Not too long ago we wrote about ESG and Supply Chains, and now we’re offering, “More About ESG and Supply Chains”. It might seem like we just can’t get supply chains out of our minds. That’s perhaps not surprising—it has been well over two years since COVID-19 snarled supply chains, creating persistent economic problems around the world. That has made the term “supply chains” part of everyone’s everyday vocabulary.
But it’s not just a matter of having supply chains on our minds. We believe there is much more to say on this topic than we covered in the other blog. ESG is a growing issue in supply chains, for good reason. Complex supply chains can present significant ESG risks, such as a big carbon footprint, the use of toxic chemicals and other environmental hazards, along with workforce health and safety issues, corruption and bribery, the use of child labor, and other problems. Those are risks to long-term sustainability, and if you don’t have sustainable supply chains, you don’t have a sustainable economy.
How to mismanage ESG in a supply chain
The apparel industry in general, and fast fashion in particular, is a poster child for ESG problems in its supply chain. In an article titled Fast Fashion and Sustainability—It’s Not a Good Look, American Century Investments notes that the industry’s supply chain often involves dangerous factory conditions, worker pay below a living wage, and child labor. In addition to these unacceptable labor practices, the article notes that producing apparel is “environmentally destructive, contributing to pollution, waste, greenhouse gas production and excessive water consumption.”
These practices create costly headline risk, as the experience of UK-based online fashion company Boohoo illustrates. An article from TEBI explains that in 2020, factory workers at one of Boohoo’s suppliers were being paid just £3.50 an hour and were not offered workplace protection against Covid. The backlash was harsh, and Boohoo’s reputation and sales were severely damaged. To help recover lost ground, ProactiveInvestors.com notes that the firm appointed a former high court judge to review its supply chains, which revealed “a lack of oversight, dismal monitoring and poor governance at the company.”
We do not mean to pick on the apparel industry. Many other industries, such as manufacturing, food and agriculture, tech, and consumer products, have ESG concerns buried within their own supply chains. What can investors do to uncover these problems before they hit the headlines and cause a company’s stock price to sink? What can companies do to prevent these problems in the first place? Even better—can companies use ESG in the supply chain as an opportunity to bolster their brand and increase customer loyalty? (Spoiler alert: the answer to that last one is “yes”).
Start with Due Diligence
You can’t fix something if you don’t know there’s a problem. To avoid reputational damage, companies have to get serious about conducting due diligence within their supply chains. The OECD-FAO (a collaborative effort of the OECD and the U.N. Food and Agriculture Organization) is in the process of publishing “Guidance for Responsible Agricultural Supply Chains to provide a framework and benchmarks to “help agri-businesses and investors contribute to sustainable development and identify and mitigate adverse impacts.” The guidance focuses on risk-based due diligence and is relevant for enterprises across the agricultural supply chain, “from the farm to the consumer.”
The OECD-FAO aims to provide a step-by-step approach on how companies can integrate due diligence into their operations and supply chains. The organization is consulting with a wide range of stakeholders, including investors and financial institutions, and will publish handbooks on issues such as deforestation and forest degradation in agricultural supply chains, child labor and forced labor in the cocoa supply chain, and living incomes and living wages in agricultural supply chains and garment and footwear supply chains.
Focus on Transparency
While due diligence is essential when evaluating supply chain risk, it goes hand-in-hand with transparency. Here’s where the opportunity part of ESG comes in. An article in Forbes says that having the tools (and systems) to track and certify that raw materials come from sustainable sources can be a differentiator for manufacturers. At the same time, tracking can reveal ways to improve supply chain resilience. Mapping the supply chain, which means gaining transparency into its products, processes, and suppliers, not only highlights ways to improve sustainability, it helps to improve quality and efficiency.
Investors need to demand greater transparency from companies. Active managers who integrate ESG into the investment process can press company management for more information about supply chain practices. Transparency is essential for ESG ratings and data providers, too. There are still few, if any, disclosure mandates that require companies to reveal supply chain issues such as the ones we have described here. But we can look at a company’s overall track record with respect to transparency. If its Corporate Social Responsibility report is skimpy compared to its industry peers, or if the company does not publish a CSR report at all, that’s a red flag. Remember, companies can pick and choose what they reveal in their CSR reports; sometimes what they don’t say can be as revealing as what they do say.
ESG + Supply Chains Makes Sense
ESG + Supply Chains is not a random mash-up of those two terms – there’s a lot to say on the subject. In fact, we could play a kind of “Mad Lib” game where we choose almost any aspect of business (sales and marketing, operations, R&D, finance, HR, etc.), or any industry to fill in the blank, “ESG and ___________” and would find relevant things to say on the topic. Send us your suggestions and we’ll see where it leads us. And keep in mind that OWL ESG’s ratings, data and analytics can help you investigate any sustainability topic, to meet your business needs.