Why businesses must focus on supply chain sustainability today
Supply chain sustainability has gained significant attention sparking the need for businesses to reshape their operations and sourcing practices. This insight explores the reasons behind the increased focus on supply chain sustainability, the business case for action and what companies can do to get started.
Why is there a renewed focus on supply chain sustainability?
Supply chains globally have been under pressure due to the COVID-19 crisis, geopolitical conflicts, trade disruptions, and climate change impacts, all of which have exposed vulnerabilities in supply chain structures. Additionally, media coverage highlighting human rights concerns in regions including Xinjiang and the Democratic Republic of Congo have shed light on the ethical concerns within global supply chains. These developments have prompted a growing recognition of the need to reshape business operations, sourcing practices, supplier relationships, and overall operational impact.
In light of this, there are some key drivers affecting the state of play of supply chains.
Regulatory drivers
Regulation has emerged as a key driver influencing supply chain sustainability, including:
- The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) aims to integrate due diligence requirements for businesses focusing on adverse human rights and environmental impacts such as child labour and biodiversity loss. Once adopted, it will impose reporting obligations on some 17,000 large EU and non-EU companies.
- The EU Deforestation Regulation requires companies to ensure products sold in the EU have not contributed to deforestation. Companies selling certain high-risk commodities – i.e. cattle, cocoa, coffee, oil palm, rubber, soya and wood, or derivatives of these commodities –will need to conduct due diligence and confirm their products are not linked to deforestation.
- The Uyghur Forced Labour Prevention Act in the United States has driven greater supply chain traceability, with importers required to conduct human rights due diligence to ensure their imports are not associated with forced labour in the Xinjiang province. To date, there have been almost $1.4bn worth of goods held up at the US border due to this regulation.
Even businesses headquartered outside the jurisdictions mentioned above are affected if they do business there. Non-compliance with regulations can lead to financial penalties, but the more significant risks lie in reputational damage and potential competitive disadvantage if peers are actively addressing these issues. Additionally, there are costs associated with delays and disruption to business, as the Uyghur regulation makes clear. Given the relative novelty of many of these regulations a learning curve is to be expected in determining the best practices for compliance.
Investor drivers
Investors are increasingly aware that a business’s supply chain could be a source of potential risk. This is because supply chains tend to be complex and opaque – spanning many countries, multiple tiers and with a combination of outsourcing and offshoring. Consequently, these can result in hidden risks such as human rights abuses and natural resource depletion. These issues can expose the investor to many of the same direct financial and reputational harms faced by the businesses they invest in, but with added risk to the investor’s own reputation.
It is expected that with the increase in supply chain regulations, investors will continue to call for more transparency and traceability to inform their decision-making. For example, last August, a group of investors with a combined AUM of £4.5trn signed a letter in support of human rights and environmental due diligence legislation in the UK.
Consumer drivers
Consumers have become another significant driver behind supply chain sustainability. For example, studies have shown that a growing number of consumers, particularly in the fashion industry, want more information about the journey their clothes went through before reaching their hands. The rise of Generation Z, with their heightened consciousness of consumption patterns compared to other demographics, has further amplified the need for businesses to adapt and address supply chain sustainability concerns.
What is the business case for focusing on supply chain sustainability?
Focusing on the sustainability of a business’s supply chain offers clear incentives that go beyond regulatory compliance:
Effective risk management
Addressing social and environmental impacts in supply chains helps businesses mitigate risks and build resilience. For example, Sancroft recently worked with a food and beverage client to assess the risks associated with their ingredient supply chains. By proactively detecting these risks, the business was able to put measures in place to address these issues and avoid reputational damage, investor scrutiny and potential supply disruptions. Taking pre-emptive measures is often more cost-effective than managing the fallout from an adverse impact.
Capitalise on new supply chain opportunities
By thoroughly viewing the supply chain through the lens of sustainability, businesses can make decisions on where they source, from whom they source and by what means. Businesses can identify and transition to more environmentally and socially responsible suppliers. This shift can enhance security of supply, assure authenticity in sustainability approaches – reducing the risk of greenwashing – and reduce investor concerns.
Access to financing
Improving supply chain sustainability can attract a greater pool of capital from investors. This is because traditional investors are now considering ESG factors in their investment decision-making, together with a new movement of impact investors who now make up $1.2tn of the investment market.
Investors will assess a business’ supply chain performance to inform financing decisions. This is generally informed by own proprietary research and ESG ratings as well as company disclosures on incumbent supply chain regulations. In addition, investors will use this information to screen potential investments for supply chain risks and engage with current investments to improve supply chain performance. Engaging with suppliers can also help them gain access to finance to make improvements, often one of the main barriers for suppliers in developing countries. For instance, businesses can encourage suppliers to adopt ethical business standards such as the Ethical Trading Initiative Base Code, promoting trust and making it easier for them to secure funding.
How to get started on your supply chain journey
Businesses can start their journey towards a sustainable supply chain through the following steps:
Assess the current state of your supply chain
Conduct a comprehensive assessment to understand the current sustainability performance of the supply chain when it comes to environmental, social and governance issues, by exploring:
- Are we meeting regulatory/investor/consumer expectations on supply chain sustainability?
- Where are our pain points when it comes to supply chain sustainability?
- What sustainability risks are we exposed to in our supply chain?
Understand the gaps and prioritise
Analyse the findings from the current state assessment to identify gaps and areas for improvement within the supply chain. Prioritise the key issues based on double materiality – i.e. the actual and potential impact and relevance to the business. The following questions can help:
- What is our ambition level on environmental and social issues in our supply chain?
- Have we considered what has greatest potential to affect our business?
- What are the underlying reasons behind the gaps?
Develop a plan of action
Once the key gaps and prioritised issues have been identified, businesses should develop a comprehensive plan of action. This could involve developing responsible sourcing policies or conducting environmental or human rights due diligence, for example. The following questions will help inform this stage:
- Does the plan consider actions/targets in the short-, medium- and long-term?
- Do we need further support through more resourcing / external collaboration e.g., working groups?
- Will our plan meet the current and future expectations of our key stakeholder
Implement, monitor and evolve
Action plans are only effective if their performance is measured on a regular basis, so monitoring will be necessary. Due to the complexity and evolving nature of supply chain sustainability, businesses will need to remain agile to adapt to ongoing changes. Questions to consider while evolving your supply chain sustainability approach are:
- How often do we need to review performance?
- Do we have adequate systems and resourcing to monitor performance?
- Is our approach adaptable and agile?
To discover how your business can improve the sustainability of its supply chain, please contact: ilkka.saarinen@sancroft.com or judy.kuszewski@sancroft.com