ESG and supply chain risk

“For too long, the supply chain operation has been taken for granted and ran on the assumption everything would go just right, with every interweaving part of the supply chain fitting perfectly, all the time,” Oliver Chapman, CEO of supply chain specialist OCI told me. “Now we are paying the price for such complacency.” 

But include ESG in the mix, and you get a whole new world of complexity added to the equation.

“Simple decisions can have ramifications,” says Grant Griffiths, Risk and ESG specialist and global ambassador for the Institute of Risk Management and speaker at the Risk conference in November.  

For Oliver Chapman, also scheduled to speak at Risk, an important element is risk management relating to the supply chain is the audit. 

He emphasises the importance of auditing the supply chain, of having a detailed understanding of every part in the supply chain — he emphasises this can mean “the suppliers’ suppliers’ supplier.”  It is like one of those endless corridors of mirrors created from two mirrors facing each other. The supply chain stretches far indeed, creating a complex ecosystem.

“Auditing the supply chain for ESG risk is part of the supply chain audit,” says Oliver Chapman.

So that is a good starting point: the supply chain audit. And the supply chain audit must begin with an extensive list of suppliers. 

Apple and Foxconn

But consider why it matters. 

A company that claims to have a squeaky clean ESG approach, which prides itself on the trinity of environmental social and governance, will look hypocritical if it buys product from a company that employs slave labour, or maybe labour working in appalling sweatshop conditions

Apple is a case in point.  Back in the early 2010s, the company was mired in controversy relating to working conditions at the Foxconn factory in Shanghai— some reports even suggested that the management at the factory used nets to catch workers trying to commit suicide by jumping from the factory’s roof.  

When the controversy broke, Steve Jobs was Apple’s CEO — he said that the company was “all over it,” but the truth is Jobs was a master salesperson and visionary but was not famous for his compassionate approach to management.

Under Tim Cook, it has been a different story, and the company has invested heavily in improving its supply chain.  

Not many people reading this would be so keen on working at a Foxconn factory, but conditions, according to various media reports, are not like they used to be. But it is not straightforward. A shutdown hit Apple’s supply chain at Foxconn’s Sriperumbudur factory after the mainly female workforce went on strike protesting working conditions. 

Apple responded by saying it had put Foxconn on “probation.” 

The Apple solution has partly involved diversifying its supply chain and shifting partly to manufacturing plants in India, where ESG adherence is said to be superior.

The conditions at the factories used in the Apple supply chain highlight the issue’s complexity. Apple says it cares, and frankly, Tim Cook probably does, but the solution is not so easy.

Meanwhile, Cook was forced to squirm at the Oscars as Ricky Gervais vented forth. “Apple rolled into the TV game with a superb drama about the importance of dignity and doing the right thing, made by a company that runs sweatshops in China. So, you say you’re woke, but the companies you work for, I mean, unbelievable. Apple, Amazon, Disney. If ISIS started a streaming service, you’d call your agent, wouldn’t you?” 

But what damage has this done to Apple? 

Cook may have felt uncomfortable, but the Apple share price barely flickered.

This is where Risk enters the equation. Setting aside the morals of the issue; (which is a big thing to set aside), the business case involves squaring the benefits in terms of cheaper goods arising from manufacturers with questionable working practices lurking in the supply chain versus potential damage. The damage can include:

• Possible strikes leading to supply chain shortages

• Public anger — which could turn into something catastrophic for a company

• Potential problems with a company’s own workforce in an era of labour shortages which may not want to work for a company that includes sweatshops in the supply chain.

• Shareholder disquiet 

• Future government regulation and potential fines. 

So the risk calculus is not simple.

But a company that is authentic about ESG, not just parts of the ESG framework, would prioritise overviewing the supply chain to eliminate sweatshops.

The bigger picture 

But ESG covers multiple considerations —working conditions at suppliers’ factories are just part of the story.

If a company is truly authentic in its quest to support the environment, that means vetting all organisations in the supply chain for their environmental policy, for example.

Likewise, organisations in the supply chain with poor governance pose a risk. 

How do you audit the supply chain for ESG?

At one level, auditing the supply chain for ESG risk seems simple. Once the supply chain audit reveals the names of all the suppliers in the chain, it would not be so difficult to check their ESG scores.

But therein lies a problem. How accurate are ESG scores, and are they overly influenced by practices one might call greenwashing? 

Some individual suppliers may be too small to have an ESG score.

A more extensive audit will take account of social media comments from both the company and its public, what the company says in press releases and on its website, editorial coverage including local media to the company and comments by staff and other stakeholders on forums. 

ESG and the supply chain

If the cost of living crisis has taught us anything, it is that the supply chain is incredibly important but also complex. Detailed consideration of supply chain risk must form part of a company’s risk strategy. Add ESG to supply chain risk, and an added level of complexity is added, but the Risk of not doing this might be unacceptably high.