Early adopters of environmental, social and governance (ESG) initiatives should be patting themselves on the back. ESG activity, initially driven by consumer demand and a general desire to do better, has grown into a massive movement that’s captured the attention of customers, investors and governments worldwide.
ESG requirements can no longer be ignored, but they shouldn’t be feared, either. Companies that move fast and act smart now can stay ahead of due diligence legislation, mitigate supply chain risk and gain a competitive advantage in the process. As I explained in a recent article on Supply & Demand Chain Executive, organizations that leverage supply chain digitization will be the most likely to succeed.
Product Sustainability Begins in the Field and Factory
Sustainability has become a priority for businesses of all shapes and sizes and across every industry. Ninety percent of companies have an ESG strategy in place and chances are good yours does, too – or will very soon.
The goal, from a manufacturing perspective, is clear: learn how to do more with less as efficiently as possible while maintaining profitability and complying with due diligence legislation. This sounds simple enough, but we all know it’s a very complex issue and that’s partially because ESG concerns touch every part of the value chain, from the field or mine where raw materials are sourced to the packaging and transport modes used to bring your finished product to market.
It’s easy to forget about where materials come from when you’re holding a product in your hand or looking for a supplier that can offer a great deal and reliable shipping, but many of those items come with ESG implications.
The International Labor Organization reports that 27.6 million people were in forced labor in 2021, with children accounting for more than 12% of that total. As discussed in a recent QAD blog post, the United Nations forecasts 160 million children between the ages of 5 and 17 are involved in child labor.
With statistics like these, it’s clear that ethical sourcing isn’t just important from a legislative and trade compliance perspective, but is simply the right thing to do.
ESG Regulations are Driving Investment in Sustainable Procurement
Regardless of where you stand on the ethics behind ESG issues, you’d think consumer demand would be a clear driver for sustainable product development. One recent study found 78% of Americans value a sustainable lifestyle, while another discovered 66% are willing to pay more for products that fit the bill.
Brands, however, have been slow to respond to consumer demand for ethically sourced products given that this effort could require ending decades-old supplier relationships, pricing, and established logistical processes and replacing them with entirely new ones. That doesn’t happen overnight, and without any ‘carrot’ to help incentivize companies to begin that work, it’s easy to understand their reluctance.
Instead, the US Government and other countries have led with the ‘stick’ approach where the pain of non-compliance can include Customs’ seizure of entire shipments, and it appears to be working. In a recent BearingPoint survey, a whopping 85% of companies attribute their move to sustainable procurement practices to government regulations. Compliance appears to be a significantly larger driver for sustainable procurement than ethics or consumer demand.
ESG Legislative Requirements are Many and Varied
The underpinnings of sustainable procurement and ESG strategy aside, it’s important to note that virtually every nation is taking a slightly different approach to ESG issues. Companies are faced with a patchwork of government mandates and due diligence is a business imperative, but it can be especially difficult for those involved in global trade.
There are too many ESG-linked policies to list and new ones are emerging seemingly every day, but here are a few you should watch:
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- The US Uyghur Forced Labor Prevention Act took effect on June 21, 2022, and requires importers to prove that products do not contain any trace of material associated with China’s Xinjiang region. US Customs and Border Protection (CBP) has reportedly detained over 3,500 shipments with an economic value of nearly 1.1 billion. Importers must comply with Withhold Release Orders (WRO) that allow CBP to “detain the products in question until/unless importers can prove the absence of forced labor in their product’s supply chain”
- The New York Fashion Sustainability and Social Accountability Act is under consideration in the New York Legislature. If passed into law, fashion retailers and manufacturers fashion retailers and manufacturers above the $100 million threshold for annual revenue will be required to disclose social and sustainability data.
- The European Commission (EU) Corporate Sustainability Due Diligence Directive establishes a corporate due diligence duty. EU companies are required to implement due diligence procedures to detect, prevent and mitigate human rights issues, including child labor and environmental concerns in their supply chains.
- The Supply Chain Due Diligence Act took effect in Germany on January 1, 2023, and requires companies with 3,000+ employees to conduct human rights and environmental due diligence within their supply chains.
- Canada’s Bill S-211, which will take effect beginning January, 2024, will mandate large companies to report on parts of their supply chain where forced labor might be occurring, or face fines up to $184,000 per shipment.
National, state and local governments worldwide are ramping up ESG activity and are under extreme pressure to do so, just like the businesses that may be affected by their policies.
Companies involved in global trade need to prepare now and the best way to do that is by organizing people, processes and systems to monitor ESG legislation, with a focus on ensuring authorities have access to the data or documentation required to keep their shipments flowing.
Enhanced Risk-Modeling Turns ESG Risk into an Opportunity
Supply chains are and will likely remain in flux amid the war in Ukraine, COVID-19 disruption and global recessionary risks. Due diligence legislation is adding another layer of complexity to the equation, making end-to-end supply chain visibility more important than ever. Without it, businesses may be subject to shipping delays, customs issues, longer lead times and negative interactions with consumers that drive down sales.
While some may see ESG legislation as another impending form of disruption, I see it as an opportunity for businesses that are prepared to gain a competitive advantage. The existing state of supply chain disruption combined with ESG factors makes a strong case for incorporating enhanced risk modeling into corporate sourcing and supply chain planning. These tools position businesses to take a proactive approach to ESG risks and other risks to the supply chain to identify opportunities to optimize trade-related costs.
With this information, your business may choose to source from countries where transportation costs are lower, transit times are faster and duty and tax rates are more attractive.
Get Ahead of ESG Concerns with Supplier Management Software
Most businesses can’t expect to dictate suppliers’ material sourcing decisions, but they can choose to work with ethical suppliers who understand and support ESG compliance.
Manufacturers should discuss ESG requirements early in the procurement process and use Supplier Management software to streamline the sharing of data and information between companies, suppliers and agencies like the CBP. This type of solution also makes it easy for suppliers to pass along ESG data while also taking advantage of self-service features for bills of material, invoices, purchase orders and other documents.
Companies should look for a Supplier Management solution that integrates with both on-premise and cloud-based ERPs and pushes data to and from the ERP to inform manufacturer and supplier decision-making. A quick and easy implementation process is important for both parties, so it’s also best to choose a solution that doesn’t require additional hardware.
A great Supplier Management solution can help businesses:
- Achieve a high level of ESG compliance across the supply chain
- Ensure on-time deliveries
- Reduce lead times
- Management quality issues and inventory delivery
- Standardize barcodes
- Communicate forecasts and plans to suppliers in real time
Due diligence legislation is evolving rapidly and will continue to do so, but emerging government mandates can work for your business rather than against it. Enhanced risk modeling and Supplier Management software give businesses the tools they need to identify and mitigate ESG-linked supply chain risks while also taking a stand against human rights abuses. There’s even a good chance your business will have an opportunity to grow its market share among sustainability-conscious consumers.
