Sustainable Supply Chains

All companies have supply chains. However, some have more tiers and are more complex than others. Against a backdrop of increasing scrutiny over supply-chain E&S concerns, ensuring that a company understands its supply chain, has assessed the type and location of E&S risks, and is able to manage (or exclude) potential issues within that chain, is becoming increasingly important as a risk-mitigation and – potentially – a market-access strategy.

Supply-chain risks encompass a broad range of E&S issues, including: labour and working conditions, occupational and community health and safety, biodiversity, pollution prevention and stakeholder relations. In some instances, particularly where supply chains impact indigenous peoples or other vulnerable groups, are labour intensive, or where the chains source materials from fragile and conflict-affected areas, human-rights risks may be evident. There are significant opportunities for companies to drive improved efficiency and better business practices among their suppliers (for example, by requiring better labour and employment practices), which can result in benefits to them as the customer.

A particular challenge for all companies, and their investors, is the extent to which they can influence supply-chain practices beyond tier-one suppliers. Good practice increasingly involves mapping supply-chain risks thoroughly – so that the type and significance of E&S risks are understood – and then making a decision about how best to address material business risks (for example, the risk of forced or child labour), which may include removal of some suppliers where leverage and influence are limited and impacts are significant.

In an increasing number of industry sectors (including agriculture, forestry, mining and textiles), there are voluntary sustainability standards and chain of custody assurance programmes that provide increased comfort on the presence of good E&S practices in supply chains (see Sustainability Map).

Sectors

Sectors and activities with particularly complex and / or high-risk supply chains include:

• Agriculture and aquaculture.

• Fisheries.

• Food and beverages.

• Textiles and garments.

• ICT.

• Forestry and plantations.

• Healthcare.

• Hospitality.

• Infrastructure (especially via EPC contractors).

• Manufacturing (e.g. cement, pulp and paper mills, refineries etc).

• Mining.

• Oil and gas.

• Retail.

Risks

Failure to effectively manage E&S aspects of the supply chain can result in risk / adverse impacts on companies, such as:

• Increased disruption to supply of goods and raw materials, and associated operational impacts.

• Loss of brand value, customer and consumer confidence, as well as the potential loss of access to some markets and buyers.

• Difficulties accessing additional investment and capital.

• Increased regulatory requirements and potential loss of markets.

• Feelings of opposition and grievance, which can impact a social licence to operate within communities.

• Reputational damage.

Opportunities

Implementing changes to supplier behaviour and approaches to E&S can result in a range of investor benefits over the short, medium and long term. Potential benefits include:

• Reduced costs and enhanced efficiency and productivity.

• Process and product innovation.

• Access to new markets.

• Improved working conditions for employees of suppliers can reduce staff turnover and improve productivity, and quality and reliability of delivery.

• Increased company value and improved opportunities for exit.

More resources

• IFC 2012 Performance Standard 1: Assessment and Management of Environmental and Social Risks and Impacts.

• IFC 2012 Performance Standard 2: Labour and Working Conditions.

• IFC 2012 Performance Standard 6: Biodiversity Conservation and Sustainable Management of Living Natural Resources.

• Investments in the Agricultural Value Chain: Expanding the Scope of Environmental and Social Due Diligence.

• United Nations Global Compact: Sustainable Supply Chains: Resources and Practices.

• UN Guiding Principles on Business and Human Rights.

• OECD-FAO: Guidance for Responsible Agricultural Supply Chains (2016).

• UK Modern Slavery Act 2015.

• A good practice note for the private sector: Managing risks associated with modern slavery.

• PRI: Managing ESG risk in the supply chains of private companies and assets (2017).

• McKinsey & Company: Starting at the source – Sustainability in supply chains.

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