By ESG Analyst Natalia Salazar
Supply chain ESG accounts for the entire footprint of a company’s operations, from start to finish.
Environmental, Social and Governance (ESG) criteria have become increasingly important in the last two decades as the world continues to shift towards a more sustainable future. The growing adoption of sustainability initiatives within operational frameworks of companies reflects the evolving landscape of ESG practices in supply chains.
ESG criteria related to supply chains serve as foundational principles for companies striving to establish and uphold socially responsible and sustainable business practices. Environmental considerations encompass operational footprint and sustainability practices, such as carbon emissions, material sourcing and production, and waste management. Social aspects pertain to the impact of operational policies and practices on employees. Governance concerns the fulfillment of regulatory obligations and compliance demands.
Effective supply chain ESG management enables manufacturers to contribute positively to society and the environment while mitigating risks and maintaining efficiency for the benefit of their company, partners, and investors by creating value.
The Importance of Supply Chain Transparency
To ensure compliance with ESG standards, companies need greater transparency in their supply chain processes to identify areas where they need to improve or are not meeting their objectives.
Supply chain transparency refers to a company’s ability to understand what is happening in its supply chain and communicate that information to stakeholders, personnel, investors and customers. Establishing transparency means comprehensively tracing the entire footprint of a company’s operations, from material extraction to reaching processing sites, encompassing the global journey of these materials and the individuals who are involved. It also involves gathering information on supplier practices and performance, enabling systematic evaluation of ESG compliance.
Effective supply management and transparency, such as supplier mapping, auditing, and risk assessments, allow companies to ultimately identify potential risks and opportunities, such as environmental damage or unethical labor practices. Implemented mechanisms should ensure that each step of the process aligns with the company’s commitment to sustainability and ethical practices. As a result, improved transparency can enhance companies’ relationships with suppliers, stakeholders, investors, and customers.
Achieving Environmental Goals Through Supply Chain Transparency
The Environmental component of ESG centers on a company’s environmental footprint throughout its operations. This encompasses responsible utilization of land, water, and natural resources, ethical sourcing of raw materials, waste reduction, and carbon emission minimization. By integrating supply chain transparency, companies can gain insight into the environmental impact of their production processes and supplier networks.
To adhere to these environmental considerations, companies are required to collaborate with supply chain partners who share their environmental objectives and recognize any risks linked to sourcing material from specific regions or employing certain procedures. Supply chains concerned about meeting ESG criteria may encounter challenges when collaborating with partners who source material through environmentally damaging processes or produce high carbon emissions during extraction and/or production.
By increasing transparency in the supply chain, we ensure sustainable practices are adopted throughout the entire process, minimizing negative impacts on the environment. Oversight through audits, inspections and other follow-up tools helps companies to make informed decisions about which materials and suppliers to use.
By providing publicly available information about sustainability efforts, such as carbon reduction, besides ensuring compliance with environmental regulations, companies can enhance their reputation with environmentally aware investors and customers.
Achieving Social Responsibility Goals through Supply Chain Transparency
The Social aspect of ESG is focused on fostering a strong company culture through the implementation of practices that benefit its employees. This involves all individuals within a company’s supply chain, including those in sourcing, production, manufacturing, distribution, and transportation. Enhancing visibility into labour practices across a company’s supply chain processes is key for reaching social ESG objectives. This can be done by putting in place policies addressing workplace diversity, ensuring working conditions and providing fair compensation to workers.
Human rights violations, child labour regulations, and fair trade practices have become key issues companies need to address when working with foreign entities. For example, some major diamond companies have become more aware of diamond sourcing and extraction, subsequently prohibiting the sale of so-called “blood diamonds.” These diamonds, also known as conflict diamonds, are mined in war zones in countries such as Angola, often resulting in human rights abuses and exploitation.
Companies need to conduct ethical audits to ensure they adhere to global standards and certifications ensuring socially sustainable practices. Some certifications are provided in the market by programs such as WRAP (Worldwide Responsible Accredited Production), the Sedex Members Ethical Trade Audit (SMETA) framework, or Amfori BSCI (Business Social Compliance Initiative). Companies’ performance is assessed by these certifications against benchmarks defined by regulations, laws, and requirements to ensure that labour rights, safety, and health conditions for people involved in the processes are met.
Achieving Responsible Governance Goals Through Supply Chain Transparency
ESG compliance through governance refers to how well companies meet their regulatory and compliance guidelines. Besides ensuring that the company is enforcing all internal and external policies and complying with regulatory and legislative frameworks, effective corporate governance goes beyond mere compliance. A company’s board of directors should focus on being transparent, improving governance practices, and building supply chain trust and resilience.
A company that is transparent about its supply chain can prove that it is not supporting child labour or forced labour. This transparency can build trust with investors, particularly important as investors have become more focused on the social consequences and the ethics of their investments. Moreover, transparency can enhance trust with regulators, who are increasingly examining companies to check their supply chains do not breach any labour laws or environmental regulations.
Companies that prioritize transparent corporate governance can foster a strong company culture rooted in transparency and ethics, upholding their reputation and brand integrity.
Building a Supply Chain Around ESG
Integrating an ESG strategy enhances overall operational efficiency and sustainability within a company.
Transparency initiatives with suppliers and in the manufacturing processes not only avert potential problems but also generate value for the companies by improving the trust of clients, partners, and investors. Emphasizing ESG without neglecting the supply chain consistently enhances brand reputation and trust.
Establishing supply chain transparency is key to achieving a company’s ESG goals. Without a clear understanding of what going on along all the stages from start to finish of the supply chain, setting ESG effective goals becomes challenging. Focusing on setting supply chain transparency allows to build a foundation of critical information necessary to set a work towards ESG best practices.
References
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