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Environmental and ecological risks and impacts in supply chains are many and varied. In this section we will examine the many different aspects an investor needs to consider when looking at a business' supply chains and their ethical implications.

Environmental, Social, and Ethical Risks & Impacts in Supply Chains

Jon Mowll Jon Mowll Responsible Investment Analyst
Edentree Insight reports

Supply Chains: At the heart of business

Jon Mowll

Responsible Investment Analyst
23 Oct 2020

Chapter 3

Environmental, Social, and Ethical Risks & Impacts in Supply Chains

Environmental and ecological risks and impacts in supply chains are many and varied.

Depending on the particular supply chain in question, they may include disruption, degradation, and destruction of ecosystems (e.g. deforestation, seabed dredging), erosion of topsoil, greenhouse gas emissions, over-consumption of water and other materials, localised air-, land-, and water-pollution, waste and ‘end-of-life’ impacts. Similarly, risks and impacts which might be thought of as falling under the ‘S’ (‘social’) of ‘ESG’ are manifold. These may include working conditions, pay and recruitment fees, Modern Slavery, forced and child labour, and human, indigenous and land rights. Certain risks are more ‘ethical’ in nature, such as the treatment of animals where they feature in supply chains, and the collection, harvesting, and use of personal data, itself a valuable commodity.

Environmental Footprints

In terms of environmental impacts, deforestation is one of the more salient and familiar risks / impacts in numerous supply chains – those of soy, beef, palm oil, timber/logging, and industrial agriculture more generally.

Transport networks and infrastructure are also to blame, both for fragmenting and destroying forested regions, and for allowing mining and logging companies access to previously inaccessible areas. Deforestation and other land-use change has knock-on impacts on biodiversity, weather patterns and access to freshwater, flooding, carbon emissions; it is also often a land rights issue. Even now, of the 350 corporates and 150 investor bodies most exposed to supply chains with high deforestation risk, around half have not publicly committed to eliminate deforestation from their supply chains.

The globalisation of many supply chains has ‘offshored’ some problems with localised pollution associated with industrial processes. Nonetheless, in some places in wealthy nations, the problem persists, such as in the vicinity of the US Gulf Coast’s petrochemicals and oil refining industry, in agro-chemical run-off in the UK, or in certain specialist recycling industries in northern Europe. Wealthier countries are also not free from localised pollution linked to logistics/distribution stages in supply chains, such as pollution from road vehicles and shipping, or local spills from oil & gas infrastructure. Oil remains the lifeblood of many supply chains and economies. Yet oil supply chains are particularly risky in terms of localised impacts on water; threats to marine and terrestrial life are profound, as are the knock-on impacts on affected communities.

Over 90% of global trade is still carried by sea, and pollution of marine environments is also associated with sea freight. Container ships are responsible for pollution such as ballast water, biocides (chemicals used in anti-fouling paints), waste (such as sewage and garbage from human activity), and sometimes oil spills. It’s thought that pollution kills over one million seabirds and 100,000 sea mammals every year because they cannot survive in toxic waters. This is an often under-appreciated impact of globalised supply chains!

Because many listed companies’ extended supply chains are vast, the impacts throughout them often dwarf those resulting from a company’s direct operations. This is certainly true in terms of greenhouse gas (GHG) emissions. The CDP reports that companies’ supply chain GHG emissions are, on average, 5-and-a-half times as high as their direct emissions. The share of emissions from supply chains varies considerably by sector, of course; for food retailers or housing developers, embedded emissions in the products they sell (including transport) can represent upwards of 90% of a company’s total emissions. We will later look at both climate impacts on supply chains, and efforts to decarbonise them.

‘Waste’, as we conventionally think of it, can occur at any stage in material and energy supply chains, from the extraction or production of raw materials, through to the use and disposal of products. Typically, the true cost is borne by global commons and ecosystems (such as the atmosphere, landfill sites, waterways and oceans), and the communities which rely on them. Reconceptualising waste within supply chains presents an enormous opportunity to use fewer virgin resources and lessen environmental impacts. We have written in the past on the global problem of waste, and considered the need to move from a linear economy to a circular one. When we come to think about reconceptualising supply chains later in this Insight, we will look again at the circular economy, and how ‘waste’ doesn’t exist in such models.

The true cost of waste is borne by global commons and ecosystems (such as the atmosphere, landfill sites, waterways and oceans), and the communities which rely on them.

Social and Ethical Concerns

In terms of social considerations, ‘working conditions’ in supply chains can be used as something of a ‘catch-all’ term, encompassing issues within supply chains such as hours, quality of worker accommodation, health & safety, and so on.

Long working hours and forced overtime are a major concern, for instance, among workers in the garment industry. Factory managers typically push employees to work between 10 and 12 hours, sometimes 16 to 18 hours a day. As many garment supply chains work on just-in-time delivery contracts and with deadlines around new ‘seasons’ of products, working hours get longer as deadlines get closer. We have highlighted this in our 2020 Expert Briefing on Fast Fashion. Moreover, health & safety when dealing with hazardous chemicals, or working in dangerous conditions, is also a major problem in many industries’ supply chains, including those of tech hardware products such as smartphones.

One pernicious risk in many of these supply chains is child labour. The International Labour Organisation (ILO) estimates that some 220 million children between 5 and 17 years old are in employment today. Some of the highest risk sectors/commodities are coffee, cocoa, cotton, bricks, garment production, tobacco, cobalt and conflict minerals (tungsten, tin, tantalum, and gold). In parts of Asia, Africa and South America, for instance, children sift for small nuggets of gold in riverbeds – gold which may end up in consumer electronics. They are at high risk of contracting dysentery, malaria, meningitis and tuberculosis due to the unclean water.

As ‘labour’ itself (i.e. people) is now regularly treated as a supply chain in its own right, concerns around recruitment fees, migrant- and bonded-labour are also on our radar. This is a particular concern in certain parts of the world, such as the Middle East, and is inevitably going to become more pressing as climate impacts trigger mass migration.

In addition, land rights and indigenous rights are a concern in many supply chains, especially where governments fail to uphold traditional indigenous land rights. We see this with oil & gas pipelines in the US, with proposed timber/logging in Africa and Latin America, and with open-cut mines in Southeast Asia. In short, it is often at the farthest end of supply chains that these rights are threatened.

As responsible investors, we also have to think about some more ‘ethical’ issues in relation to investee companies’ supply chains. Our previous Insight, for instance, considered some of the ethical dilemmas and issues surrounding the use of animals in various supply chains – from perfumes and scents to entertainment; from fur, wool, and leather to food supply chains and pharmaceutical products. As technologies are developed, we have also been grappling with ethical implications in data supply chains. Transparency around data usage, which data is collected, data privacy and security are the most important issues for us to consider.

As responsible investors, we also have to think about some more ‘ethical’ issues in relation to investee companies’ supply chains.

These are far from all risks which exist in companies’ supply chains. Every sector and every region has its specifics. However, having touched upon some of the more familiar risks and impacts, we will now explore how companies today are attempting to manage and mitigate them.