ESG Table Stakes & the Supply Chain
(Excerpt from the book, ESG Table Stakes - Why ESG Matters to Stakeholders And Why Every Company Needs It. By Melissa Baldridge, due out this fall.)
A VUCA World
“VUCA” stands for volatile, uncertain, complex and ambiguous. The U.S. Army co-opted the VUCA concept in the 1990s after the fall of the Soviet Union, when our binary, linear orientation about our enemy (the Soviets) crumbled into pieces along with the Berlin Wall. Afterwards, problems seemingly came from every direction, not just from Moscow and the Eastern bloc of Soviet satellite countries.
We’re in a time of polycrisis where exigencies pile on one after the other so that the overall effect feels worse and heavier than the sum alone would suggest. If the pandemic showed us anything, it’s that the invisible, seamless supply chains for all the instantaneous goods we take for granted are vulnerable and brittle.
Risk on the Supply Chain
A simple definition of supply-chain risk is that it’s “ … the potential occurrence of a problem along a company’s supply chain, such that the provision of a good or service is prevented.” These can occur both externally and internally. Internal risks occur inhouse and are, therefore, easier to control. External risks can come from anywhere and are harder and more expensive to predict and mitigate. One key to understanding supply-chain complexity comes in identifying (when possible) the layers or tiers of suppliers (see Figure 1).
Named Penny by an employee, my well-loved Toyota Prius has approximately 30,000 parts – thirty-thousand. At the top of the heap is the original equipment manufacturer (OEM), in this case, Toyota, the original equipment manufacturer (OEM). Any module, system or component that goes into that Prius comes from a Tier 1 supplier, those with which Toyota has a purchase order. Those Tier 1 suppliers buy their goods from Tier 2 component suppliers. Say, for example, a sound or window system. Tier 2 vendors have purchase orders with Tier 1 companies and not with Toyota. And Tier 2 suppliers, in turn, have purchase orders with their parts and service providers (Tier 3). And so on.
The OEM may have a sterling reputation for ESG initiatives and implementation. Problems happen, though, when lower-tier suppliers don’t. Maybe they use toxic materials, dump hazardous waste even if it’s legal in its jurisdiction, or use illegal or inhumane work practices, to name a few potential issues. Because these lower-tier vendors are usually unknowns, blame rolls uphill to Toyota. Toyota now has to address the problems caused by an entity with which it has no purchase order or control because Toyota’s globally recognized brand is the car.
Supply Chain and ESG
During the pandemic, many companies put sustainability on hold, but it’s back, and procurement professionals have placed it at the heart of strategy making.
For many businesses, the supply-chain carbon footprint is 70 percent or more of the company’s total. Yet greenhouse gas emissions (E) are hardly the only impact companies have to account for and to square.
Table 1 shows an example of some possible supply-chain ESG issues, though each situation will be different. Environmental issues get a lot of press and are easiest to grasp because they’re about the physical world, stuff and the environmental impact that stuff has. Yet supply-chain issues more often reside under the social pillar (S) because they usually involve human talent and tech, and the governance pillar (G) because they reflect the tone at the top, leadership and strategy, which mold supply-chain operations. No alt text provided for this image
Relationships – Suppliers as Valued Partners or Vendor Scum?
Some companies treat their suppliers like sht. Treat suppliers like partners, not like vendor scum.*
- My grad school carbon-accounting professor
At root, supply chains are about humans and personal relationships. The chains and links of vendors are made up of people who provide the products and services that enable us to meet customer needs – people who can be trusted and who (hopefully) trust us in return. This valuable stakeholder group, suppliers, are a business’s first line of defense when things go sideways as they, too, are invested in success. Any company that treats them inconsiderately or thoughtlessly puts a business at risk.
Unfortunately, each player in the external value chain often worries that providing information such as capacity, inventory, or internal operational efficiency metrics could lead to someone else taking advantage of them. It’s a business strategy, and there’s nothing wrong with that, but relationships can’t be that transactional. We will all be as strong as the weakest link, so there has to be a feeling of ‘we’re all one big family.’ This way, if something breaks, you can support them immediately.
In a study of 424 supplier managers, 60 percent said joint activities with their suppliers were the best mitigating action they could take in 2022. Key business partnering places people and relationships first when seas get choppy.
Labor and Human Rights Abuses Around the Globe
Just because a U.S.-based business would never force or indenture (or worse) someone to work directly for them doesn’t mean it isn’t happening down their supply chains. It is. While this topic may seem obvious, even one misstep can blow up overnight into major reputational damage that can rock an organization.
In 2013, a nine-story building, Rana Plaza, in Bangladesh failed structurally and collapsed, killing over 1,100 people and injuring 2,500 more. Home to five garment factories, the tragedy drew a bright line for the global fashion industry about human rights for their lower-tier workers forced to toil in unsafe conditions and places.
Fashion is hardly the only global industry with a record of heartbreaking human rights abuses. International mining for rare-earth metals also takes center stage because, like Rana Plaza, mining disasters can be enormous and deadly. While the onus is on international mining companies to diligently prevent disasters and children in their workforces, janky, artisanal and small-scale mining operations, particularly in the Democratic Republic of the Congo (DRC), hire kids routinely. In fact, the International Labour Organization (ILO) estimates that approximately one million children work in the mining and quarrying sector to keep the planet supplied with minerals for clean-tech hardware.
Uyghur Forced Labor Prevention Act
Right before Christmas 2021, President Biden signed the Uyghur Forced Labor Prevention Act (UFLPA) into law, passed with massive bipartisan support. UFLPA assumes that anything produced, manufactured or sourced from the Xinjiang region of China (Xinjiang Uyghur Autonomous Region, XUAR) is the product of forced labor unless proven otherwise.
The XUAR produces one-fifth of the world’s cotton and is a big exporter of textiles, clothing and footwear, rare-earth minerals, natural gas, machines, toys, vehicles and plastics. The Chinese government has detained over 100,000 Uyghurs without trial and interned, tortured, intimidated and forced the labor of many more.
Alive and Well in U.S. Supply Chains
Lest we judge from on high companies with criminal labor overseas, child labor exists here, too. It has risen since 2015, and a Biden administration child-labor enforcement group of the DOL and Health and Human Services (HHS) called the uptick in exploitative work practices “alarming”. In 2015, the Department of Labor (DOL) found 1,012 minors working in violation of the law (1.9 per case), while in 2022, the number tripled to 3,876 (4.6 per case).
In 2023, The New York Times published an expose on migrant children working dangerous jobs in companies large and small across the United States – 12-year-old roofers in Tennessee and Florida, 13-year-old hotel maids in Virginia, underage slaughterhouse workers in Delaware, Mississippi, and North Carolina, minors sewing “Made in America” tags into J. Crew shirts and deboning chicken sold in Whole Foods. In 2022, 130,000 unaccompanied minors crossed the U.S. border, and an overwhelmed HHS, pressed to process them quickly, lost track of 85,000 of them. Presumably, a large number of these lost children funneled into this growing U.S. shadow workforce.
Hearthside Food Solutions
Based in Grand Rapids, Mich., Hearthside Food Solutions makes well-known snack and cereal brands like Cheerios, Lucky Charms and Nature Valley granola bars. The New York Times investigation found 15-year-olds throughout Hearthside’s factory, working night shifts with heavy and dangerous equipment that could dismember them, one packaging machine having split open the head of a young interviewee’s coworker.
Hearthside responded that they outsourced their staffing.
To Conclude
While supply-chain issues may seem on their face to be heavily environmental, especially in manufacturing, they’re largely about people – how companies treat their suppliers to the labor and practices hidden in opaque value chains. The days of throwing up of hands and claiming, “We didn’t know!” are over because blame rolls uphill.
On the upside, ensuring a supply chain is beneficial for all positions a company as a leader for all makes a company stand out as a leader and minimizes reputational wreckage if issues do show up.