Redefining responsibility: The importance of managing supply chain risks

By accounting for Environmental, Social, and Governance (ESG) factors, businesses can effectively manage supply chain risks and reduce liabilities.

In recent years, the supply chain has become a new focus area for fostering the sustainable development of an organisation. By accounting for Environmental, Social, and Governance (ESG) factors, businesses can effectively manage risks and reduce liabilities. In addition, a business can leverage the value created by these risk management protocols, resulting in positive impact not only within the organisation, but also across the broader supply chain.

To conduct a comprehensive risk assessment, it’s important to consider vulnerabilities throughout the supply chain. This includes evaluating the potential impact of supply disruptions on the ongoing availability of raw materials, scrutinising potential human rights violations which could harm business reputation, the long term viability of supply, and ensuring labour practices uphold dignity and fairness. For example, an unintentional fuel spillage during transportation can have significant ramifications, from environmental repercussions, inherited liabilities, and damage to brand image.

A scoped approach

Supply chains have a significant impact on the environment, including the use of natural resources, pollution of water bodies, air quality, and the generation of greenhouse gas (GHG) emissions. A company, if reporting on their own carbon footprint, should include the carbon footprint of its supply chain when estimating its Scope 3 emissions. These emissions are produced throughout the lifecycle of a product or service, from the extraction of raw materials to the disposal of the product at its end of life.

Scope 3 emissions pose the most complex challenges – they’re often the most significant source of an organisation’s GHG emissions and can be the most difficult to measure and manage. Reducing the carbon footprint of a supply chain can be a challenge. However, it can if managed adequately help businesses reduce costs, improve reputation, and reduce risk.

The ripple effect

A significant challenge is understanding the ripple effect within the supply chain. For instance, if a company is heavily reliant on a transportation provider to get their products to consumers, any disruption in the transport provider’s operations directly impact the company’s deliverables and, consequently, shareholder value. The balance of power and influence in supplier relationships can also swing based on business volume. If a single supplier holds a substantial chunk of a company's orders, the leverage dynamics change. Therefore, embedding ESG considerations in procurement processes isn’t just forward-thinking; it’s sound business acumen.

Planning ahead

Recent upheavals, like the Covid pandemic, drove home the urgency of de-risking supply chains and the need to adopt more agile contingency planning. Localising and diversifying supply sources can mitigate significant disruptions, ensuring that businesses remain resilient against unforeseen challenges.

Our journey at EY is built on a dual-phased approach which begins with robust risk management controls and then shifting gears towards impact value creation. It’s a continuum rather than a binary choice. As we tread this path, one of our core principles is to avoid 'greenwashing'. True ESG practices need to be organic, deeply entrenched within processes, and shouldn’t be just surface-level initiatives for external optics.

Finally, it’s imperative to understand that this journey has its own set of challenges. Often, the primary hurdle I’ve identified is the lack of adequate stakeholder engagement. The perennial question arises: why would a supplier commit to ESG practices when it seemingly benefits the principal company more? The answer lies in effective stakeholder mapping and strategic communication, emphasising mutual, long-term gains.

Initial stages of ESG implementation might be cost-intensive as these initiatives are often process-driven. However, as businesses evolve, leveraging data becomes critical in making management decisions, and this can only be done if there are systems in place to collect and validate this data required. This shift from mere risk management to innovation fuelled by data insights can truly transform business performance.