Supply chain sustainability has gained significant attention sparking the need for businesses to reshape their operations and sourcing practices. This article explores the reasons behind the increased focus on supply chain sustainability, the business case for action and what companies can do to get started.
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.
Regulation has emerged as a key driver influencing supply chain sustainability. Some examples of regulation that is shaping the way supply chains are managed include the EU’s Corporate Sustainability Due Diligence Directive (CSDDD), the EU Deforestation Regulation and the Uyghur Forced Labour Prevention Act in the United States.
Even businesses headquartered outside the jurisdictions of these regulations 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. Given the relative novelty of many of these regulations a learning curve is to be expected in determining the best practices for compliance.
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 and consequently 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.
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.
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.
Focusing on the sustainability of a business’s supply chain offers clear incentives that go beyond regulatory compliance:
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.
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.
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.
Businesses can start their journey towards a sustainable supply chain through the following steps:
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:
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:
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:
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:
Written in association with Sancroft.