Update 2022: ESG Risks in Supply Chains

ESG Risks in Supply Chains

The post-pandemic economic recovery of 2021 created major global dilemmas such as fluctuations in fuel prices and disruptions at seaports due to the rising prices of a vast array of goods. With the addition of the Ukraine-Russia conflict, the resurgences of COVID-19, and the growing impacts of climate change, a “normal” supply chain is unlikely this year. After decades of relying on warehouses and online systems to monitor inventory to order goods, manufacturers and suppliers must now consider new ways to handle extra capacity and supply chain and shipment delays.

Thus far, only some countries, such as those in the European Union, have prioritized and begun regulating disclosure of supply chain impacts on the environment and society. Many nations still have a long way to go in ensuring all stakeholders are protected from ESG risks in supply chains. However, regulators and lawmakers will soon have no choice but to report on issues concerning human rights, due diligence, and environmental impact. By fortifying their supply chains against common ESG risks, businesses can invest in their own longevity and that of their customers, investors, and employees.

Businesses that recognize both internal and external ESG risks are better prepared to proactively handle these challenges. The following is a list of common ESG risks that are directly impacting supply chains in 2022:

  1. The depletion of raw materials and natural resources.

The negative effects of climate change, growing population, and slow transition towards sustainable business practices all translate to the fast consumption of natural resources. The global economy has already been facing severe shortages of essential supplies to produce goods and services. For example, the shortage of semiconductors used in electronics and vehicles has caused several automakers to halt or slow production during the last two years. According to research by AutoForecast Solutions, 33,000 vehicles were added to the recent tally of vehicles cut from automakers’ global production plans because of this semiconductor/microchip shortage.

  1. The struggle to make sure employees are performing work safely.

Within supply chains, safety incidents can often be overlooked. This can be due to inexperienced workers, businesses failing to give sufficient safety training, or the prevalence of contractors and third-party workers. There is also a tendency to not report incidents in countries where laws are less stringent. Especially with the emphasis being on a speedy economic recovery after the pandemic, laws on workplace safety can become lax.

To safeguard operations and stakeholders, it is essential for businesses to emphasize that health and safety due diligence must remain a priority on the same level with production across the entire supply chain (including when enlisting suppliers and contractors.) Third-party inspections and audits can be conducted to reinforce this standard.

  1. The prevailing ignorance of labor disputes.

Violations of the ILO’s Code of Conduct for businesses are more likely to take place as nations make efforts to push forward growth and profits to benefit the global economy. To avoid labor disputes and reduce ESG risks during this time of transition, businesses need to set an example for suppliers and follow codes of conduct regarding the following:

  • Occupational safety and health: These policies help businesses prioritize the creation of a safe and healthy workplace for all employees.
  • Wages and benefits: When businesses feel vulnerable, it is a temptation to initiate “flexible” payment policies, whether those entail offering increased incentives and higher pay than is sustainable to attract talent from a dwindling workforce or threatening to withhold pay when business is slow. However, businesses must follow globally accepted methods of determining wages and benefits to ensure that the compensation enables employees to maintain a decent standard of living.
  • Working time: Organizations need to be cognizant of the impact that specific work can have on employees. There are limitations to the maximum number of hours worked by employees, to ensure that individuals’ health and productivity are not impaired.
  • Child labor: Organizations need to follow national and international policies on what age workers can start working and under what conditions. Unfair practices include using children under the age of 18 as full-time employees without providing them the same level of benefits and compensation as adult employees.
  • Forced labor: It is important for businesses to make sure employees know that employment is an agreement, and completing work is a choice made by the employee. They must be able to leave their work and/or resign of their own free will. Bonded labor or forced labor are not viable business practices.
  • Discrimination: To remain ethical and fair places of work, businesses need to ensure that workers are not discriminated against in any way or for any reason. All workers and employees have equal human rights and should be treated fairly, regardless of personal attributes or social status.
  • Harassment: Based on internationally approved laws, all workplaces need to ensure that workers can perform their work free of any form of harassment (including verbal, visual, sexual, or physical.) Having a whistleblower policy that allows victims to anonymously report misconduct within the organization is an important step to making sure employees are safe.
  • Grievance: A whistleblower policy can also help uphold the ability of all workers to raise their grievances and have access to a fair hearing and remedy. The correct protocol for answering grievances will be determined by company management. As all voices must be represented, unanswered grievances should be reported alongside answered ones.
  • Freedom of Association: Employees may organize groups at work to better communicate changes needed within the workplace. This freedom creates the opportunity for corporations to continually improve for the sake of their workers.
  • Collective Bargaining: Along with the freedom to associate as groups, workers (regardless of their employment status) should be able to collectively negotiate the terms and conditions of their employment, including how grievances are handled.   

While the current ESG risks in supply may be unprecedented, they are still manageable. Businesses need to emphasize training to help staff identify key risks impacting the organization, from potential conflicts of interest to improving corruption prevention and detection measures. Providing adequate training also helps build trust between all levels of employees, enabling greater communication and transparency about working conditions and challenges. Suppliers need to ensure transparency and accountability throughout their supply chains by documenting every step of the planning stage and any created procedures. Not only is transparency useful for partnering, training, and reporting, but it also boosts business reputation and can help maintain professional relationships with stakeholders in the global economy.

Author Bio

Fatima-Fasih

Fatima Fasih

Experienced in corporate sustainability in both developed and emerging markets, Fatima Fasih has over 5 years of experience in advising businesses on their sustainability strategies and reporting. She also assists businesses in identifying their progress on the UN Sustainable Development Goals.

Currently, working as an independent Sustainability Consultant, Fatima holds a Masters degree in Sustainability Management and Bachelors in Health Sciences and Environmental Science from the University of Toronto.

She is also certified a Greenhouse Gas Inventory Quantifier (GHG-IQ) and aims to work towards pushing businesses to play a larger role in solving the world’s biggest sustainable development problems: hunger, poverty, and inequality.

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