Supply Chains: The hidden ‘S’ in ESG – is your company ready for what’s coming? Part 1 of 2

During the last few years, the ESG landscape has expanded its focus to encompass corporate supply chains. This shift is largely due to growing public awareness of social issues, Scope 3 emissions reporting and regulatory developments in Europe. Regulators, investors and others recognize that the environmental, social, and governance practices of suppliers and partners can significantly impact sustainability performance and pose potential business risks if not properly identified and managed. With the recent passage of the EU's Corporate Sustainability Due Diligence Directive (CSDDD), the impacts of this will be felt in two ways: as a purchaser (your own supply chain) and as a supplier (your customers).

Alongside the CSDDD, reports falling under the Corporate Sustainability Reporting Directive (CSRD) will also need to assess value chains as part of the double materiality process, and national-specific supply chain laws are starting to take shape, such as the Canadian ‘Forced Labour in Canadian Supply Chains’ Act. Based on these developments, companies will find increasingly greater pressure from stakeholders and regulations to bolster supply chain transparency, particularly in relation to ESG factors.

As a Purchaser: Complexity and Transparency Are at the Forefront of Supply Chain Challenges

One hurdle corporate managers face is the intricate structure of global supply chains, which often involve multiple tiers of suppliers. Many companies struggle to identify their indirect suppliers, let alone monitor their ESG performance. This lack of visibility creates substantial risks, as undisclosed unethical practices or environmental impacts can undermine a company's overall supply chain strategy. The increasing demand for transparency from customers, investors, and regulatory bodies further amplifies these challenges.

Stricter Supply Chain Regulation is Coming

The CSDDD represents a significant advancement in regulatory efforts to ensure that large corporations operate sustainably and ethically.

With the first application date for EU companies being July 2027, the CSDDD mandates that in-scope companies identify, prevent, mitigate, and account for human rights and environmental impacts within their operations and across their value chains. After being phased in, it will  apply to EU-based companies with more than 1,000 employees and a net turnover exceeding EUR 450 million, as well as to non-EU companies with substantial business activities in the EU, starting with those generating €1.5 billion in revenue in the EU.

One of the core requirements is that companies develop and implement due diligence policies to address potential adverse impacts on human rights and the environment. These impacts include issues like child labour, deforestation, and pollution. The CSDDD also obligates companies to adopt climate transition plans aligned with the Paris Agreement, setting out clear targets and actions to reduce carbon emissions.​ It also aims to create a uniform legal framework across the EU and provide businesses with greater certainty and a level playing field. ​ Overall, the CSDDD aims to have a profound impact on how companies manage ESG issues within their supply chains, pushing them towards greater transparency and accountability in their operations.

Additionally, national laws like the German Supply Chain Due Diligence Act impose strict requirements on companies to provide detailed documentation proving that their supply chains are free from forced labour and other unethical practices. Meeting these demands necessitates extensive data gathering and collaboration with suppliers, which can be a daunting task given the complexity of modern supply chains.

Frameworks and Partnerships Can Help Drive Success

Companies can reduce the burden of assessing ESG within their supply chains by aligning with standards, utilizing established ESG frameworks, and engaging with industry associations and partnerships. Leveraging newly developed reporting standards such as the International Sustainability Standards Board standards and CSRD can also help companies think about the materiality of ESG risks across the value chain, and preparation for these standards will help build capacity for supply chain-specific regulations such as the CSDDD. Furthermore, companies can look to other third-party standards, such as those of ESG Rating agencies, the Corporate Human Rights Benchmark or the United Nations Global Compact, to understand what supply chain factors stakeholders are considering.

Collaborating with industry associations and participating in sector-specific initiatives can ease the ESG assessment process. For example, organizations like the Responsible Business Alliance (RBA) or industry-specific collaborations such as The Sustainable Agriculture Initiative (SAI) offer tools and platforms that allow companies to share information and conduct shared audits. Such collaborations promote the adoption of best practices and create collaborations that reduce the individual effort required for ESG compliance​. Forming partnerships with other companies and non-governmental organizations can enhance the capacity to address complex ESG issues that span multiple tiers of the supply chain. These partnerships can provide access to specialized knowledge, resources, and technology, making it easier to implement and monitor ESG initiatives. For instance, collaborative platforms like the Sustainable Apparel Coalition’s Higg Index enable companies in the apparel industry to assess and improve their environmental and social impacts collaboratively, leveraging shared data and resources​.

Mapping ESG's Role in Supply Chain Management

Practical Steps For Companies with Complex Supply Chains

1.      Identify Applicable Regulations: For companies with complex supply chains, practical steps to compliance begin with a clear understanding of relevant regulations and their specific requirements. This foundational step ensures that companies are fully aware of their obligations under various national and international laws, such as the CSDDD.

2.      Map your Supply Chain: Next, companies should map their entire value chain to identify all direct and indirect suppliers, pinpointing potential ESG risks at each level.

3.      Build a Roadmap: Creating a detailed roadmap is crucial. This roadmap should include key questions to ask suppliers, such as their labour practices, environmental policies, and compliance with human rights standards.

4.      Prioritize Suppliers: Companies need to prioritize which suppliers to engage with first, such as focusing first on those with the highest risk or spend​.

5.      Create Risk Assessments for Suppliers: Determine an initial narrow list of risk-based questions for your suppliers and engage them through a questionnaire.

6.      Feed Supplier Data into a Scorecard: Have a clear plan for using the gathered data to rate and potentially further engage suppliers. Effective data management systems are essential for organizing, analysing, and reporting this information​.

7.      Monitoring and Reporting: Alongside continuing to monitor ongoing performance as part of your due diligence efforts, for the CSDDD, you will need to publicly report on the due diligence processes put in place in a sustainability report or website format. Companies can get ahead of reporting deadlines with internal preparation and managing internal stakeholder expectations.

Getting Started on Your ESG Supply Chain Journey

Navigating the complexities of ESG supply chain management requires a multifaceted approach that includes understanding relevant regulations, leveraging established and upcoming frameworks, and fostering strong partnerships with suppliers and industry associations. Large companies must map their value chains, prioritize supplier engagement, and manage data effectively to ensure compliance and improve sustainability practices.

Partnering with an experienced ESG consultancy such as Leaders Arena can provide invaluable support in effectively implementing these strategies and navigating the evolving ESG landscape. We offer high-level regulatory guidance and the ability to break down complex challenges into manageable steps to help companies achieve their supply chain due diligence objectives more efficiently. Take action today by contacting heather@leadersarena.global to guide your journey towards sustainable supply chain management and compliance.