The modern supply chain is a bit of a trapeze act: complex, requiring precision and potentially devastating if things go wrong. Pete Rau of EcoVadis invites companies to return to basics — it all starts with procurement.
Supply chain and supply chain risk have become household names within the past few years, especially relating to social and environmental crises. For example, from 2016 to 2021, modern slavery increased by 20%, with about 50 million people now caught up in some form of it. Global supply chains account for 55%, or 27.6 million of these cases. Meanwhile, the United Nations Intergovernmental Panel on Climate Change reports that the world will likely miss a key goal to limit global warming to 1.5 degrees Celsius above pre-industrial temperatures within a decade. This would lead to catastrophic and irreversible damage to climates and communities.
Clearly, there’s plenty of risk and impact to go around. But to drive greater supply chain compliance and reduce risk, start with your procurement function. It holds the keys to unlocking supply chain and regulatory compliance and driving ethical and environmentally sustainable business practices.
Procurement has entered the chat
Procurement teams’ work extends far beyond most other departments’ perception of them as cost-obsessed negotiators who enforce approved vendor lists and purchase-order processes. They find, vet and select the suppliers and vendors that provide the goods and services their organizations need to keep their production lines and operations running, which is a weighty job. By establishing these relationships and controlling this spending, procurement teams can extend its value proposition beyond its four walls to uplevel its organization’s supply base.
For example, McKinsey estimates the average consumer-packaged-goods company’s supply chain accounts “for more than 80% of its greenhouse gas [GHG] emissions and more than 90% of the impact on air, land, water, biodiversity and geological resources” where the company and its suppliers operate.
Due to its relationships with suppliers and central role within supply chains, procurement can be an organization’s most influential and consequential business function. It can leverage its purchasing power by integrating sustainability criteria into its workflows and decisions and allocating more company spend with suppliers that demonstrate commitment to reducing social and environmental impact. These commitments include protecting human rights and ensuring safe working conditions, as well as setting net-zero emissions goals and taking steps to reduce them.
What’s more, procurement teams can help their organizations comply with new laws and regulations concerning climate change, environmental impact and human rights. They can map their supply base for risks and conduct due diligence on new suppliers and vendors to ensure they are compliant with applicable laws and regulations, continuously monitor their companies’ and their suppliers’ risk exposure across multiple risk domains and regularly assess supplier performance.
Non-compliance with ESG laws and regulations presents its own kind of financial and operational risk to organizations. Thus, it is in your organization’s best interests to collaborate with procurement to mitigate supply chain risks. In doing so, you’re more likely to drive compliance, resilience and sustainability across your organization.
Pay attention to supply chain laws and regulations
New ESG due diligence laws and regulations continue to raise the bar — and the stakes — for corporate compliance, procurement and supply chain leaders. These laws and regulations are proliferating at the state, national, regional and international government levels, making what once were voluntary due diligence initiatives, disclosures and decisions to change business practices now mandatory under penalty of law. Although these laws and regulations vary widely in scope, severity of enforcement and jurisdiction, they have three common factors:
- 1. They’re more ambitious: These laws are an extension of the enhanced enforcement by customs agencies on imported products made with forced labor. Not only do they mandate importing parties to conduct due diligence into their supply chains for slave labor and disclose findings to customs and compliance officers, they also incentivize companies to mitigate ESG risks within their supplier base and their country or countries of origin. Compliance now means turning findings into actions.
- 2. They’re more prescriptive: New ESG laws and regulations establish exact due diligence steps and proof points for companies to achieve and maintain compliance. Companies cannot rely on suppliers’ self-declarations or statements that lack evidentiary data; instead, they must now take active risk-mitigation steps. Governing bodies now have higher standards for compliance that not all companies have been meeting.
- 3. They have heavier enforcement regimes: It’s one thing to pass ESG due diligence laws; it’s another to enforce them and hold companies accountable. Take Germany’s Supply Chain Due Diligence Act (LkSG) for example, which went into effect Jan. 1, 2023. For companies with at least 3,000 employees today (and with over 1,000 employees by Jan. 1, 2024), non-compliance can cost between 400,000 and 800,000 euros per offense and risk incurring reputational damage.
Failure to comply with due diligence laws and regulations, new and existing, amplifies risks and consequences for companies.
For instance, in the U.S., the 2015 Trade Facilitation and Trade Enforcement Act removed loopholes that restricted the authority of Customs and Border Protection (CBP) to intercept shipments of products and materials suspected to have been produced with forced labor. Thus, CBP has been able to enforce existing anti-slavery laws, such as Section 307 of the Tariff Act of 1930. This new enforcement authority has resulted in denials of entry or seizures of commodities and products from Uganda, Thailand, Niger and many other countries “where oversight is lax or even nonexistent.”
Because parts of these laws mandate higher quality of due diligence and supplier response, many procurement, risk, and compliance teams may need to upgrade their tools. Some examples include:
- Higher thresholds for acceptable supplier response. For example, rising climate reporting rules and related net-zero targets render old-school supplier “self- declarations” inadequate. Consider the LkSG: the German government has signaled on the law’s FAQ page that supplier self-declarations alone do not guarantee compliance.
- High-risk industry categories and countries, wherein the identification of human rights and environmental risks must extend deeper. Considering LkSG, the German government expects companies to obtain “substantiated knowledge” of relevant risks, which, when identified and analyzed, may extend into Tier 2, 3 or beyond.
- Industry-specific sustainability risks and targets, beyond specific due-diligence regulations. Examples include supply chain decarbonization and net-zero targets, ethics and anticorruption, cybersecurity, and many more. It is essential to have indicators that can help identify these risks, which ones are material for which suppliers, and tools to drive mitigation and improvement to address them.
Procurement holds the key
Conducting supplier due diligence, busting data silos to increase enterprise-wide visibility into supply chains, and continuously monitoring and assessing supplier performance and risk are just a few of the vital duties and initiatives that procurement teams undertake for the organization. They’re natural allies when it comes to employing in-house resources, such as spend, supplier, risk and performance data, to drive compliance to applicable ESG and supply chain laws and regulations.
Remember: Procurement holds the keys to building and maintaining sustainable, reliable and ethical supply chains, and will be instrumental in complying with ESG due diligence laws and managing supply chain risks. Work with procurement to monitor your company’s supply chains for bad actors and bad news and get ahead of them. With their help, you can address these problems early, course correct where you can, and cut ties where you must.
Work with procurement to implement best practices, processes and solutions that will help your team comply with laws and regulations, plus those that are surely to pass. For example, Norway’s recent due diligence law and similar laws being considered in Canada and the Netherlands will be fixtures of future business cycles.
Consider adopting an ESG due diligence framework, supported by critical procurement tools, such as predictive risk profiling and mapping, supplier disclosure, rating and — very importantly — improvement tools, which are at the root of long-term performance management and risk mitigation. Something else to consider: reporting components that will align with current and future laws and regulations.