LRQA: CSCOs 'Must Balance ESG With Cost Efficiency'

Chief supply chain officers (CSCOs) are becoming more aware of their responsibilities as they seek out new ways to be more efficient from a cost perspective while also factoring in ESG.

Not only is it crucial for companies to eliminate emissions from their supply chains, but also understand the impact it has on livelihoods, particularly when it comes to long-standing child labour and human rights issues.

So, how exactly will organisations take action to increase visibility of social impacts from their supply chains? Also, how does this factor into risk management from a commercial perspective? From a leading global ESG assurance partner, Ian Spaulding, CEO of LRQA, points out some of the key trends in ESG he found last year, which he believes will be carried over to 2024.

• Politicisation of ESG 
• Due diligence enforcement 
• Climate change and impact on supply chains 
• Traceability and supply chain mapping 
• Emergence of risk in unexpected places

Policies put ESG into practice 

The onus is on organisations to reduce their impact, and it’s been noted that a large portion of consumers—more than 65% according to Harvard Business Review—want to buy products and services driven by purpose. While this is enabling a lot of traction among companies to deliver on this, there is little to stipulate, meaning much of this change is influenced by the market. 

Imagine a scenario, for example, where consumer sentiments change and businesses continue to pursue profit in order to survive these external pressures. Without clear legislation, there is very little to protect against such a shift. 

This is where policy is necessary to govern the response. More importantly, when it comes to reporting on sustainable activities, laws will determine a standard approach to visibility and therefore target greenwashing—a historical concern—and also ensure that companies are, declaring their approaches to and impact on the planet and its communities. 

“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,” says Spaulding.

“This has given rise to ‘green hushing’, with some companies reducing external visibility of their sustainability initiatives even though they continue to progress towards their goals. European regulators are meanwhile tightening the reins on greenwashing, signalling a shift towards concrete actions and accountability in the ESG landscape.” 

Ensuring due diligence through legislation

On the above point, organisations are to be held accountable with the correct legislation in place, but without realistic penalties, the incentives to improve ESG performance are rather hollow. While we would like to think that companies will respond to positivity, the issues with greenwashing and green hushing influence the need for legal reinforcement of both reporting and, in turn, action to reduce the impact of supply chains. 

Where, historically, information on sourcing has been kept thin—leaving room to speculate issues like modern slavery and poor labour conditions—authorities are now enforcing transparency among businesses. Spaulding cites the Corporate Sustainability Due Diligence Directive, which turns voluntary practices into necessity by holding them accountable. 

“Its precursor, the German Supply Chain Due Diligence Act, has already spurred complaints against multiple retailers for failures,” says Spaulding.

“In the US, 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.” 

There is a growing concern around climate change, yes, but this is now increasingly linked to the human rights argument. The risks associated with ESG in the supply chain are not just bad for business, more so global health. After all, the reasons we urgently need to claw back the effects of climate change all link back to the health of the population. 

“This shift towards climate justice has turned environmental issues into a civil rights movement, with a focus on people and communities,” Spaulding says. 

“The growing connection between climate risks and human rights risks emphasises the need to recognise a ‘just transition’ in corporate climate action. Companies must now conduct due diligence throughout their supply chains to mitigate both environmental and social risks.”

More intuitive technologies, such as artificial intelligence (AI) and machine learning, leave fewer and fewer excuses for lack of visibility over the supply chain. While there remain challenges around labour exploitation, which are difficult to measure, it is expected that intelligent technologies will play a major role in debunking the labour impact of supply chains as more data becomes available. 

“The Global Trace Protocol sought to meet these growing needs, by helping to 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,” Spaulding explains. 

“As global companies search for better and more efficient technologies to benefit risk management, 2024 will no doubt see organisations leveraging AI algorithms to analyse vast datasets for compliance with ESG standards.” 

Unexpected ESG risks in the supply chain 

With various factors in mind, 2024 will echo the previous year’s trends whereby businesses question the narrative. They will look to ensure ESG metrics and measurements are targeted towards the right areas and provide adequate data to make informed decisions. 

With more suitable data backing their risk management efforts, supply chains will be governed by more strenuous regulations that we hope will hold them accountable to adapt their social strategies to eliminate some of the longstanding issues within their industries.