Global supply chains: can polluters ever be sustainable?

That we live in a “global village” is a given. With globalisation momentum that started a few decades ago, supply chains became far more complex. However, the new reality of the pandemic has created havoc on supply chains, seen in material, production, labour and transportation shortages, that has put pressures for profit-maximisation. Redeveloping sourcing capabilities around the globe and managing disruption risks have become accepted business practices or rather an expectation from stakeholders.

Outsourcing production to a global geography (not too far away from target-markets-geography) with cost arbitrage did deliver better economic outcomes. It also brought in economic and social development, resulting in higher standards of living for millions of people. Yet, studies have shown that such global supply chains have also created further gaps between the haves & have-nots. Recent studies have also indicated that global supply chains could account for nearly 80% of the world’s carbon emissions, and might need an estimated $100 trillion investment to achieve the planet’s goal of net-zero carbon emission over the next three decades.

Over 3/4th of global trade moves across these globally inter-connected supply chains. These come with their own sets of issues and risks as complexity and scale of supply chain increase. Those, in turn, could impact operational, financial outcomes, which consequently hurt the reputation of the brand(s). Contemporary sustainability issues in supply chains include environmental pollution, shortages of raw material and natural resources, labour issues, workforce health and safety incidents, illegal or improper labour practices, corruption issues. Also, Covid issues globally have shown the risks and vulnerability of global supply chains, including geo-political swings.

Supply chain sustainability is about managing environmental, social and commercial impacts, and consistent adoption of good governance practices. Its objective is to create, protect and grow long-term environmental, social and economic value for all stakeholders involved in bringing products and services from all sources to end-consumer.

The business case for supply chain sustainability for a particular company depends on a variety of issues, including the industry, geography where it operates, objectives of various stakeholders, cultural nuances, organisational culture, competitive pressures and, more importantly, their board imperatives. Leading brands have been quick to realise that good supply chain management has moved from being just a hygiene factor to actually being the brand USP.

ESG & Global Supply Chains

ESG helps investors better understand the sustainability and societal impact of a business to determine current valuation and future financial performance. In today’s world, consumers expect greater transparency and detailed disclosures. Transparency is linked to trust, and consumers want to trust the companies they buy from. And conversely, they also prefer to buy only from the brands they trust! Supply chain can be seen as the larger ESG risk for most companies with complex vulnerability across their global linkages.

Once the companies get their “how they buy” correctly, they can drastically improve their ESG quotient. Most companies typically only know their direct suppliers. For example, one direct supplier may be linked to 100s or even 1000s of next-set-tier suppliers, whereas, in the conventional business, many of them do not bother about capturing data beyond the direct vendor or two step-down sub-vendors.

Companies can protect themselves from potential supply chain interruptions or delays associated with suppliers’ environmental, social or governance issues by ensuring suppliers have robust management systems and regulatory compliance programmes. Proactive companies are using sustainable procurement practices to ensure their suppliers can adapt quickly to anticipated changes in environmental regulations, product responsibility legislation and reduce potential future liability. Leading proponents also offer training initiatives to work with their stakeholders across the supply chain to ensure effective ESG engagement as well as compliance.

With detailed product information and sourcing details, consumers would have increased confidence in the product, and increased propensity to buy that brand. Over time, such brand-consumer relationship, added to proactive communication by the brand, would help build consumer trust.

Successful supply chain managers should start thinking beyond their financial goals. The smarter of them actually build win-win relationships that will deliver long-term value along the entire supply chain, even if it means short-term financial loss and additional operational workload. By mitigating and responding to sustainability risks quickly, companies can control costs, protect their market share and reduce risk premiums.

Traceability, Digital Transformation & ESG Momentum

Simply setting ESG goals won’t turn any needle in the medium to long term. In the short term, ESG efforts, and their disclosures and measurements, would come under more detailed scrutiny and auditing by regulators, consumers and policy makers.

A sustainable supply chain is one that is able to anticipate and adapt to unforeseen events. Traceability is critical to the achievement of ESG goals. The critical challenge is to factor traceability aspects in ESG policies and measurements; complicated, as they often have complex supply chains and industrial processes for firms working across markets.

For ESG, it needs to showcase traceability and auditable records. To this effect, technology adoption can be a large game changer and key enabler. Blockchain can offer the requisite process transparency and immutable data veracity. It has the ability to “digitally represent” assets moving along supply chains. A regular audit of vendors’ ESG performance on the ground is also essential. Currently available technology allows for firms to have a single dashboard view of the full spectrum of risk facing its supply chain, allowing for mitigation and potentially even innovation to respond to the challenges at hand.

As supply chain issues continue to draw the scrutiny of investors, regulators and consumers, and intersect across a range of ESG issues, it will become increasingly important for boards to engage in discussions on how their firms are managing their supply chains.

After all, there is lot riding on the boards. The stakeholders rightly expect and trust that the boards would play an important role in ensuring that the supply chain frameworks are well-integrated into the overall ESG deliverables as well as operational, strategic and enterprise risk management processes.

The long-term success of any organisation is built not only on profits and profitability but also in its contribution to the future of the society. Ensuring good performance on ESG issues is not only a board’s fiduciary role, important to investors and the public, and supportive of long-term strong financial performance, it is also critical to a company’s relevance in a world increasingly suffering from ESG-related crises—whether they believe in ESG or not! A sustainable corporate sector starts at the very top. Starting with people before profit as a purpose. And empowering people for maximising their potential while contributing to the community and enterprise.

Views expressed are personal. Srinath Sridharan is Corporate Advisor & Independent Markets Commentator. Subrato Basu is Transformation Advisor to several Fortune 500 companies.