Managing ESG Risk in Your Supply Chain

As regulators and stakeholders demand more ethical and sustainable business practices, environmental, social and governance (ESG) criteria are in focus. Businesses need to be ready to disclose information about their sourcing and supply chain practices.

Stay Up to Date on ESG Laws

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Many countries are tightening their supply chain laws. Environmental, social and governance (ESG) risks include corruption, violations of human rights, health and safety, and labor laws.

Among the most recent are Germany’s Lieferkettengesetz (Supply Chain Law), the French Loi Sapin 2 (anti-corruption law), Dutch Child Labor Due Diligence, UK Modern Slavery Act, and the proposed EU directive on Corporate Due Diligence and Corporate Accountability.

Organizations are increasingly held accountable for their supply chain partners. Although supplier acts of non-compliance may not be your fault, they are your problem.

The situation continues to change, so in procurement and supply chain professions, be aware of supply chain laws you should know.

Why is ESG Important? And Why Now?

Your supply chain can present significant compliance risks. Growing focus is being placed on environmental, social and governance criteria. What does this involve?
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Environmental

Impact of the business and its supply chain on the planet, particularly regarding pollution and climate change.

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Social

Policies and practices that affect people in the organization, throughout the supply chain, and in the wider community.

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Corporate governance

Framework for directing enterprises legally and ethically, including transparent risk management.

Lessons learned for the new normal include a renewed focus on corporate responsibility. More than 45% of procurement and supply chain professionals say they feel pressured to adopt supply chain sustainability practices. Often, this demand comes from governments, mass media, and their own executives, among others. (State of Supply Chain Sustainability 2020, MIT Center for Transportation & Logistics, in cooperation with the Council of Supply Chain Management Professionals.)

Consequences of ESG Violations

Violations of sustainability, business ethics, and corporate social responsibility (CSR) requirements in your supply chain can lower your shareholder value. “Every reduction in the Forbes Image Index by just a single point for companies listed on the stock exchange causes a 2.82 % reduction in company goodwill,” states a CIRANO report. “CSR issues often result in reduction of multiple index points.” In addition to the financial impact, ESG noncompliance by your suppliers can damage your own company’s brand and reputation.

A case study on supplier ESG violations illustrates these consequences. The riskmethods Solution™ can help companies manage their financial and reputational risk:

What happened? Between 2013-2015  one of the largest hardwood retailers in the US faced court cases for non-compliance and violation of the “Lacey Act.”  This law bans trafficking in illegal wildlife, including plant products such as timber and paper.  

Among other violations, the retailer was investigated for importing Chinese-made laminate flooring that contained potentially unhealthy levels of carcinogenic formaldehyde. Widespread consumer panic and negative media coverage resulted in a sharp drop in sales, and all senior managers were replaced. In addition to a $13 million penalty for environmental crimes in 2016, damage claims included a $36 million class-action lawsuit in 2018. The company was also fined $33 million in 2019 for lying to investors and the public about its compliance with formaldehyde regulations. 

How did The riskmethods Solution™ help? ​Active monitoring and continuous alerts by riskmethods Risk Intelligence informed customers about the legal and financial situation of the company, as well as negative media coverage. ​ 

What did customers do with the information? ​Our customers were able to plan ahead and start securing alternative suppliers.​ Customers could make the strategic decision of halting purchases from the hardwood retailer to protect their own brand and image. ​ 

We saved companies.​ Being aware earlier on about violations by the retailer helped preserve and protect our customers’ integrity and image. They also avoid reputational harm, fines, and economic loss in their own businesses. 

Is ESG the Same as Sustainability?

Some overlap exists between environmental, social and governance (ESG) and sustainability. When referring to sustainability, many people think first of natural resources. But sustainability goes beyond “green” behaviors. Three pillars of sustainability consider the social, environmental, and economic impacts of business activity, short- and long-term.

Put another way, sustainable organizations weigh the effect their operations have on people, the planet, and profit, both now and in the future. ESG covers similar aspects, yet is more typically an investment framework. Companies can measure their ESG efforts. They can report their ESG rating or risk profile along with the financial performance of their business. Investors can then evaluate companies on the basis of such disclosure.

Best Practice Guide

Learn how specialty-chemical company Clariant uses The riskmethods Solution™  to ensure that their suppliers comply with sustainability and ESG criteria. 

  • Stay ahead of the competition
  • Meet demands for traceability and transparency
  • Protect brand reputation

What Our Customers Say

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To secure our market position, it’s more important than ever to protect our image. With The riskmethods Solution, we can make sure to cooperate with suppliers that are adhering to regulations and won’t harm our reputation.
Artur Kulawiński, Global Supply Risk Manager, Clariant International Ltd
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The riskmethods Solution helps us to work with financially stable suppliers that avoid child labor and push sustainable production.
Natalie Cueni, Global Senior Procurement Manager, Clariant International Ltd

How The riskmethods Solution Supports Your ESG Strategy

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Gather relevant risk data

To assess risks, you need ongoing evaluation of sources including specialist databases, social media channels, and news portals. Gathering and sorting relevant data requires a high degree of automation.

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Gain transparency into your supply chain

Get visibility into all levels of your supply network - across multiple supplier tiers. Real-time continuous monitoring for ESG and compliance risk information is key.

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Analyze risk proactively

Be aware of the potential impact of risks so you can take the right actions to reduce damage. Proactively uncover vulnerabilities in your supply network.

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Use targeted risk reduction

Reduce risk through supplier assessment. Evaluate potential partners, conduct surveys, and integrate results into supplier risk profiles. Stay up to date with ongoing assessments.

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The riskmethods Solution helps you ensure compliance in your supply network through monitoring of key ESG areas including: 

  • Business partner fines or penalties Indicate corruption, price-fixing, violation of antitrust laws, etc.
  • Environment Fines for waste of natural resources or pollution-generating activities
  • Human rights Violations indicate child labor, modern slavery, human trafficking, etc.
  • Hazardous substances Warnings about the use of hazardous substances in production.

Our premium data sources include specialized partners like IntegrityNext and Ecovadis. Among other services, these specialized providers automatically obtain supplier self-assessments and certificates and provide ongoing monitoring of regulatory compliance and sustainability requirements. And with readily available data, you can quickly create sustainability reports on your supplier network.

How To Make Your ESG Efforts More Efficient

The volume and pace of regulatory change can be overwhelming. It’s impossible to identify, monitor, assess, and mitigate ESG and compliance risks in complex supply chains using manual processes. Organizations that embrace automation and a holistic view of their supply network can stay ahead of the competition. Not sure how to get started with supply chain risk management? We can help you establish a powerful SCRM program based on solid structures, educated teams, and the advanced technology of The riskmethods Solution. Use the power of artificial intelligence to manage risk!  

Act now: Request a demo of The riskmethods Solution

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