In the past year, risks associated with ESG (Environmental Social Governance) risks have become a big concern for businesses across all industries — and for a good reason. ESG-related supply chain regulations across the globe are on the rise. In 2022, the Uyghur Forced Labor Prevention Act (UFLPA) was signed into law by President Biden to crack down on forced and child labor from the Xinjiang region of China. That same year, Germany released the German Supply Chain Due Diligence Act, and globally a number of carbon reduction programs have been released.
Now that ESG is top of mind for lawmakers, it naturally has become top of mind for the general public. Organizations are now under more pressure than ever to satisfy ESG requirements – in both the court of law and the court of public opinion. In a recent Resilinc customer survey, sent specifically to supply chain leaders, surrounding ESG, 65% of respondents reported they are required to include sustainability and ESG requirements in new projects and products. What’s more, over 80% said that creating a sustainable business helps them increase competitiveness in the market and benefits business growth.
With supply chain legislation related to ESG expected to continue, now is the time to ensure your supplier network is compliant – and this goes beyond tier-one suppliers. Gaining visibility into your supply chain can not only help you mitigate ESG risks but can also result in a more sustainable and even profitable business.
Let’s take a look at the steps you can take to mitigate ESG risks in your supply chain.
#1 Identify Sustainability Goals
First, consider what sustainability goals are important to your business. To determine your goals, it might be helpful to think about what ESG stands for; environmental, social, and governance. Below is a look at some common concerns and goals for each component of ESG:
In the environmental category, carbon footprint reduction is top of mind for many businesses as more regulations surrounding CO2 emissions are being released at regional and company levels. Under social, reducing the use of forced labor and child labor in addition to providing fair pay and living wages is becoming more important following regulations such as UFLPA and the German Supply Chain Due Diligence Act. This leads to the second step: identifying ESG risks.
#2 Identify ESG Risks in Your Supply Chain
Next, consider which ESG risks pose the greatest threat to your company. For example, the UFLPA targets five high-risk sections of goods: apparel, cotton, tomatoes, polysilicon, and aluminum. If you know your products rely on polysilicon (in 2021 China produced nearly 80% of all polysilicon), then there’s a high probability you have risk here in your supply chain.
Look at which regulations apply to your specific industry and region. For example, France passed The French Corporate Duty of Vigilance Law in 2017 which requires French corporations with over 5,000 employees in France and/or over 10,000 employees worldwide (including affiliates’ employees) to publish an annual sustainability plan. In December 2022, Canada released the Fighting Against Forced Labour and Child Labour in Supply Chains Act. This act applies to all entities (corporations, trusts, partnerships, or other unincorporated organizations that meet certain requirements) selling or distributing goods in Canada or elsewhere.
While doing your research is important, you cannot identify every ESG risk simply by researching legislation. To fully understand your supply chain, you must know where you source your products.
#3 Know Where and From Who You Are Sourcing (Map Your Supply Chain)
Even if you know your tier-one suppliers, 80% of supply chain issues originate in tier-two and tier-three, making ESG risk a visibility and knowledge problem. Go beyond high-volume, tier-one suppliers to get the full picture of your supply chain (especially when it comes to mitigating ESG risk). To close the visibility and knowledge gap, you must map your supply chain (ideally down to the part or raw material level). By doing so, you can see what countries and factories you source commodities, parts, and materials from.
Resilinc offers both Autonomous AI Mapping and supplier-validated Multi-Tier Mapping. AI (or autonomous) mapping uses artificial intelligence to collect information on your “most likely” supply chain. This information can come from various sources such as websites and public domain sources. AI supply chain mapping is a great way to rapidly (and inexpensively) gain visibility into your supply chain. However, AI often comes with a surplus of irrelevant data. For a complete and accurate picture of your supply chain, supplier-validated, multi-tier mapping is recommended.
Resilinc’s supplier-validated Multi-Tier Mapping provides a significantly more accurate picture of your supply chain by verifying suppliers at different tiers. Resilinc maps customers’ supplier supply chain network down to third-tier suppliers. If Resilinc identifies any suppliers who, for example, operate in the Xinjiang region of China or; parent entities that are based there; or sanctioned suppliers are found, Resilinc will alert the customer—so they can take the next steps to mitigate the risk.
#4 Gain Additional Visibility Through Monitoring
To mitigate ESG risk, you must monitor disruptions—preferably using a 24/7, global monitoring service. For example, Resilinc’s EventWatchAI scans over 100M sources and sites for worldwide potential disruptions that can impact supply chains. Resilinc identifies impacts in over 100 languages, 200 countries, and 50 event types to tailor alerts and suggest actions specific to each customer. Within the 50 different event types monitored by EventWatchAI, there are 400 types of risk from weather and industrial accidents to cyber security, labor issues, and more. Below is a look at the ESG-related risk types monitored by EventWatchAI:
- Environmental: Chemical spill, environmental hazard, forest fire, flood, extreme weather, hurricane
- Social: FDA/EMA/OSHA action, fine, labor violation, human health, labor disruption, protest/riot, UFLPA
- Governance: Legal action, regulatory change, compliance, corporate, restructuring, leadership transition, profit warning, business sale, business spin-off, company split, merger & acquisition, bribery counterfeit
#5 Assess and Quantify Your Suppliers for ESG Risk
After mapping your supply chain and monitoring your suppliers, you can use supplier assessments to validate potential violations you’ve found. Supplier assessments are pre-scripted assessments you can send directly to suppliers for various concerns such as anti-corruption & bribery, citizenship, ESG, health & safety, modern slavery, pandemic readiness, supplier sustainability, UFLPA, and customer-authored assessments.
Using data collected from these supplier assessments, Resilinc’s RiskShield assigns a risk score to each supplier to help customers evaluate the risk associated with each supplier. Resilinc uses two proprietary risk scores to evaluate suppliers for ESG risks: Resilinc DVI (Disruption Vulnerability Index) ESG Score and our ESG Assessment Score. Resilinc also used third-party data integrations such as EcoVadis Sustainability Rating and Kharon UFLPA insights.
Once you’ve started assessing your suppliers, highlight or note which suppliers have more robust CSR, sustainability, and ESG policies and practices in place. This way you can single out those suppliers that may be more vulnerable and potentially cause legal, brand, or supply issues. If you find suppliers that are more vulnerable, work with those suppliers to develop joint plans to close gaps and ensure limited exposure to any issues. However, if the risk is too great, it might make sense to terminate the relationship and find a new supplier.
The Future of ESG in Supply Chain
Allowing ESG and other sustainability risks to go unmonitored in your supply chain can lead to brand issues, legal troubles, and serious supply chain disruptions (such as factory shutdowns or detained imports). As more and more ESG regulations are passed, the days of plausible deniability are over. Governments, companies, and customers are calling for more sustainable business practices and supply chains.
While sustainable and ethical supply chains may seem like a difficult journey, it is one worth starting. The results of investing in this type of visibility include mitigating risk, improving the strength of your supply chain, improving (and protecting) your brand, and ultimately building a better future for your business and the world.
This journey all starts with gaining visibility into your supply chain. By mapping your supply chain down to the site-part level and continuously monitoring and collaborating with your suppliers, you can know where your products come from, act faster when regulations are passed, communicate directly with your suppliers, and make meaningful changes toward building a more sustainable supply chain.
To learn more about the latest ESG regulations check out our special report Navigating the ESG Mandate: Latest Intelligence and Risk Mitigation Strategies.
