ESG & Supply Chain Transparency

How Supply Chain Transparency Technology Protects Your Bottom Line and Combats Global Social Injustice

By Erika Peters, Exiger Global Head of Third Party & Supply Chain Risk Management

Read the full version of this article, Combating Global Social Injustice Through Supply Chain Transparency Tech, in SupplyChainBrain’s 2022 Supply Chain ESG Guide.

Ethical behavior in supply chains and protecting your company’s bottom line can work in concert. There are two main drivers making risk-management teams pay more attention to ESG supply chain issue than ever:

1. An increasing number of global supply chain regulatory requirements make companies responsible at both the direct third-party and indirect supplier relationship levels. For example, the German Supply Chain Act envisions fines for failure to assure that the supply chain doesn’t include modern slavery or human trafficking. In the U.S., the Uyghur Forced Labor Prevention Act (UFLPA) and related regulations place similar expectations on companies for taking reasonable efforts to exclude goods and services generated by forced labor in China’s Xinjiang Uyghur Autonomous Region. The UK Modern Slavery Act has similar objectives. Companies are expected to comply within the next six to 12 months.   
    
2. Poor supply chain social risk-management processes can lead to bad press and loss of stakeholder and customer trust. Activist investors are no longer a fringe group, but are exercising great leverage and now require companies to truly understand and take ownership for their supply chains from a social risk perspective.

These factors mean that organizations need to invest in processes and technology that provide transparency and insight into their vendors and supply chains.

[ Additional ESG Supply Chain Risk Management Resources: The ESG Standards with Tom Fox and Erika Peters podcast | The ESG Due Diligence Process – Why It’s Important in 2022]

Labor-related supply chain risk management must account for prohibitions on:

• Child labor
• Forced labor
• Slavery
• Disregard of occupational safety and health obligations
• Withholding of adequate wages
• Bans on the right to form trade unions

These are all part of the “S” in ESG, and are no longer just a “nice to have” element of an ethics program, but rather a supply chain imperative. Companies know they need to make these supply chain risk management concerns a priority, but the challenge for many is identifying how to do this at scale to screen thousands, and sometimes tens of thousands, of suppliers across their ecosystems. Manual processes mean less thorough due diligence, longer supplier onboarding or monitoring timelines, and a higher risk appetite for unknown exposure that could be surfaced by other entities, instead of being proactively controlled by the organization.

Analyzing ever-changing supply chain social risk source data from multiple sources adds to the complexity. Shipping data, for example, changes at least daily as new shipments are loaded or unloaded. Russian sanctions are also quickly evolving.

77% of large companies see the need to monitor risks of suppliers down to Tier 3 or deeper.

Exiger and Stax Inc. global market study of more than 300 risk management professionals

Supply chain risk management (SCRM) technology can enable solutions — as long as it scales with the overall digitization of the supply chain. SCRM software should include the following four key attributes:

• Due diligence on critical suppliers should include data on direct owners and ultimate beneficial owners as well as their supplier relationships. It’s imperative to dig into supply chains beyond the first-tier supplier, to avoid issues of “supply chain washing,” where the true origin of goods is obscured. All due diligence results should include a risk assessment process to flag only high-risk suppliers for further mitigation as needed. This is both a regulatory expectation as well as fundamentally economic, as resources should be aligned to combat the areas of greatest risk.
   
• Due diligence tools should be appropriately scalable and make use of a mix of data sources, including social media, to minimize the chance of significant social issues going undetected. For example, does your existing solution pick up on foreign-language social media posts, indicating poor working practices in a factory? Have you considered the potential indicators provided by supplier financial distress or ownership structure in your consideration of social issues in your supply chain? All other things being equal, entities with opaque ownership structures might not be transparent about, or caring of, their workforces.
   
• A comprehensive risk analysis carried out with direct suppliers should also be capable of supporting a risk-prioritized approach, to understand which links in the multi-tier supply chain warrant further investigation. It should also seek to uncover product-relevant parties within the supply chain that present significant risk exposure. Mapping of the supplier’s suppliers should be highly automated; any effort attempted manually would rapidly overwhelm a human analyst. Such an analysis should also include the ability to automatically issue appropriate questionnaires (or other risk-reducing steps) to high-risk suppliers and supply chains once they have been identified. 
   
• The solution needs to support the ongoing audit and reporting capabilities that are required under global regulations. They need to be easily integrated into the overall performance metrics used in supplier relationship management. Information generated by due diligence results can be a powerful part of the operational toolset — the more you know about your suppliers, the better off you’ll be in protecting yourself from liability associated with improper behavior. You’ll also be better armed with information when negotiating your next transaction.

As organizations are asked to do more with less, they’re becoming increasingly dependent on third parties to operate the business. The vendor base can comprise tens of thousands of entities, so investing in technological solutions now is the only way to make it through regulatory reporting requirements, and proactively manage consumer concerns. The pressure to purchase technology should not undermine the importance of finding a solution provider that has the appropriate subject matter expertise and global capability to support a multinational.

How Exiger Can Help

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