Future-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 Future-Proofing SupplyFuture-Proo Chains: Supply Chain fSustainabilitying Supp and lyKey TrendsChain in 2021s: 2 Supply Chain Sustainability and Key Trends in 2021
While corporate sustainability was a key focus of many companies before 2020, this past year made it clear that managing environmental, social, and governance (ESG) issues must be at the forefront of a company’s operations. The COVID-19 crisis has exposed critical supply chain weaknesses, particularly among suppliers with poor workplace health and safety practices. Global calls for greater inclusion and transparency resulted in firms with alleged human rights violations throughout their supply chain or lacking diversity within their workforce coming under public scrutiny. Increasing regulatory and consumer pressure for climate action prompted companies to make a record number of sustainability commitments. These events underscored the importance of sustainable, resilient, transparent, and legally compliant supply chains. However, while a company may adhere to the highest ESG performance standards in its own operations, many of its suppliers may not hold similar practices. Studies have estimated that up to 90% of a company’s sustainability impacts originate in a firm’s supply chain.1 These impacts can hold considerable risk: companies such as Nike2, Marks & Spencer3, and Hershey’s4 have experienced firsthand the reputational and financial fallout caused by ESG-related scandals in their supply chains. Given the benefits to gain and the risks to lose, corporations are turning towards their supply chains to incorporate ESG considerations. This guide summarizes the rationale behind integrating ESG considerations into a company’s supply chain management practices and outlines the key supply chain sustainability trends for 2021.
Future-Proofing Supply Chains Future Value: Future-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 3 The Business Case for Supply Chain Sustainability What does a supplier’s ESG performance include? Environmental refers to the resources a supplier uses, the waste it Supply chain sustainability shifts the focus from short-term financial considerations to long-term value creation, and considering and managing produces, and the resulting consequences of those activities on the the ESG performance of one’s suppliers. By including such non-financial planet. This includes water management, greenhouse gas (GHG) considerations, sustainable supply chain management not only benefits the emissions, and the use of dangerous chemicals environment, but also reduces risks, mitigates impacts, and realizes reputational Social refers to how a supplier manages its relationship with internal and financial benefits, such as cost savings, brand goodwill, and customer loyalty (see Table 1 for an overview). and external stakeholders. This includes labour relations, employee training and education, reputational issues, and how a supplier fosters Moreover, ESG performance is increasingly considered a component of – and positive relationships within the broader community proxy for – resilience. Companies with strong ESG performance often have robust governance frameworks, manage social and environmental risks well, and Governance refers to a supplier’s internal framework of procedures, have stronger relationships with suppliers. Weak ESG performance, on the other practices, and controls. This includes internal processes utilized to hand, can carry significant reputational and operational risks for a company. govern itself, comply with regulations, conduct external audits, and Prioritizing supply chain sustainability can, therefore, reduce general risks for corporations, including minimizing operational disruptions due to environmental guide decision-making risks, regulatory risks, or reducing reputational risks caused by labor issues.5
Table 1: Impact of supply chain sustainability on companies
Company with weak supply chain sustainability Company with strong supply chain sustainability
Risk management Increased likelihood of unexpected financial and reputational risks Greater ability to identify, avoid, and manage potential risks, including better distribution of risks by greater collaboration with suppliers
Operations Unstable access to raw materials and increased chance of Reduced incidences and/or impact of supply chain disruptions disruption to supply chain
Reputation Increased reputational risks, including loss of brand value due to Builds brand loyalty among customers and increases ability to controversial events operate without disruption or negative media attention
Costs Increased costs related to supply chain disruptions Reduced costs due to increased efficiency and productivity
Shareholder value Potential decrease in shareholder value due to higher costs and Potential increase in shareholder value due to lower costs and impacts of controversial events on share value reduced reputational and financial risks
Human resources Increased likelihood of workforce instability (e.g., strikes, low Decrease in employee turnover and greater stability in workforce retention rates)
Future-Proofing Supply Chains Green growth: Future-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 4 Key trends in supply chain sustainability 1. Building greater resiliency As markets rebound from the initial shock of the COVID-19 pandemic, buyers, governments, and investors are calling for systemic changes in supply chain management to prevent similar future disruptions. Shifting consumer demands for transparency and increased stakeholder attention on the ESG performance on a company’s suppliers have also placed pressure on companies to change Supply chain resiliency has increasingly been an ongoing focus in supply chain how they manage their supply chain. management. However, in light of the widespread supply chain disruptions caused by COVID-19 pandemic, companies are scrambling to accelerate In 2021, companies will need to respond to these demands by making key ESG- resilience-building activities across their supply chains. According to a recent related changes to their supply chain management practices. Here are the seven McKinsey survey of supply chain executives, an overwhelming 93% reported emerging trends in supply chain sustainability that companies will need to pay they are taking steps to increase resilience across their supply chain in the attention to this year, along with some practical tips and takeaways for supply coming years.6 chain and sustainability professionals. Fostering supply chain resilience involves risk anticipation, impact mitigation, redundancy systems, and building suppliers’ capacity to rapidly adapt to changes. These measures enable an affected supply chain to regain full functionality after a shock faster compared to less resilient supply chains. When Key Takeaways the COVID-19 crisis began, companies with resilient supply chains were able to resume or continue production quicker than companies that had not put resiliency-related measures in place.7 1 Mitigate against disruption impacts: source from geographically diverse suppliers, multi-source key commodities, and reduce the Building resilient supply chains will be paramount in the future as the COVID-19 number of unique parts required crisis is not an isolated event. Similar supply chain shocks are expected to increase in frequency and magnitude over the coming decades, triggering Implement redundancy systems: revisit safety stock parameters, supply disruptions lasting a month or longer every 3.7 years on average. These 2 build redundancies into transport routes, and establish secondary disruptions alone will cost an average company approximately 45% of its annual 8 supplier relationships profits over the course of a decade. Consequentially, companies have a strong financial incentive to continue to build greater resiliency across their suppliers in 3 Increase your capacity to anticipate risks: plan for global scenarios the coming years. and increase visibility across suppliers. Tools that quickly identify suppliers with higher or lower material ESG risks across your entire supply chain, like Sustainalytics ESG Assessment Platform, can help supply chain professionals increase visibility.
Future-Proofing Supply Chains Future-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 5 Microsoft went further and committed to removing its historic emissions by 2050, in addition to achieving a carbon neutral supply chain.13 2. Focusing on a green recovery Committing to a green recovery is not just good for the environment; it makes financial sense. Green consumerism continues to gain momentum, especially among consumers under the age of 40, with surveys showing that more than two-thirds of those consumers don’t mind paying a premium for sustainably In economic recovery plans across the globe, sustainability initiatives are being produced products.14 Reputational benefits present additional incentives to placed at the center, with many governments investing significant amounts in embrace a green recovery and improve a company’s ESG performance, as green recovery measures. The EU recovery package, for instance, includes funds sustainable companies can more easily attract top talent, boast higher retention directed towards assisting green food supply chain strategies, green transport rates, and increase customer loyalty.15 options, and circular economy initiatives.9 Companies are capitalizing on these initiatives and using the recovery period to ‘green’ their supply chains. Manufacturers are innovating with eco-friendly packaging, while retailers are developing low carbon alternatives. In 2020, there was also a dramatic increase in large manufacturers and retailers committing to carbon neutral operations – including reduction commitments across their supply chain operations.10 For instance, Apple and Novartis, committed to being 100% carbon neutral across their respective supply chains by 2030.11 12
Key Takeaways
1 Engage leadership and set supply chain sustainability goals: have senior leadership share the strategic value of a sustainable supply chain to stakeholders, regularly communicate commitment to suppliers, and set goals that align with organizational targets
2 Integrate environmental considerations into procurement decisions: set environmental benchmarks for potential suppliers and integrate ESG risk ratings into the procurement decisionshelp supply chain professionals increase visibility
3 Analyze existing suppliers’ environmental performance: identify high and low risk performers in terms of their environmental stewardship and call for performance improvement, when needed
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3. Responding to increased scrutiny on suppliers’ social performance
Recent calls for racial inclusion and the protection of workers’ health and safety have resulted in greater attention on the social performance of company’s “By proactively managing environmental issues within our supply suppliers. Regardless of the buyers’ social performance, companies can face significant financial and reputational risks when their suppliers violate labor chain, we are safeguarding the continuity of sustainability at the laws, discriminate, or negatively impact their local communities. Several fashion heart of our business.” brands, including Boohoo and H&M, faced intense public backlash in 2020 due to the alleged use of forced labor by their suppliers.16 — DELL, 201933 In converse, companies committed to strong social performance across their supply chains mitigate these risks, and benefit from positive publicity and brand differentiation. IBM provides a good case in point: it attributes its supply chain diversity as being a key factor in winning contracts.17 There are also numerous campaigns and organizations dedicated to promoting companies that have integrated social standards across their supply chain. Governments are also increasingly considering a supplier’s supply chain sustainability in major procurements and approvals for large, complex projects such as infrastructure, mining, and energy projects. In Canada, purchasers in Key Takeaways the provincial government of British Columbia must consider social impact – broadly defined as the use of purchasing power to create social value and support social policy objectives – with respect to potential suppliers for all major 1 Communicate social performance expectations with suppliers: requests for proposals.18 The US federal government mandates that contracts include messaging from senior executives and implement social of a certain value be awarded to small businesses or include sub-contracting performance requirements in procurement contracts such as the options to smaller businesses whenever possible, particularly to small Responsible Business Alliance Code of Conducts businesses owned by women, disabled veterans, and in historically underutilized business zones.19 2 Increase transparency with external stakeholders: publish suppliers’ ESG ratings, which includes social performance metrics, For those companies with strong social performance across their supply chain, on the company website and in annual reports this presents an opportunity to set themselves apart from their competitors and increase their likelihood of securing contracts.
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4. Reporting on suppliers’ ESG performance
This year will see wide-reaching ESG regulations enter into force in several markets. The EU Taxonomy requires financial market participants and large companies in the EU and UK to publicly disclose on their alignment with certain “Sustainability in the supply chain is one of our top priorities. environmental objectives. Although the Taxonomy regulation does not extend This is reflected by the assessments of our managing to a company’s supply chain at this time, companies are expected to be under greater scrutiny by investors, consumers, and other companies for details on the directors, who ranked responsible supply chain practices…as material issues affecting industry supply chains. one of the biggest challenges facing our future sustainability Other regulation frameworks around the world also require companies to performances.” guarantee that their supply chains are free from human rights abuses, such as California’s Transparency in Supply Chains Act and the UK and Australia’s — ALDI NORD Modern Slavery Acts, which mandate a firm report on the risk of modern slavery in its operations and supply chain. With regulatory trends in supply chain disclosures expected to accelerate in the coming decade, companies should begin to collect relevant data and be prepared to report on their upstream ESG performance. While not mandatory, many voluntary reporting standards such as the Global Reporting Initiative (GRI), Task Force on Climate-Related Financial Disclosures (TCFD), and Sustainability Accounting Standards Board (SASB) are also integrating supply chain disclosure requirements. ALDI Nord, one of the largest supermarket chains in the world, discloses detailed information on its Key Takeaways suppliers in line with GRI Standards. The company has also chosen to publish information on suppliers’ production facilities for selected product groups, allowing customers to trace the origins of ALDI Nord’s textiles and footwear.20 1 Improve data collection and data management of suppliers’ ESG With 80% of Fortune 100 companies using the GRI standards to report on performance: source quality data on end-to-end operations to their sustainability-related activities, voluntary disclosures of a company’s ensure compliance with current and future disclosure regulations, supply chain sustainability are becoming commonplace and expected by many as well as ease reporting requirements of voluntary standards, stakeholders. e.g., GRI
2 Report using voluntary reporting standards: disclose using internationally-recognized reporting standards to increase transparency and create internal incentives for continuous improvement
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5. Integrating climate-related risks
Climate-smart supply chain planning is expected to play a significant role in key infrastructure to mitigate future supply chain disruptions after Hurricane supply chain management in the next year and beyond. With the impacts of Sandy revealed the fragility of the state’s fuel supply to extreme weather climate change being felt more acutely in the coming decade,21 companies are events.24 Global restaurant chains, including Chipotle and MacDonald’s, have beginning to recognize the inherent risks climate change poses to their supply also commenced with integrating climate change risks into their supply chain chains. Higher temperatures, extreme weather events, sea-level rise, and water management, including conducting water risk assessments along their supply shortages affect the availability of crucial materials and resources.22 These chain and diversifying suppliers.25 climate-related impacts pose significant disruption risks across global and local supply chains. As such, many investors are putting pressure on companies to tackle climate-related risks in their supply chains.23 Companies will need to assess their exposure and vulnerability to climate-related risks along their supply chain and put mitigation plans in place, including asset protection measures and alternative material sources. For instance, in New York, energy suppliers have begun building higher sand and gravel banks around
Key Takeaways
1 Identify risk exposure across suppliers: conduct a climate vulnerability risk assessment or identify suppliers with weak environmental management systems
2 Support suppliers’ in addressing climate-related risks to their operations: build strategic partnerships with suppliers to jointly work on implementing climate change mitigation and adaption measures (e.g., the physical protection of key assets or moving high-risk facilities)
3 Investigate alternatives for high-risk materials: source substitute materials or secondary suppliers for material or products at high-risk
Future-Proofing Supply Chains Future-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 9 arrangements with their lower-tier suppliers.29 However, thanks to advances in artificial intelligence, machine learning, blockchain technology, and big data, 6. Gaining greater visibility across lower-tier companies can now leverage digital solutions to collect, aggregate, and analyze suppliers ESG data on suppliers. These advanced technologies create opportunities for businesses to identify problematic suppliers beyond Tier 1, avoid costly controversies, and promote their sustainability efforts with the certainty that their total supply chain will stand up to stakeholder scrutiny. Traditionally, companies have demanded that their Tier 1 suppliers – the manufacturer or service provider providing goods or services directly to the company – comply with certain ESG standards, with the expectation that these suppliers demand similar ESG performance from their own suppliers. In practice, this cascading effect along the supply chain rarely occurs, with significant ESG- related risks remaining further upstream in the supply chain. Studies have shown that most lower-tier suppliers – those smaller companies providing materials and products to Tier 1 suppliers – fail to mirror the ESG standards expected from the end buyer.26 The intense stakeholder scrutiny Adidas, Calvin Klein and Lacoste27 experienced when lower-tier suppliers were found to be dumping chemicals into rivers in China or the public fallout Hewlett- Packard and Apple28 weathered when allegations surfaced of hazardous working conditions in suppliers’ factories are all potent examples of the risks that lower- tier suppliers pose to a company. Companies can mitigate these risks by analyzing their lower-tier suppliers and addressing potential vulnerabilities. Gaining total visibility on end-to-end operations can be challenging for a company, with approximately two-thirds of companies reporting that they lack crucial information on business-continuity
Key Takeaways
1 Utilize data to improve end-to-end visibility: use enterprise solutions that measure and analyze lower-tier supplier data
Build collaborative relationships with suppliers: this could 2 include formal and informal information exchanges to increase visibility on upstream issues and develop a more collaborative mindset to support each other in case of disruptive events
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7. Supporting suppliers through access to capital and capacity building
Many small and medium-sized suppliers may lack the knowledge or access to financing to align their operations with a buyer’s ESG standards. This can prevent some smaller suppliers from winning bids or cause them to fail “IBM’s global spending…presents an opportunity to promote our compliance audits. To ensure that smaller suppliers can satisfactorily comply company’s values and help drive progress in environmental and with their ESG standards, some banks and companies have begun providing financing programs and capacity training to their suppliers to improve their ESG social responsibility throughout our supply chain.” performance. The sports apparel company, PUMA, provides a financing program — IBM, 2019 32 to suppliers to improve their environmental, health and safety, and social standards.30 Capacity building also provides opportunities to promote diversity and inclusion across the supply chain by empowering minority-owned small businesses to supply to larger procurers. For instance, Nutrien, a Canadian agricultural company, works with majority Indigenous-owned companies they call ‘Opportunity Partners’ and extends additional resources to allow them to be more competitive in Nutrien’s supply chain.31
Key Takeaways
1 Provide training resources for suppliers: provide simple online tools or in-person training, which equip suppliers with the skills, knowledge, and systems to manage ESG issues
2 Investigate supply chain financing programs: provide loans to suppliers, with loan terms conditional on the suppliers’ ESG performance, in partnership with financial institutions or alternative lenders to support each other in case of disruptive events
Future-Proofing Supply Chains Shifting the Dial: Future-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 11 Supply Chain Sustainability in Practice
Given the accelerating trends in supply chain management, integrating ESG considerations throughout the supply chain will be a key priority for companies in 2021 and beyond. The COVID-19 crisis has demonstrated the need for companies to rethink supply chain management practices, source new suppliers, and embed sustainability criteria to ensure their supply chains are future proof. However, building a sustainable supply chain takes time and resources. Companies can use enterprise software and other digital tools to increase the efficiency and effectiveness of their transition to a sustainable supply chain. These advanced tools utilize robust ESG risk data, sophisticated algorithms, and machine learning to quickly analyze risks across the supply chain and provide insight into the ESG performance of the entire supply chain, including lower-tier suppliers. These enterprise solutions and other supply chain sustainability practices mentioned in this guide can help build and maintain supply chains that are able to weather the uncertainties of tomorrow.
Are you interested in learning about how our ESG Assessment Platform can improve sustainability in your supply chain? Contact us today to connect with our team of experts.
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1 Bové, A. and Swartz, S. (2016), ‘Starting at the source: Sustainability in supply chains,’ McKinsey & 11 Apple (2020), ”Apple commits to be 100 percent carbon neutral for its supply chain and products by Company, accessed (12.01.21) at: https://www.mckinsey.com/business-functions/sustainability/our- 2030,“ Apple, accessed (19.01.21) at: https://www.apple.com/newsroom/2020/07/apple-commits-to-be- insights/starting-at-the-source-sustainability-in-supply-chains 100-percent-carbon-neutral-for-its-supply-chain-and-products-by-2030/ 2 Since the early 1990s, Nike’s use of overseas suppliers has been under scrutiny, with several alleged 12 Novartis (2020), ”Climate,” Novartis, accessed (29.01.21) at: https://www.novartis.com/our-company/ incidences of overtime violations, poor employment conditions, and worker abuse. Banjo, S. 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(2020). ‘Europe’s Green Recovery Plan has green strings 21 McFall-Johnsen, M. (2019). ‘Painfully slow hurricanes, deadly heat, and cities without water: attached,’ accessed (14.01.21) at: https://www.bloomberg.com/news/articles/2020-05-27/europe- What the climate crisis will look like in the next 10 years, according to experts,’ Business Insider, pledges-green-recovery-in-historic-stimulus-program accessed (14.01.2021) at: https://www.businessinsider.com/climate-change-in-the-next-decade-2019- 10 The number of commitments to reach net zero emissions from local governments and businesses has 11?r=DE&IR=T roughly doubled in less than a year, as many prioritize climate action in their recovery from Covid-19. 22 Goldstein, A., Turner, W.R., Gladstone, J. et al. 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24 Zawadzki, S. and Sussman, A. (2013). ‘Analysis: Six months after Sandy, New York fuel supply chain still 29 Sneader, K. and Singhal, S (2021). ‘The next normal arrives: Trends that will define 2021—and beyond,’ vulnerable,’ Reuters, accessed (13.01.21) at: https://www.reuters.com/article/idUSBRE93T0DG20130430 McKinsey & Co., accessed (18.01.21) at: https://www.mckinsey.com/featured-insights/leadership/the- 25 Chipotle is securing alternative sources for avocados due to rising temperatures and prolonged next-normal-arrives-trends-that-will-define-2021-and-beyond droughts in key agricultural regions in Mexico, the primary producer of avocados. McDonald’s has 30 BNP Paribas (2016), ” BNP Paribas and PUMA launch innovative financing program for suppliers publicly disclosed an assessment of its meat and dairy suppliers’ exposure to water risks. Forbes (2020), to reward social and environmental standards ,” BNP Paribas, accessed (25.01.21) at: https://group. “Fast Food Giants Need To Tackle Climate And Water Risks, Investors Warn,” Forbes, accessed (28.01.21) bnpparibas/en/press-release/bnp-paribas-puma-launch-innovative-financing-program-suppliers-reward- at: https://www.forbes.com/sites/mikescott/2020/02/07/fast-food-companies-need-to-step-up-on- social-environmental-standards climate-water-action-investors-warn/?sh=467cb6e46de5 31 Nutrien (2020). ‘2020 Environmental, Social and Governance (ESG) Report,’ Nutrien, accessed 26 Villena, V. and Gioia, D. (2020). ‘A More Sustainable Supply Chain,’ Harvard Business Review, accessed (14.01.21) at: https://www.nutrien.com/sites/default/files/uploads/2020-04/Nutrien%202020%20 (11.01.21) at: https://hbr.org/2020/03/a-more-sustainable-supply-chain ESG%20Report_0.pdf 27 Suppliers to major clothing and shoe brands were found to be releasing wastewater polluted with 32 IBM (2020), ”IBM 2019 CSR Report,” IBM, accessed (19.01.21) at: https://www.ibm.org/ dangerous chemicals into the Yangtze River Delta and the Pearl River Delta in China. Stanway, D. (2011), responsibility/2019/IBM-2019-CRR.pdf “Big-name brands sourcing from polluting China firms,“ Reuters, accessed (25.01.21) at: https://www. 33 Dell (2019), ”2019 Supply Chain Sustainability Progress Report,” Dell, accessed (29.01.21) at: https:// reuters.com/article/us-china-pollution-greenpeace/big-name-brands-sourcing-from-polluting-china-firms- corporate.delltechnologies.com/content/dam/uwaem/production-design-assets/en/corporate/social- idUSTRE76C0YS20110713 impact/collaterals/cy2019-supply-chain-sustainability-progress-report.pdf 28 Allegations of labor law violations, including excessive overtime and unsafe working conditions, were made against a key supplier to major tech brands, resulting in intense public scrutiny and changes to the supplier‘s labor practices. Barboza, D. (2012), ”Foxconn Plans to Lift Pay Sharply at Factories in China,“ New York Times, accessed (28.01.21) at: https://www.nytimes.com/2012/02/19/technology/foxconn-to- raise-salaries-for-workers-by-up-to-25.html?_r=1
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