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Govern the Full Range of ESG Risk in Supply Chains Today

January 2, 2024

Article

The supply chain risk category known as ESG — environmental, social and governance — spans broad issues like carbon emissions, modern slavery, money laundering, deforestation and more. It’s also very deep, with threats lurking in remote tiers of the supply chain that can deliver costly blows to your business and its reputation.

Consider the harm to major brands suggested by these headlines:

Failure to manage ESG risk is global news. These headline examples show that customers, regulators and investors don’t care if the ESG issue came from a sixth-tier supplier in your supply chain. It still inflicts a harmful impact all the way up to your business reputation and bottom line.

Let’s take a closer look at this risk category covers and explore ways to identify and protect your business by safeguarding the supply chains that are connected to it.

Overview of ESG Risk

This broad risk category applies to policies and ethical practices of an organization, its suppliers and third-party relationships within its ecosystem. This chart breaks down many of the relevant issues under each of the main vectors in this category: environmental, social and governance.

Environmental

Environmental concerns
Greenhouse gas/carbon emission impact
Pollution and waste
Hazardous materials management
Recycling and circularity
Animal rights and trafficking
Maintaining biodiversity
Deforestation
Water conservation and management
Air quality
Energy management

Social

Human rights
Modern slavery
Human trafficking
Forced & child labor
Conflict minerals
Social discrimination
Worker rights
Fair wages
Product and workplace safety
Diversity, equity and inclusion
Supporting charities and social enterprises
Promoting employment
Data privacy

Governance

Leadership
C-level changes
Board of directors
Management team members
Management team members
Compliance with laws and regulations
Fraud, corruption and sanctions
Money laundering
Tax evasion
Business in high-risk locations
Layoffs
Liquidity problems
Supply chain oversight
Data breach
Misleading communication (greenwashing)

It’s important to remember that many of these risks may have very little to do with your business and Tier 1 suppliers. Most of the risk (80%) stems from lower tiers in the supply chain. That’s why monitoring of ESG risk beyond your own walls is critical to minimizing costs, building supply chain resilience and protecting your reputation.

“Nobody really cares where the ESG risk is coming from as it touches you,” said Erika Peters, Global Head of Innovation and Operations at Exiger. “It could cause a reputational issue and a big cost to your business. So the key is if you want to do good business, you have to go beyond just your business.”

Erika Peters, Global Head of Innovation and Operations at Exiger

Expand Your ESG Data Inputs to Detect Risk

Monitoring for the risks beyond primary suppliers is a tall order — just for the needed data inputs alone. Relying solely on supplier surveys for an accurate ESG assessment will likely fall short, since they only cover a moment in time. Here are key layers that form a comprehensive risk management approach:

Baseline measurements: You’ll want to assess the inherent level of risk across factors such as product, service, location analysis and raw materials — along with assessing the international relationships associated to the supplier. This also requires entity- and item-level visibility within the full supply chain.

Supplier inputs: Obtain supplier inputs through ESG-focused questionnaires for documentation, certifications and policy-provisioned evidence or attestations to protect your organization.

Open-source screening: Conduct comprehensive AI-powered open-source due diligence across multiple-language adverse media and watchlists to identify risk associated with the supplier and its extended ecosystem.

Continuous monitoring: Identify when the ESG risk associated with a supplier changes over time, so you can take corresponding action to protect your business.

These four layers make a good framework for ESG risk management in supply chains. But, of course, ESG is only one major category of supply chain risk that needs monitoring — along with others like FOCI (foreign ownership, control or influence), product, financial and cyber risks.

Risk-Scoring Solution for Ongoing Risk Management

Figure 1: Sample risk meter from 1Exiger dashboard

Keeping track of all ESG risk data — and synthesizing it into actionable decisions — requires far more than a manual approach. An AI-powered technology solution is essential to fit this risk management task. The 1Exiger platform is one such solution, and its features include a risk-scoring system that displays ESG risk ratings in a single dashboard view. The system leverages Exiger’s full data suite, including the most comprehensive forced labor dataset in the world, to return associated risks and events in the form of an ESG risk score on an ongoing basis.

The components that go into the score include:

ESG negative news:
Exiger’s open-source analytics collects, labels and assesses negative events related to ESG matters, including modern slavery, labor violations, deforestation and pollution.
ESG positive news:
Exiger’s open-source analytics collects, labels and assesses information which could be considered positive, such as awards and certificates of quality.
Jurisdiction risk:
The risk model includes risk associated with a company’s headquarters and corporate family tree.
Diversity, equity and inclusion:
Exiger’s ESG solution screens entities against a database pulled from over 400 trusted sources, including government agencies, certification agencies and corporate registrations.
Industry risk:
Exiger’s risk model includes more than 100 risk ratings for various industries, evaluated differently from a social and environmental perspective.

With the 1Exiger platform, you can realize a 360-degree view of supply chain risks that could impact your business operations, brand and reputation. The platform puts ESG next to other risk categories, making it easier to see the full risk profile and make informed decisions to protect your business and build resilience in your supply chain.

Exiger can help you govern ESG risk in your supply chain.