No Result
View All Result
SUBSCRIBE | NO FEES, NO PAYWALLS
MANAGE MY SUBSCRIPTION
NEWSLETTER
Corporate Compliance Insights
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe
No Result
View All Result
Corporate Compliance Insights
Home Opinion

Ensuring the Company You Keep In Your Supply Chain Is Aligned with Your Own ESG Standards

Just a Handful of Countries Mandate Some Form of ESG Reporting Among a Business's Suppliers. But the Tides Are Shifting.

by Stephany Lapierre
October 14, 2021
in Opinion, Risk
A man works at a GM factory.

Will ESG standards prove toothless if they don’t incorporate suppliers into the equation? That is the question investors, stakeholders and business leaders are asking as reporting mandates gain steam and come into effect around the world.

Consumers, investors, the public and lawmakers often ask: what use are exemplary ESG standards (relating to climate and environmental protection, workforce demographics and diversity, workforce health and well-being, cybersecurity and more) if respectable organizations still endorse (knowingly or unknowingly) bad practices within their supply chains?

High-profile events in the past decade have raised consciousness on the issue. In 2020, the Australian Strategic Policy Institute (ASPI) published a report identifying 83 foreign and Chinese companies benefiting from forced labor of Uyghur workers through abusive labor transfer programs. Leading technology brands have also hit the headlines when their practices of environmental infractions, such as the use of toxic materials, have come to light. Often, the main concern was the total absence of transparency, with accusations of secretive supply chain management in factories abroad.

Regarding climate specifically, McKinsey recently found that up to 90% of companies’ impact on the environment occurs in their supply chains. Such impacts can include toxic waste, water pollution, loss of biodiversity, deforestation, long-term damage to ecosystems, air emissions and excessive energy and water use. In the specific case of CO2 emissions, supplier operations can be responsible for 65-95% of a company’s total.

ESG in the Supply Chain: Lawmakers Are Taking Note

Any organization must therefore ask itself if it has the visibility required to do the necessary due diligence and ensure its suppliers are adhering to its own high standards. This has traditionally not been a concern for procurement professionals, who are judged on savings, technical quality, cost effectiveness, speed of delivery and reliability – not ESG compliance. We believe few companies today are pursuing ESG compliance simply because it’s morally the right thing to do; more often than not, they are motivated by profit, or in some cases, legislation requiring it to varying degrees.

In June 2021, the United States House of Representatives voted 215-214 to pass H.R. 1187, the “Corporate Governance Improvement and Investor Protection Act,” a compilation of several new company disclosures and related studies. If signed into law, the bill would amend the Securities Exchange Act of 1934 to require public companies to make potentially significant disclosures regarding ESG issues and would empower the SEC to define the parameters of such disclosures.

An amendment to H.R. 1187 by Congressman Dean Phillips of Minnesota would broaden its scope to require a large company to file annual reports with the SEC regarding its impact on “employees and contractors who are in its supply chain, communities it impacts, other stakeholders, the environment and other matters of common interest to citizens and relevant the social and natural systems.”

Europe Taking the Lead

Lawmakers are also acting internationally. Europe is taking the lead on supply chain due diligence. In Germany, a new law ratified on June 25, the Lieferkettenschutzgesetz – the supply chain law, could impose heavy fines if suppliers within companies’ supply chain are found to breach labor, human rights or environmental standards. The fines can go up to €800,000 or two percent of the company’s annual revenues if these exceed €400 million.

Germany’s Finance Minister, Olaf Scholz, explained the reasoning behind the law: “In future, it will be clear that ‘Made in Germany’ also means respect for human rights.”

The law is of international significance. Companies based or operating in Germany (irrespective of where they are legally registered) with more than 3,000 employees, or German-registered branches of foreign companies with more than 3,000 employees, must comply with the law from January 1, 2023. Companies with more than 1,000 employees must comply from January 1, 2024.

A similar law was enacted in France in 2017 and the Netherlands has a law specifically addressing child exploitation in the supply chain.

It is now likely that the German law will provide the basis for EU-wide legislation (in fact, that was the explicit intention of the German lawmakers). On March 10, the European Parliament adopted an outline proposal for the “EU Directive on Mandatory Human Rights, Environmental and Good Governance Due Diligence.” The European Commission has now been tasked with drafting a formal legislative proposal for this Directive to be presented to the European Parliament later this year and likely to come into force in 2023.

Germany should be applauded for being the first nation to extend comprehensive ESG reporting requirements to a business’ supply chain, even if only to immediate (Tier 1) suppliers. The German legislation does not (yet) require companies to actively monitor their Tier 2 suppliers and beyond.

Actions Organizations Can Take Now

Supply chains can run very deep and be very complex, and most organizations only have a direct relationship with the next level in the supply chain, known as Tier 1 or Top Tier suppliers. How can an organization influence what happens further along the chain?

The answer is by dangling carrots and, if necessary, wielding sticks.

Be crystal clear on your expectations: When it comes to dealing with Tier 1 suppliers, the duty falls upon contract managers to ensure that there is an obligation to understand and adhere to the buying organization’s own ESG standards. Supplier relationship managers need to be proactive in ensuring that these standards are adhered to in practice. Factory visits to Tier 1 suppliers are recommended.

Encourage Tier 1 suppliers to engage with those further down the chain, i.e. the Tier 2 suppliers: Procurement must impress upon primary suppliers that they have a duty to educate their own next-tier suppliers on the meaning of sustainability, business ethics and other ESG issues, and the benefits of compliance. This can extend to training and, in some circumstances, financial support to adjust business practices.

Reward compliant Tier 1 suppliers with opportunities to improve their own businesses: Make it clear that suppliers setting and enforcing ESG standards for their own suppliers will be rewarded. This can be done systematically, for example by weighting RFPs in their favor, or bonus schemes.

Consult with industry peers about their experiences: Take advantage of resources available that can provide a sense of industry peers’ own experiences in working with particular suppliers and understanding these suppliers’ level of commitment to ESG. Networking with peers can be a very effective way to understand a potential supplier’s ESG integrity.

Engage with governments and the broader community: Multinational organizations need to engage with governments and civil societies in those countries where their operations are based. Involvement with organizations such as the Extractive Industries Transparency Initiative (EITI) can facilitate such contacts – and will be a credit to any company’s own ESG standing.

Terminate contracts with suppliers that fail to meet your standards: Finally, the stick. Suppliers that fall short, or fail in their own due diligence, are a liability. Find alternatives and make it clear why you are doing so.

In terms of what the near-term future holds, we believe a fair amount of organizations won’t begin supply chain reporting unless it is mandated, though forward-thinking organizations will be more proactive (even if not totally driven by altruism and social consciousness). These organizations realize that public opinion, especially among younger generations, is making itself felt. Whether as investors or as customers, people increasingly want their money to follow their values – along the entire value chain. Commercial reasons for ESG aside, these organizations also realize delay puts them at risk of reputational damage and, coming soon, litigation.

In terms of how far down the tiers the requirements go, we don’t expect these to go beyond Tier 1 and Tier 2 suppliers any time soon. Engaging with suppliers beyond these levels is particularly challenging; unfortunately, the more upstream suppliers are in the supply chain (often in countries or regions with weak or unenforced labor laws), the less oversight and control organizations have over them.

However, much work needs to be done to increase transparency, traceability and influence over these upstream suppliers. In the meantime, it is entirely possible that organizations may structure their supply chains in such a manner that preferred suppliers (whose ESG compliance may not be verified) fall just outside the scope of regulations. While we hope that this does not occur, it may happen in a similar way that organizations take advantage of tax loopholes. However, if we remain vigilant, serious, high-profile supplier issues that come to light would require investigation to the fullest extent possible.

Today, ESG initiatives can be thought of as a positive and important movement. They are much more than the sum of reports by individual companies and organizations. In the modern economy, no organization is an island; on the contrary, it is just one hub in a global network of buyers and sellers. Whether motivated by legislation, commercial concerns or true social consciousness, an organization’s ESG record is judged not simply on its internal operations but on the entire supply chain it interacts with, and ESG initiatives must broaden in scope to address these concerns.


Tags: Supply Chain
Previous Post

Former Brazilian Petrochemical CEO Sentenced to 20 Months in Prison Over FCPA Violations

Next Post

USA Gymnasts Saw Something and Said Something – But the FBI Didn’t Listen

Stephany Lapierre

Stephany Lapierre

Stephany Lapierre headshotStephany Lapierre is the founder and CEO of TealBook, a highly coveted supply chain thought leader, and one of the most influential minds in emerging data technologies. She has been recognized as one of the Top 100 Most Influential Women in Supply Chain, and her company, TealBook, has both been named a Top 50 company to watch by Spend Matters and won the Cool Vendor Award by Gartner. Prior to TealBook, Stephany spent 10 years building a successful strategic sourcing and procurement consulting firm focusing on large scale sourcing optimization projects

Related Posts

semitrucks

Tracking Down Emissions When They’re Buried in Your Supply Chain

by Sarah Carpenter
February 22, 2023

Manufacturers are pressed from all sides to prove their environmental bona fides, but given the nature of manufacturing-related emissions, that...

thread needle

Regulatory Clarity Is Coming, But Companies Still Need to Thread the Needle on ESG

by Dean Alms
February 15, 2023

A handful of ESG-related regulations are in the works or go into effect in 2023 targeting global supply chains. Despite...

supply chain

Only 1 in 4 Manufacturers Have High Confidence in ESG Readiness of Their Supply Chains, Survey Finds

by Staff and Wire Reports
January 27, 2023

Ever-evolving regulatory requirements, consumer demand and investor expectations are all forcing manufacturers to increase the transparency of their supply chain,...

cci top 10 stories collage

Top 10 Compliance Stories of 2022

by Jennifer L. Gaskin
December 7, 2022

The more things change, the more they stay the same. This time last year, we summarized the top 10 ESG...

Next Post
USA womens gymnastic team at 2016 Rio Olympics

USA Gymnasts Saw Something and Said Something – But the FBI Didn't Listen

Compliance Job Interview Q&A

Jump to a Topic

AML Anti-Bribery Anti-Corruption Artificial Intelligence (AI) Automation Banking Board of Directors Board Risk Oversight Business Continuity Planning California Consumer Privacy Act (CCPA) Code of Conduct Communications Management Corporate Culture COVID-19 Cryptocurrency Culture of Ethics Cybercrime Cyber Risk Data Analytics Data Breach Data Governance DOJ Download Due Diligence Enterprise Risk Management (ERM) ESG FCPA Enforcement Actions Financial Crime Financial Crimes Enforcement Network (FinCEN) GDPR HIPAA Know Your Customer (KYC) Machine Learning Monitoring RegTech Reputation Risk Risk Assessment SEC Social Media Risk Supply Chain Technology Third Party Risk Management Tone at the Top Training Whistleblowing
No Result
View All Result

Privacy Policy

Founded in 2010, CCI is the web’s premier global independent news source for compliance, ethics, risk and information security. 

Got a news tip? Get in touch. Want a weekly round-up in your inbox? Sign up for free. No subscription fees, no paywalls. 

Follow Us

Browse Topics:

  • CCI Press
  • Compliance
  • Compliance Podcasts
  • Cybersecurity
  • Data Privacy
  • eBooks Published by CCI
  • Ethics
  • FCPA
  • Featured
  • Financial Services
  • Fraud
  • Governance
  • GRC Vendor News
  • HR Compliance
  • Internal Audit
  • Leadership and Career
  • On Demand Webinars
  • Opinion
  • Resource Library
  • Risk
  • Uncategorized
  • Videos
  • Webinars
  • Well-Being
  • Whitepapers

© 2022 Corporate Compliance Insights

No Result
View All Result
  • Home
  • About
    • About CCI
    • Writing for CCI
    • NEW: CCI Press – Book Publishing
    • Advertise With Us
  • Explore Topics
    • See All Articles
    • Compliance
    • Ethics
    • Risk
    • FCPA
    • Governance
    • Fraud
    • Internal Audit
    • HR Compliance
    • Cybersecurity
    • Data Privacy
    • Financial Services
    • Well-Being at Work
    • Leadership and Career
    • Opinion
  • Vendor News
  • Career Connection
  • Events
    • Calendar
    • Submit an Event
  • Library
    • Whitepapers & Reports
    • eBooks
    • CCI Press & Compliance Bookshelf
  • Podcasts
  • Videos
  • Subscribe

© 2022 Corporate Compliance Insights

Welcome to CCI. This site uses cookies. Please click OK to accept. Privacy Policy
Cookie settingsACCEPT
Manage consent

Privacy Overview

This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary
Always Enabled
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
CookieDurationDescription
cookielawinfo-checbox-analytics11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checbox-functional11 monthsThe cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checbox-others11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-necessary11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-performance11 monthsThis cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy11 monthsThe cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytics
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
Others
Other uncategorized cookies are those that are being analyzed and have not been classified into a category as yet.
SAVE & ACCEPT