Changing World of ESG Exposing Businesses to New Risks

A global survey by Infosys of more than 2,500 business executives and managers found that many firms have not even taken the most basic steps to embed ESG principles into their supply chain.

The survey shows that 99% of respondents want to align their supply chain partners and ESG goals, and that often this is a result of pressure from regulators, customers or investors. 

A sizeable group of UK companies (40%) say they already select partners or vendors based on ESG impact, the same as companies overall.

The pressure on businesses to make meaningful progress on ESG issues has never been more intense, and yet corporate behaviours around ESG are also being shaped in some unexpected ways by societal and regulatory pressure.

Ian Spaulding is CEO of LRQA, LRQA is one of the world's leading providers of professional services for engineering and technology and for increasing the performance of critical infrastructures.

LRQA is a leading global ESG assurance partnerIts industry experts conduct an estimated 20,000 responsible sourcing and sustainability-related assessments across 100 countries each year. 

Spaulding says 2023 saw human rights and child labour issues “impact supply chains in the US and Europe, as well as in developing nations”. 

This, he says, has “exposed significant gaps in the way that organisations address these risks”.

Spaulding says a number of factors are impacting ESG and supply chain management. One factor is the “politicisation of ESG”.

He says: “ESG has become a politically charged term, particularly in the US where the backlash against woke capitalism has led to discussions about divesting government pension funds from ESG-related investments.”

This, he says, has given rise to so-called ‘green hushing’. 

“Some companies are reducing the external visibility of their sustainability initiatives, even though they continue to progress towards their goals,” he explains.

“European regulators, meanwhile, are tightening the reins on greenwashing, signalling a shift towards concrete actions and accountability in the ESG landscape,” he adds.

Another key factor says Spaulding is due diligence enforcement.

“The regulatory landscape is evolving, making ESG performance disclosure mandatory with enforced penalties for non-compliance” says, By way of example, he cites the EU’s Corporate Sustainability Due Diligence Directive, which he says “gives legislative teeth to what has previously been a voluntary practice for businesses”. 

He adds that the German Supply Chain Due Diligence Act has “already spurred complaints against multiple retailers for failures”.

In the US, Spaulding points out the Uyghur Forced Labour Prevention Act “continues to influence sourcing practices, resulting in halted shipments and increased enforcement”.

All of these developments emphasise the need for addressing material risks associated with company operations to improve business performance,” Spaulding concludes.

A third factor impacting ESG performance is the “emergence of risk in unexpected places”.

“ESG risks are extending beyond traditional areas,” says Spaulding. As He gives as an example Indirect suppliers and commodity supply chains.

“These are often considered out of scope,” he says, “but have demonstrated gaps in responsible sourcing, especially concerning vulnerable populations.”

He adds: “This has exposed out-of-date assumptions about risk evaluation, leading businesses to wonder if they have been evaluating risk in the right way.”

He advises that a “more nuanced approach” is vital here “as supply chain scrutiny is expected to intensify in 2024”.

Spaulding identifies AI as another factor impacting ESG issues.

“The ongoing proliferation of technology solutions, including those powered by AI and machine learning, has created a need for better harmonisation in risk management methodology and due diligence,” he says.

Spaulding adds The Global Trace Protocol – which enables verification of socially responsible sourcing decisions – “has sought to meet these growing needs by helping monitor risks to ensure that supply chains are free of exploitative labour practices”. 

“It seeks to solve a number of challenges including complex, opaque, shifting supply chains and the need for upstream visibility and due diligence,” he adds.

Spaulding concludes that, as global companies search for better and more efficient technologies to benefit risk management, the coming year “will no doubt see organisations leveraging AI algorithms to analyse vast datasets for compliance with ESG standards”. 

This, he feels, “will allow risks associated with labour practices, environmental impact and governance issues to be monitored and addressed at a much larger scale.”

In conclusion, he says: “This year will be  pivotal for organisations globally to leverage innovation along with strategic foresight, to build more resilient, sustainable, and socially responsible supply chains.

“There has never been more pressure for responsible sourcing professionals to rethink approaches to meeting ESG goals. 

“This means being agile in a fast-changing legislative and economic climate for responsible sourcing and due diligence. A one-size-fits-all approach has proven to not be enough, paving the way to a more holistic and ethical approach.

“As a leading global assurance partner, LRQA will continue to support clients with their due diligence requirements and is ready to help companies looking to respond.”

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