is one response, which may or may not result in a reduction of risk. Another way is through consolidation of the number of suppliers. Geographical proximity does not necessarily mean better standards.”

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