What is Sustainability in a Supply Chain?
Supply chain sustainability is the process of assuring the future viability of your business, by addressing the risks and impacts that come from the production and distribution processes, for the goods and materials that you receive, and that you produce. These impacts and risks can appear anywhere along a supply network, from source to finished goods. Basically, sustainability is knowing what’s going on in your supply network - and taking steps to continuously improve. The impacts and risks may be generated by your operations, or by your upstream suppliers, or even by your customers. Sustainability should be a key element in guiding a company’s business strategy and in engaging supply network activity. Sustainability in this context is the acknowledgment and management of environmental, social, and governance risks along the supply network. This process requires ‘due diligence’.
What is Due Diligence?
Supplier due diligence is the action taken by an organization to vet its vendors, to understand their risk profile, credibility, and their ESG performance, and to spot potential red flags in their operations. This should not only be performed before entering into a contractual relationship but also regularly throughout the supplier/customer relationship. The application of blockchain technology to global supply chains now gives customers all along a supply chain, from resource to finished product, the opportunity to perform quality due diligence. That due diligence can then lead to discussion and collaboration to improve the ESG performance of the full supply network.
Why is Sustainability Important?
Reputation is Fragile
Warren Buffet once said: "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." We live in times of instant global communication. Today’s consumers want the peace of mind that comes from knowing that what they buy hasn’t harmed the environment, or the people who’ve made it, or the communities that it was made in. Unethical or ill-considered behavior – even just a one-time lapse – can harm both reputation and the bottom line.
Businesses are associated with the company that they keep.
If you buy it, you not only own it, you own the consequences that come from how your upstream supplier has produced it. Recent examples include:
o Palm oil that has been produced using slave labour.
o Garments that have been manufactured in unsafe working conditions.
o Electronics containing minerals that have been mined by children.
One-third of recent survey respondents have fired a supplier based on their environmental performance.
Rightfully concerned with potential reputational risks associated with supply-chain activities, downstream customers are increasingly reviewing suppliers’ ESG profiles. One-third of recent survey respondents have fired a supplier based on their environmental performance. It is no longer acceptable to ignore a supplier’s human rights abuses or to invest in an unstable country. A [Yes]/[No] response to a leading question, like, “Do you employ slave labor?“ does not constitute due diligence.
Everybody is focusing on due diligence, basic reporting is no longer enough.
Who is demanding proof of sustainable sourcing?
o Governments, enacting due diligence and responsible sourcing regulation.
o Mineral associations, publishing recommended standards of ESG measures.
o Investment houses, establishing metrics of their ESG evaluation of producers, complete with ratings and recommendations for improvements and follow-up actions
o Investment firms, creating funds that specifically contain holdings that conform with ESG performance.
o Customers, considering the source and sustainable activities when making purchase decisions.
There is a strong international desire - Driven by the UN SDGs
In September 2019, the UN Secretary-General called on all sectors of society to mobilize for a decade of action on seventeen interwoven global objectives designed to achieve a “better and more sustainable future for all people and the world by 2030”. The Sustainable Development Goals are a call to action to the private sector, government, and civil society, to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030. Industry and industry associations are responding to this call, implementing actions to address sustainability goals.
There are New EU Directives Coming
NFRD – the Non-Financial Reporting Directive
In 2014, the European Commission issued the Non-Financial Reporting Directive (NFRD) for financial market participants. The NFRD introduced a requirement for companies to report both on how sustainability issues affect their performance, position, and development (the ‘outside-in’ perspective), and on their impact on people and the environment (the ‘inside-out’ perspective, or ‘double materiality’).
SFDR – the Sustainable Finance Disclosures Regulation
As part of the 2018 Sustainable Finance Action Plan, to reorient capital towards sustainable growth, in 2019 the EU introduced the Sustainable Finance Disclosures Regulation (SFDR). The regulation requires asset managers and investment advisers to disclose how they address Sustainability Risks and Principal Adverse Impacts. In addition, the EU SFDR aims to help investors to choose between products by classifying funds into three distinct categories, according to the degree to which sustainability has been considered.
In 2020, the EU Taxonomy Regulation was introduced. It came into effect in January 2022. The Taxonomy Regulation establishes a classification system (or taxonomy) that provides businesses with a common language to identify whether or not a given economic activity should be considered "environmentally sustainable". This then allows it to be determined how far investment is environmentally sustainable, or 'green'.
CSRD – the Corporate Sustainability Reporting Directive
In 2021, the EU introduced the Corporate Sustainability Reporting Directive (CSRD). This Directive intends to make companies disclose how their sustainability/business strategies align with limiting global warming to 1.5°C and how they contribute to the EU’s own climate goals.
Reporting reflects a ‘double materiality perspective’, as it reflects both the inwards and outwards impacts of a company. Companies will report on:
- Strategy & business model and their resilience towards sustainability-related risks and climate scenarios;
- Sustainability targets & indicators set, and progress towards achieving them;
- All environmental-related matters that are affected by or affect their business, including greenhouse gas emissions, energy efficiency, environmental footprint results, and dependencies;
- Social considerations;
- Governance processes including risk management.
The Directive will apply to all companies listed on EU-regulated markets and large companies with two of: a balance sheet total of at least EUR 20,000,000, a net turnover of at least EUR 40,000,000, and an average of 250 employees. It will also apply to companies incorporated outside the EU but listed on its markets along with EU-domiciled subsidiaries of non-EU companies. The first set of standards for this Directive will be released on Oct 31, 2022.
CSDD - Corporate Sustainability Due Diligence Directive (draft under discussion)
The aim of this Directive is to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance. The new rules will ensure that businesses address the adverse impacts of their actions, including in their value chains inside and outside Europe.
Strong Sustainability Performance Creates Value
A McKinsey Global Survey of 2475 participants showed that value-creating companies are more likely than others to make sustainability a strategic priority, to set out specific aspirations and targets, to make sustainability an element of their corporate culture, and to train employees on how to integrate sustainability into their work.
Responses also suggest that value-creating companies experienced:
o Growth in customer base, and in access to resources
o Cost reduction through process improvement
o Increased productivity from a supportive work culture
o Improved asset and investment decisions from planning for the medium to long term
A paper by Schoenmaker et al. also concludes, “Companies that perform well on material ESG issues, also show a superior financial performance.”
Sustainable supply chains are no longer “nice to have”, they are an “opportunity”. Companies can certainly simply comply with obligations to report on ESG matters, just like reporting on any other regulated requirement, but the companies that use these requirements to report ESG results as an opportunity, are thinking sustainability. They are working beyond the next annual report, are recognizing the benefits that are available through blockchain traceability and supply network collaboration, and are acting strategically to place ESG, sustainability, and supply network improvement, as a top business priority. They are finding collaborative solutions to continuously improve their supply network. With responsible, sustainable supply chains, your company, your supply network, and ultimately the planet, all benefit.
Do you want to find out more? Our team is always happy to discuss which supply chain due diligence data you could capture and how Product Passports can communicate it along your supply chains. Get in touch here.
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