As consumers pay more and more attention to companies’ sustainability the need for ethical practices in production and distribution is no longer an option. In addition to the consumer and reputational considerations for sustainable business, regulators are paying more attention to ethical practices and are developing new Environment, Social and Governance (ESG) legislation that must be complied with. With these factors in mind, consumer goods companies must closely examine their supply chains, and recognize unethical practices within their production and distribution networks.
Ethical consumption, a type of consumer-based activism through purchasing from companies supporting sustainability and ethical practices, is on the rise. In a 2020 study by professional services firm, Accenture, surveys showed that 60% of participants were making more sustainable, ethical, or environmentally-friendly purchases since the start of the COVID-19 pandemic.
As this data shows, consumers are paying increasing attention to where they shop and what they purchase. Many of these decisions are made based on how sustainable a company’s procurement, production, and supply chains are. And this information is easy to access as companies become more transparent due to increased consumer focus and demand.
Such transparency, while increasingly necessary, can also expose reputational vulnerabilities. If a company’s third party does not meet the sustainability expectations of an organization’s customers, shareholders, regulators, or local community, the company can face reputational risk and damage. An example of reputational risk caused by unsustainable practices is negative news coverage due to harmful environmental or human rights practices within your supply chain.
The importance of sustainable practices isn’t new to consumer goods companies, and most organizations have had some type of corporate social responsibility (CSR) program in place since these types of programs began developing in the 1970s. Within CSR programs, responsibility was usually focused internally and within local communities, and managed by HR or marketing departments.
As companies and regulators focus more on a broader approach to ethics, however, a new shift in programs is being seen through Environment, Social, and Governance (ESG) programs. These programs are generally managed by risk and compliance departments, acknowledging that an organization’s responsibility for risks extends beyond internal factors. Under ESG programs, more attention is paid to supply chains and that responsibility is also taken for the actions of third parties.
The E in ESG stands for environment, and companies, consumers, and regulators are becoming closely focused on how their actions affect sustainability factors such as climate change. Unilever, one major company focused on making proactive changes to its practices, has planned for zero net emissions from its product manufacturing lifecycle by 2039. Governments are also paying attention; the EU, for example, has set a target to reduce carbon dioxide emissions by 80% by the year 2050.
With this increased focus on how our actions affect the planet, consumer goods companies are tasked with creating greener, cleaner products and utilizing processes and practices that meet sustainable standards. A major factor in this shift is taking responsibility for any unsustainable practices that your third parties are utilizing as they perform services for you. An example of how a company can be liable for the actions of their vendors is if a third party you’re utilizing causes an environmental disaster such as an oil spill; as a company that engages with them, you can be responsible for this disaster as well. Financial, compliance, and reputational losses can all be experienced in such an event.
The S in ESG stands for social and places focus on a variety of issues such as:
With this shift from CSR to ESG programs, consumer goods companies must make efforts to identify, mitigate and rectify social injustices within their supply chains and third-party activities. Failing to eliminate such unethical practices within supply chains and vendor relationships can lead to severe compliance and reputational damage, and, more importantly, these practices put peoples’ health and safety at risk.
The G in ESG stands for governance, and regulators around the world are working to ensure that sustainable and ethical practices are being met by businesses. Existing regulations such as the UK Modern Slavery Act and the California Transparency in Supply Chains Act require companies to identify human rights violations throughout their supply chains. Under these regulations, organizations can be held accountable even if unethical practices are being performed by third parties.
Regulations such as these will become increasingly more normalized. According to NASDAQ, U.S. President, Joe Biden’s head of Securities and Exchange Commission (SEC), Gary Gensler stated, “[The Administration is] likely to heavily reform and broaden ESG investing and corporate disclosure rules in the U.S.”
Outside of the United States, other legislation is being considered and enacted. In March of 2021, the European Commission approved guidance requiring that consistent due diligence be performed on supply chains to ensure that any harmful environmental and human rights practices are eliminated. Under this guidance, companies within the EU will be held accountable for their third parties, as well as outside companies that access EU markets or have employees within the EU.
Despite this regulatory shift to examining ESG practices, Dun & Bradstreet has reported that 43% of companies surveyed struggle to identify ESG factors as part of their due diligence processes. Examining your supply chains, processes, and activities of your third and nth parties is the first step towards eliminating unethical practices and achieving compliance to regulations on the horizon.
Identify the scope of your ESG program: The needs of each company are different, and consumer goods companies have special considerations in terms of manufacturing, distribution, and supply chains. Your ESG program should be structured around current risk profiles, how third parties are utilized and managed, and which regulations must be adhered to.
Identify ESG risks for each third party: To manage ESG risk as a whole, you must first identify ESG vulnerabilities in each of your suppliers. Examine how each supplier operates, the individual risks it presents to your company, and any fifth or n-th parties they engage with that can affect your supply chains.
Perform initial and ongoing due diligence: When it comes to onboarding new suppliers, make sure all processes are documented, and that the potential relationship is validated with ESG checks such as security and financial ratings, sanctions lists, reputation risks, etc. This is not a one-time activity, though, and continuous due diligence should be performed utilizing inspections, assessments, and questionnaires.
Build up your ESG reporting: Make sure that all ESG-related processes, practices, and procedures for all third parties are documented and provide a transparent view into all activities. This will not only complement third-party lifecycle management but also provide the needed documentation for compliance and possible audit trails.
To learn more about how to proactively implement ESG practices into your TPRM program, reach out to Aravo– our team is here to help you get ahead of these risks and help make the world a better place!
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