Impact of Environmental, Social, and Governance Factors on Supply Chains
By Nikita Chan
In recent years, environmental, social, and governance (ESG) factors are becoming increasingly important to supply chain operations. As the implementation of sustainable practices becomes a priority, the question of on whom this burden should be shifted to arises.
On 10th March, the European Parliament adopted a legislative initiative report which calls for mandatory corporate environmental and human rights due diligence rules (1). The due diligence rules would oblige companies to identify, address and remedy aspects of their value chain that could or do infringe on human rights, the environment and good governance (2). According to rapporteur Lara Wolters, the rules would “hold companies liable for harm done to human rights and the environment in their supply chains” (3). The new law on corporate due diligence is not surprising as the European Union has previously imposed mandatory reporting requirements for supply chain practices such as conflict minerals and timber disclosures.
Companies have also seen the necessity of improving the sustainability of their suppliers to avoid reputation damage and regulation costs. In 2020, fashion company Boohoo was criticised and forced to change board members after reports uncovered poor working conditions and underpayment of wages (4). Meanwhile, other fashion companies such as Adidas and H&M were placed in a difficult situation after human rights violations were found in China Xinjiang’s cotton industry (5) (6). To demonstrate corporate sustainability commitment, companies began to launch ESG targets and initiatives. Global hotels chain Hilton incorporated social and environmental criteria into supplier registration and inquiry processes (7). On the other hand, pharmaceuticals company Novartis announced a target for full carbon neutrality across all company operations and entire supply chain by 2030 (8).
However, simply establishing environmental and social requirements for suppliers to comply with might not be a viable solution, as some suppliers may not even have the expertise or resources to comply with the requirements. In ‘How Lawyers are Cleaning Up Supply Chains’, Veronica Villena, an assistant professor of supply chain and information systems at Pennsylvania State University’s Smeal College of Business, explained that “most of these suppliers are located in developing countries” and do not even have chief sustainability officers (9). Additionally, suppliers, especially lower-tier ones that do not have direct contractual relationships with the corporations, may not have incentives or pressure to adhere to sustainability standards. Thus the ultimate responsibility for ensuring that suppliers are committed to environmental and fair labor practices should not fall on suppliers alone. Corporations, who are the ultimate benefitters of having suppliers dedicated to environmental and labour protection, should also share the burden and aid supply networks in reaching sustainability standards.
There are many beneficial measures corporations can adopt to promote suppliers’ social and environmental responsibility. In ‘A More Sustainable Supply Chain’, Veronica Villena and Dennis Giola recommended multinational corporations to establish “long-term sustainability goals”, require “first-tier suppliers to set their own long-term sustainability goals”, include “lower-tier suppliers in the overall sustainability strategy”, and task a point person with “extending the firm’s sustainability program to first and lower-tier suppliers” (10). These steps would send a strong message to suppliers that environmental, social, and governance requirements are crucial.
Ultimately, the duty of enforcing sustainable practices in supply chains cannot be solely placed on suppliers. To achieve positive environmental and social impacts, cooperation between governments, corporations, and suppliers is essential.