Can supply chains affect your organization’s Environmental, Social, and Governance (ESG) goals? About 80% of global trade moves through supply chains, making supply chain sustainability indispensable to your organization’s ESG reporting commitments.
With sustainability metrics driving impact investments across the globe, there is an increased urgency for organizations to implement sustainable supply chain strategies, establish transparent and resilient supply networks, and strive toward a greener planet.
Read ahead to find out what sustainable supply chains look like and learn how to optimize your sustainability efforts to reduce risks and appeal to impact investors worldwide.
What is Supply Chain Sustainability?
Organizations pursuing supply chain sustainability adopt a broad business strategy, integrating their financial, social, and environmental performance goals. By tracking the source of their raw materials, reducing their carbon footprint, and ensuring fair labor practices across the supply chain, they can commit to sustainable supply chains.
While supply chains were once limited to logistics and involved tracking the movement of goods, the rise of digital supply chains and associated analytics have made it easier to track sustainability metrics. By implementing supply chain sustainability programs, companies aim to create products that are good for the environment and enhance brand image and reputation.
Organizations that pursue sustainability pay keen attention to creating transparent, green, and circular supply chains, each defined as:
Transparent Supply Chains
Supply chains are transparent when a business is open to disclosing and reporting practices from one end of the supply chain to the other. Digital technologies have made it much easier to track supply chain activities and report on them reliably.
Green Supply Chains
Green supply chains contribute to supply chain sustainability by prioritizing environmentally conscious goals and strategies supply chain management. In such supply chains, the entire product life cycle, from design to logistics, will be governed by green principles, such as minimizing waste and reducing emissions.
Circular Supply Chains
In circular supply chains, used products are repurposed to combine the benefits of recycling and cost-saving for the organization. For instance, many companies have been using recycled plastic in innovative ways to create new products.
By leveraging technologies, organizations can bring transparent, circular, and greener supply chains to life, thus creating an excellent foundation for supply chain sustainability.
Why is Supply Chain Sustainability Important for Impact Investing?
Global Demand for Robust ESG Reporting
Affecting Environmental, Social, and Governance (ESG) in powerful ways, supply chain management is on the radar of impact investors everywhere. Scope’s analysis of 1,600 companies in the MSCI World Index suggests that, on average, supply chains are accountable for about 41% of a company’s impact on ESG.
With the global rise of mandatory ESG reporting and associated pressure from investors, organizations should efficiently manage their supply chains to meet stakeholders’ demands. For example, in the European Union (EU), public interest companies with more than 500 employees are bound by the Non-Financial Reporting Directive (NFRD) mandatory requirement for ESG disclosure.
Established in 2018, the requirement now covers about 6,000 large companies across the EU. Furthermore, the 2020 edition of the Carrots & Sticks analysis of mandatory and voluntary reporting instruments in more than 64 countries identified about 245 sustainability reporting instruments in Europe, 174 in Asia, and 47 in North America.
Since the 2016 edition of the same study, the number of sustainability reporting provisions that are issued by governmental bodies has seen a phenomenal growth of 74% between 2016 and 2020. Such growth, accompanied by the increasing involvement of both stock exchanges and central banks in sustainability reporting, indicates the rising importance of ESG consciousness for optimal business performance and impact investing.
ESG Implications and Imperatives for Organizations
Impact investing involves investing in organizations that look beyond the financial returns of their shareholders to generate measurable environmental and social implications. Impact investors pay close attention to the ESG factors that remain closely connected with supply chain risks. Human rights violations, natural resource depletion, pollution, and corruption in any organization’s complex and multi-tiered supply chain network would indicate poor ESG performance.
By identifying risk factors and establishing supply chain sustainability, organizations can enhance the financial performance of investor-owned business assets, thereby boosting the reputation and investment performance of both the organization and individual investors.
However, achieving market rates of return and simultaneously meeting ESG obligations requires strategic sustainable supply chain management programs. If implemented well, organizations can gain several opportunities to amplify financial performance. For instance, companies in the food and agriculture industry can open doors to opportunities worth USD $2.3 trillion annually by 2030, if they integrate sustainability into their business practices.
The 2020 pandemic also set the stage for supply shocks across business networks, exposing supply chain vulnerabilities and encouraging businesses to pursue resilient and sustainable supply chains. Businesses now had to ask themselves who their tier 1, tier 2, and tier 3 suppliers are and where they are geographically located so that they could better map the areas that were the most affected by the pandemic.
Only well-mapped supply chains that value transparency could effectively answer these questions to manage supply chain risks better. The pandemic drives to increase transparency is an excellent opportunity for organizations to attend to integrate both resiliency and sustainability into supply chain management.
4 Practices for Companies to Optimize Supply Chain Sustainability
With the pandemic exposing the vulnerability of supply chains, here are four practices that organizations can adopt to optimize sustainability and build resilience into supply chain management.
#1. Identifying Critical Issues and Opportunities in Supply Chain Management
The demand for creating sustainable supply chains is currently driven by pressure from internal stakeholders, customers, and regulatory bodies across the world. To cater to these diverse needs, organizations need to take a comprehensive survey of their existing supply chains and optimize supply chain sustainability by tracking both the product life cycle and the supply chains of each of their products and/or services.
To better understand issues in supply chain management, Verónica H. Villena and Dennis A. Gioia conducted a study of three Multi-National Corporations (MNCs) and their supply chain networks that included 31 suppliers with bases in the USA, China, Taiwan, and Mexico.
While each of these MNCs championed sustainability in their respective industries, their lower-tier suppliers were unable to adhere to sustainability policies and implement associated practices. Many suppliers were not equipped with adequate environmental management systems while others hired temporary employees, leading to a high rate of turnover and thus making it difficult to implement lasting environmental, health, and safety practices.
Given these issues, organizations need to take a closer look at their entire supplier network, aiding lower-tier suppliers in better adopting and managing sustainability practices. The UN Global Compact recommends an approach where leadership sets sustainability best practices at the top, thereby defining expectations across the supply chain.
Based on these best practice guidelines, organizations can begin to identify risks across their supply chains. Here are the areas to focus on.
Human Rights and Labor
It is important to survey labor conditions across offices, factories, and other sites and ensure they adhere to national and international regulatory standards. The goal is to bring whole supply chains to adopt anti-discriminatory workplace practices, avoid excessive work hours, and stick to laws that abolish child labor, modern slavery, and human trafficking as an integral part of human rights due diligence.
Corruption Risks
Organizational leadership should monitor fraudulent and corrupt practices across their supply chains. Corruption at any level can decrease product quality, create the potential for legal hurdles, and taint an organization’s reputation. Organizations can lay the foundation for sustainability across their supply chains by examining corrupt practices.
Environment
With many countries and jurisdictions needing solid environmental laws, supply chains often leave harmful traces on the environment, leaving supply chain managers with no clear direction regarding best practices for sustainable supply chain management.
By becoming proactive and tracking critical resource reduction efforts pertaining to energy, water, and waste or reducing GHG emissions, organizations can identify critical supply chain sustainability risks. Bringing suppliers on board is a crucial step to collectively adopting clean technologies and solving pressing environmental issues.
#2. Involving Whole Supplier Networks to Enhance Supply Chain Sustainability
Successful supply chains exhibit aligned incentives across partners, with the costs and rewards of business distributed equitably across the supplier network. Offering network-wide incentives is an effective way of bringing immediate and lower-tier suppliers on board to adopt practices leading to supply chain sustainability.
Sustainability in supply chains largely depends on the best practices demanded by the organizations at the top. For instance, more prominent organizations should ensure they set only practical deadlines for their first-tier and lower-tier suppliers, exhibiting sensitivity to suppliers’ current production capacities and setting the stage for just and sustainable working hours and conditions throughout the supply chain.
Besides setting a positive example, organizations can offer monetary and other incentives to help suppliers adopt sustainability practices. Additionally, organizations can periodically survey their suppliers to examine their environmental, health, and safety procedures, help them meet their sustainability targets, and train them to network and map the sustainability efforts of lower-tier suppliers.
#3. Collaborating for Better Supply Chain Sustainability
To ensure optimal business returns and ESG performance across supply chains, organizations need to engage in collaborative initiatives, establishing multistakeholder governance. By empowering stakeholders, including workers, NGOs, and governments, to equitably represent and negotiate their environmental and social concerns, organizations can develop network-wide accountability and monitor it to boost supply chain sustainability.
Consider the Responsible Business Alliance (RBA), a non-profit coalition of electronics, toy, auto, and retail organizations, that is committed to supporting workers’ rights and well-being and promoting sustainability. The RBA also keeps members accountable to a supply chain Code of Conduct that defines global ethical, environmental, and social industry standards.
Similarly, the Carbon Disclosure Project’s (CDP’s) Supply Chain Program is a great opportunity for organizations to engage in collaborative action. Recognizing that global supply chains have great power to tackle climate change, deforestation, and other environmental problems, CDP’s program equips organizations with resources and strategies to engage suppliers in the sustainability disclosure process.
When picking the right initiatives, an organization should always look for tangible results from collaborative action. By translating their vision and mission into key performance indicators (KPIs), both quantitative and qualitative, coalitions display their commitment to tackling barriers to supply chain sustainability.
#4. Optimizing Supply Chain Sustainability with Efficient Management Tools
Given the complexity and spread of global supply chains, all sustainability efforts call for efficient management tools that track environmental metrics, keeping whole supply chains accountable to ESG obligations.
Digital management tools are the perfect solution to bring transparency to entire supply chains, enabling organizations to prove their ESG credentials to impact investors easily. From Artificial Intelligence (AI) to Environmental Control Systems, organizations should actively work towards incorporating digital tools into their sustainable supply chain management programs.
Taking a holistic approach to digitization, supply chains can move away from manual spreadsheet tracking and exclusive platforms to solutions that connect multiple datasets and a range of suppliers across the supply chain network. By urging suppliers to share their sustainability data and empowering them with tools to capture such data from lower-tier suppliers efficiently, organizations can better persuade suppliers to join them on their sustainability journeys.
Digital tools also allow organizations to identify risks and train and engage first and third tier suppliers and their workers to commit to sustainability goals. However, before setting responsible examples and defining sustainability goals for the whole supply chain, organizations should first look within and adopt enterprise-wide technologies that can aid in-house green processes, helping capture and process data to support their own ESG goals.
Leverage Digital Solutions to Enhance Your Supply Chain Sustainability
Instead of deterring supply chain sustainability, the pandemic only increased the opportunities available to build transparent and resilient supply chains that can drive impact investments. Since supply chains affect ESG reporting to a large extent, the time is ripe for organizations to examine their supply networks and engage suppliers to comply with global human rights and environmental standards.
Organizations should leverage digital tools to boost sustainability, adopting a holistic approach to collect and process data and collaborate with suppliers across all levels of the supplier network. To learn more about how digital management systems can enhance supply chain sustainability, visit Benchmark ESG’s Supplier Management Software now!
