Supply chain scrutiny is becoming more intense, bringing greater financial and reputation risks, and demanding greater levels of assurance and transparency from boards, write Dr Tom Janoshalmi MAICD and Justin Dillon.

    Organisations are increasingly pledging to buy goods and services they need from companies committed to fair labour practices and environmental protections. However, as the Harvard Business Review showcased, the unfortunate reality is that suppliers — especially at lower levels of the value chain — often violate sustainability standards, exposing companies to serious financial and social risks. But the old ways of addressing these issues won’t work.

    As Eurasia Group highlighted in its Top Risks 2022, corporations will have to spend more to navigate demands by consumers and employees demanding that companies take a stand on such issues as workplace diversity, voting rights, forced and child labour, and supply chains that respect the environment, human rights and free speech.

    Compliance is expensive. It means reorienting supply chains. Firms will have to monitor beyond first-tier or even second-tier suppliers. In cases in which a significant portion of suppliers or workers operate in markets associated with human rights abuses, compliance will necessitate either relocation to less desirable places or the bifurcation of supply chains. Whether it’s shipments seized at the border or social media outcry, organisations need to become cancel-proof.

    Take solar power as an example — among the highest priorities of the global sustainability movement and top of mind for most organisations. Would you still buy the solar panels you were about to install on your house or company headquarters if you knew they were made with slave labour? At what point does it become acceptable to overlook human rights in the name of a more sustainable planet? What’s an acceptable number of exploited workers — 1000 or 100? Do we really need to choose between people and the planet?

    Choosing between sustainability and human rights is a false choice. We simply need more transparency in our supply chains.

    Solar power puzzle

    The solar energy supply chain is a prime example. A report from Sheffield Hallam University in the UK revealed that Chinese companies in Xinjiang were using Uyghur people from government-sponsored forced-labour programs to produce components in the solar supply chain. Companies in the region produce 45 per cent of the world’s polysilicon, which is then shipped around the world as a key component of solar panels made elsewhere. But countries are increasingly banning or evaluating their connections with suppliers based in Xinjiang.

    As legislation and regulatory requirements shift, the onus is on businesses to find new solutions. Otherwise, they’ll experience nightmare scenarios like having shipments seized at the borders — as happened to protective products company Ansell in January — or losing brand reputation as a result of activist campaigns.

    Board directors need to be weighing these issues in the year ahead, but this won’t be a simple lift and shift for companies. It’s not a matter of just switching from buying cheap solar panels from Xinjiang to ethically-sourced ones from South Korea. While South Korea is taking action by ramping up the ethical production of solar panels, it is only one piece of the puzzle in the complicated global supply chain. Not to mention that panels made with forced labour will inherently cost less to produce, complicating the profit-driven decision-making related to changing suppliers.

    The supply chain ethos needs to be transformed from efficiency and low-cost country sourcing to resilience and visibility. With the amount of data in circulation today, everything in the world that can be bought — from planes to apricot trees to cobalt — can be traced back to the people who built, grew or mined them, and the conditions in which they live and work. The technology exists, it’s just a matter of who wants to know about it.

    Why now?

    With multiple global crises such as climate change and the pandemic, companies and their boards must show that their business processes are future- proof. The COVID-19 pandemic has accelerated several technology-driven shifts, particularly a need for more financial flexibility and supply chain resilience. We also see customers demanding more modern and event-driven data architectures.

    Building on the data-driven supply chain shift, including having end-to-end real-time insights, a new question has emerged in many boardrooms: is our supply chain designed to be resilient and transparently sustainable?

    Companies now have a much greater ability — and obligation — to demonstrate corporate social responsibility and to share best practices for healthy supply chains and sustainable logistics. Digital transformation and the growing sophistication of digital supply chain technologies are playing a key part in this supply chain evolution. The ability to manage big data, advanced analytics capabilities, the broad business applicability of AI and increasingly sophisticated security tools have brought unprecedented visibility and accountability to next-generation supply chains.

    As ethical supply chain practices become a more immediate priority for businesses, compliance goals and sustainability benchmarks are also becoming more standardised. The UN Global Compact’s Supply Chain Sustainability: A Practical Guide for Continuous Improvement covers environmental responsibility, labour practices, human rights and corruption. These principles are built upon the realisation that socially responsible practices and products are not only good for people and the planet, but also for positive brand awareness, competitiveness and long-term profitability.

    Australian companies with consolidated revenue above $100m have been required to disclose the modern slavery risk in their operations and supply chains since the 2019 passing of the Modern Slavery Act. In February, the Human Rights Law Centre released the Paper Promises? report on 102 companies operating in high-risk areas. It found 77 per cent had failed to comply with basic reporting standards under the Act, while more than half had failed to identify obvious modern slavery risks in their operations or supply chains. The Australian Border Force report on compliance trends for the 2020 reporting year also identified a range of areas for improvement.

    Other countries are implementing new or stricter measures. According to Human Rights Watch, a new law on human rights in supply chains has initiated a shift to mandatory company compliance rules in Germany. Fines can go up to two per cent of the company’s annual revenues if they exceed €400m. This directly impacts European and German companies operating in Australia.

    According to Agile Procurement Insights Research by SAP with Oxford Economics, only 49 per cent of executives regularly refresh risk mitigation plans to address potential disruptions, while just 32 per cent say their procurement function’s supplier risk management is highly effective. To create responsible supply chains, the market has to demand it and company boards need to incorporate it into strategic imperatives.

    Call to action

    The first step must be for companies to map their supply chains. Without transparency, it’s impossible to measure or improve impact. This is a necessary foundation to build upon for a reliable, ethical and cancel-proof supply chain.

    Supply chains continue to be one of the most important levers for business to create a positive impact in the world, with an estimated 80 per cent of global trade passing through supply chains, according to the UN Global Compact. By working together, buyers and suppliers in global supply chains and networks can advance human rights including labour rights, climate resilience, environmental protection, inclusive economic growth and ethical business practices.

    This movement for supply chain transparency does not mean zero-tolerance policies or buyers asking suppliers if they use slave labour. Instead, companies need to invest in building data-driven, transparent and resilient supply chains.

    Globally, investors, companies, consumers and governments are taking a stand against abuses and we’ll eventually see the vast impact of this action. The time has come to buy better.

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