Supply Chain Management Today
Where these potential issues and risks in their supply chains are currently addressed by companies, approaches generally fall under the umbrella of ‘sustainable supply chain management’ (SSCM).10 This has evolved in many industries as a result of customer pressure. Such an approach has a number of features, stages, and methods, which we will explore here.
Companies typically follow a similar approach to tackling them, relying on supply chain mapping, risk identification and mitigation, certifications and auditing, and remediation. Collaboration with other stakeholders – be they employees, industry peers, NGOs or government actors – is often critical, and we will later explore a couple of case studies around collaborative efforts to address critical social and environmental risks in companies’ supply chains.
These approaches, however well-constructed and implemented, are frequently designed to deal with problems after they have arisen (as well as to prevent re-occurrence). Following this, we will look at underlying, systemic drivers of these problems, and how they might be addressed.
Mapping Supply Chains
Mapping supply chains down to the level of raw material production or extraction is the first step in identifying risks and impacts. Companies need to map intermediary layers too.
Few companies are able to do this, however. Many can map to ‘first tier’ suppliers, but at each tier, the number of actors within a supply chain is multiplied, and the mapping process becomes increasingly difficult. If we imagine a company with 10 suppliers in its first tier, and each of those has 10 suppliers, and so on, by the time we get to the fifth tier, the company at the ‘top’ of the supply chain is having to map 100,000 different actors. Such complexity can often result in whole industries being at risk of being implicated in harms within supply chains; we have seen this recently, for instance, with stakeholder claims that the supply chains of ‘most major apparel brands and retailers are tainted by Uyghur forced labour’.
Identifying Risks & Impacts
Risk identification – in terms of environmental or social impacts, among other risks – often takes place at the country and/or product (raw material) level. This process is best conducted alongside other stakeholders, such as NGOs, academic institutions, other corporates facing the same risks, unions, regulatory bodies and governments.
Often, some sort of materiality or risk matrix is produced, to demonstrate areas of high risk (e.g. deforestation in beef supply chains in Brazil; indigenous land and water rights in Chile’s lithium industry, or North American oil & gas infrastructure), and lower risk. The risks to companies downstream could be reputational, legal, or financial in nature. The first step here is simply for companies to acknowledge the problems within their supply chains.
A poignant example is how Nestlé now reports on child labour in its cocoa supply chain. In its latest communication on its progress, the company reported that it has uncovered 18,000 instances of child labour, with 55% of these children having been able to stop their child labour activities; it has provided remediation for over 80,000 children since 2012.
We ultimately support this level of transparency, despite its discomfort, as it identifies deep, systemic challenges few other companies may acknowledge.
Nestlé has admitted that it may take many more years to eradicate child labour in its cocoa supply chains, but maintains its target of achieving 100% sustainable (child-labour-free) cocoa
Mitigating Risks & Impacts
Risk mitigation can be achieved in a number of ways. Strong initial due diligence when selecting suppliers is a good start, but, as we have seen, often companies only map their supply chains after they are established, and their work on risk mitigation is necessarily reactive on occasion.
Often, the first step is to produce a supply chain code of conduct, or similar, which sets out expectations of suppliers with respect to human rights or labour standards. Whilst this by itself is far from sufficient to mitigate risks in supply chains, it is a first step to encouraging dialogue and common understanding on these issues. In addition to (or instead of) expectations made of suppliers, it is possible for companies to use third-party certifications to try to ensure strong sustainability credentials in the products and services they are sourcing.
Case Study: Fairtrade
One such certification is Fairtrade. Fairtrade standards require smallholder farmer and larger hired labour production set-ups to comply in key environmental and social areas.
The Standards also promote training for farmers, which can include advice on switching to environmentally friendly practices. Fairtrade enlists companies to pay a minimum price for commodities from member farms if market prices plunge, and offers to certify products made from such ethically sourced commodities. Fairtrade is half-owned by its producer cooperatives, so its standards and metrics are decided in large part by the representatives of farmers. Companies looking to ‘ditch’ Fairtrade and move to their own sustainability standards (e.g. Sainsbury’s and tea) are not beholden to the interests of those farmers deep within supply chains.
Risk mitigation comes very much from a ‘do no harm’ approach to supply chain management. Beyond this, companies are increasingly active in trying to engage with suppliers to improve working conditions, worker pay, greenhouse gas emissions, and environmental outcomes. This may involve ensuring restoration of areas which have been subjected to open-pit mining or quarrying, including creating a biodiversity ‘net gain’, or driving better health & safety standards in supplier factories, for instance.
Audits and assessments on-the-ground are an important part of sustainable supply chain management. Once companies higher up the supply chain have established a mapping process, laid out some expectations of suppliers, and perhaps put in some initial steps to mitigate risks (such as requiring sustainable or ethical certification of suppliers), auditing and checking compliance are next.
As we will see shortly, when looking at remedial action and working collaboratively, a close relationship with suppliers and other stakeholders is often necessary throughout an audit process. Ideally, audits of key or high risk suppliers should be done on a regular basis (such as annually), although it does depend to some extent on whether clauses within supplier codes of conduct are being violated as to whether more frequent monitoring would be necessary. Studies have shown that auditors tend to cite fewer violations at factories where they have ongoing relationships, so regular rotation of the people conducting the audits is advised. Moreover, audits should be both announced and unannounced, to give the best chance of uncovering malpractice or violations of policies.
Third parties can assist here – for instance, IMPACTT, an ethical consultancy focused on supply chain impacts, conducts interviews with workers, building mutual trust, and can often uncover problems overlooked by (or hidden from) traditional audits.
For responsible investors, it is sometimes difficult when we see investee companies reporting that audits or investigations into whistleblowing/allegations have found non-compliance with policies and, sometimes, quite severe human rights or environmental violations.
For some, it is best that these issues are uncovered – only then can they be addressed; for others, it points to poor due diligence in the supply chain in the first instance.
What is agreed upon is that, once issues are uncovered – whether that’s bribery and corruption, poor animal welfare, human rights abuses, illegal working practices, high levels of toxic pollution, or deforestation – companies sourcing from these suppliers have a responsibility (moral, or on occasion legal) to act in remediation. This responsibility is stressed, for example, in the United Nations Guiding Principles on Business and Human Rights.
What Does EdenTree Look For?
EdenTree engages and encourages investee companies to do whatever they can to address social, environmental, ethical, and ecological risks and impacts in their supply chains, right through to the use and disposal of products. Two recent examples are engagements on Modern Slavery and biodiversity.
In our screening and review process, and our engagements, we are looking for transparency, examples of best practice, learning from past mistakes, and a range of measures, policies, practices, and relationships with various stakeholders aimed at minimising negative impacts (and ideally having positive impacts) on communities, workers, and the environment throughout their supply chain. We do screen companies out of the EdenTree Funds where environmental or social risks in supply chains are considered too great, and/or too poorly managed.
Ultimately, we are looking for evidence that companies are applying the required time and effort to each of the ‘stages’ of sustainable supply chain management outlined earlier – mapping of high risk supply chains, risk identification and mitigation, auditing, remediation, and so on.
That said, problems within supply chains persist. Companies frequently acknowledge that getting on top of these problems is one of their most significant challenges, particularly when they are embedded deep in complex supply chains. If even some of the most responsible companies are struggling to deal with these problems, perhaps there are more systemic, underlying drivers that need attention?
EdenTree continues to engage with the construction sector in the UK around what might be termed ‘labour supply chains’. This is still a high-risk sector, and one where much work needs to be done. We have published a blog on our initial findings.
Additionally, EdenTree is working collaboratively as part of the investor-led ‘Find It, Fix It, Prevent It’ initiative, to address Modern Slavery in other high-risk sectors and ‘labour supply chains’. This is focusing both on company-specific engagements, and on working with law-makers to tackle the challenge through legislation. A blog of our findings is available on our website.
This was a new engagement theme for EdenTree, recognising the impacts on biodiversity in a range of company supply chains and operations, including food retailers (agriculture, plastics, etc.), mining companies, paper & pulp manufacturers, and construction companies.
These have been chosen for either their direct reliance on biodiversity (food retailers), or because
of the impacts that their operations and supply chains can have on biodiversity and ecosystem health more broadly. The engagement sought to understand the current state-of-play, identify pockets of best practice, and share learnings with the sectors targeted. A blog of our findings is available on our website.