Understanding the supply chain

Supply chain participants are facing new and substantial ESG risks, but also opportunities for those with flexible procedures, processes, and resilient business models. The structural inadequacies of many supply chains have been laid bare by the pandemic, the Ever Given stranded in Suez, and the impact of extreme weather. The onus on building resilient supply chains is increasingly placed on every business. ESG can be embedded into the strategic and operational efficiency of all firms with four key considerations:
 

1. Climate concerns:

The turbulent weather of summer 2021 in the northern hemisphere has highlighted how climate changes can upset traditional weather patterns and introduce greater risks to the flow of material and components. Businesses, retailers and consumers are experiencing commercial disaster and some inconvenience owing to longer delivery times and increasing costs, plus companies are forced to change their suppliers at short notice. Supply chain related exposure can come from less expected direction, as our understanding of materials and its properties develops.
 

2. Cross-dependency:

The cross-dependency of supply chains and distribution of ESG aspects across the supply/value chains present further complexity for successful ESG management. A key point made here is that for some products ESG performance will not improve without supply chain engagement. Recent studies in Germany and published in Environmental Science & Technology Letters analysed environmental impacts across several key industrial sectors and products, respectively:
  • In fashion retail nearly 14 litres of water are used in the supply chain per one EUR of sector turnover in Germany, with more than two-thirds of water use in areas with high water stress.
  • GHG emissions are a material environmental aspect for the German automotive industry. Emissions in the supply chain (i.e. from raw material production to direct suppliers across numerous geographies), are estimated to be ten times larger than those at final manufacturing plants.
  • ‘Forever chemicals’, toxic per- and polyfluoroalkyl substances (PFAS), have been identified in over half of tested cosmetics products including lipstick, mascara and foundation cream.
     

3. Consumers and regulation:

A mixture of consumer pressure, regulatory concerns, and increased scrutiny from financial institutions has propelled the supply chain to the forefront of the ESG agenda. Understanding supply chains is crucial to understanding and improving the ESG performance of your portfolio’s products or services and transition to a net-zero economy. While individual private companies may not be under the same stakeholder scrutiny or pressure to manage ESG in their supply chains as corporations, these carry a hefty commercial risk associated with inaction on the ESG front. The increased focus on supply chains is also changing the regulatory landscape - evidenced by the June 2021 enactment of the German Supply Chain Act that will from 2023 mandate companies to identify and mitigate human rights and environmental risks across their own operation including the supply chains and report annually.
 

4. Due Diligence:

#Diligencing supply chains can be tricky at present, not only due to their multi-tiered nature and complexity, and the absence of commonly recognised methodology for such assessments. Furthermore, the absence of robust and consistent data and the finite due diligence process window rarely allow a robust assessment of a company’s supply chain. Meaningful engagement during the investment period will help suppliers to start their own ESG journey, moving beyond the ‘just in time’ and quality metrics and in turn strengthening your business resilience whilst addressing ESG factors that are outside of your direct control.
 

Authored by Tomas Sys
Principal at Ramboll, and Judge, BVCA Excellence in ESG 2021

This article was originally published in 2021 as part of the BVCA's Excellence in ESG Awards, and some of the content may now be out of date. Please contact the BVCA if you have any queries or need further assistance.