Companies’ rhetoric on social and environment supply chain responsibility is impressive. Now they need to actively engage with these challenges to reduce risks and reap business beneﬁts, writes Michael Vrontamitis, Head of Trade, Europe & Americas, Transaction Banking at Standard Chartered Bank.
Globalisation is scarcely ever out of the news these days. The political, economic and ﬁnancial structures that have shaped our world since World War II face unprecedented stress as a result of lacklustre global growth since the ﬁnancial crisis, and growing dissatisfaction with the status quo. In a number of countries, rising nationalism and populism threaten to undermine the gains that have resulted from the world’s increased inter-connectedness in recent decades.
Yet while we should defend globalisation for its many beneﬁts – the extension of multinationals’ supply chains into developing countries has lifted millions of people out of poverty – we should also be aware of its shortcomings and aim to address them. By improving how globalisation functions, the world stands a better chance of consolidating the many gains of industrialisation in emerging market countries.
New research, commissioned by Standard Chartered Bank and conducted by The Economist Intelligence Unit, reveals the scale and nature of the challenge. The resulting report, No more excuses: Responsible supply chains in a globalised world, details the extraordinary increase in the length and complexity of contemporary supply chains: an estimated 80% of global trade now passes through a supply chain.
New supply chains have accelerated industrialisation in many emerging markets, compressing an evolution that took centuries in today’s advanced nations into just a few decades. Unsurprisingly, local governments, businesses and civil society have struggled to keep up with the changes wrought by industrialisation and integrating with the global economy. As a result, local communities and environments have sometimes been inadequately protected.
Time to take responsibility
To address the threat posed by rapid emerging market industrialisation, governments, non-governmental organisations (NGOs) and other bodies have introduced a plethora of rules, regulations and standards, especially in the last decade.
The number of mandatory and voluntary reporting instruments has risen from 60 in 2006 to 383 in 2016, with the number of countries covered rising from 19 to 71. Meanwhile, some advanced economy regulators have introduced rules that target issues such as conflict minerals (Section 1502 of the Dodd-Frank Act in the US) and child labour (the UK’s Modern Slavery Act). There are widespread expectations of additional compliance measures in the future.
As the report emphasises, simply reacting to such measures is not enough. Preventable disasters like the Rana Plaza factory collapse in 2013 can affect a brand’s bottom line and cause reputational damage. The globalisation of communications and media means that news from developing countries can quickly spread around the world; NGOs and activists also use social and other media to highlight corporates’ social and environmental compliance shortcomings.
Instead of simply meeting compliance requirements, corporates need to get ahead of the regulatory curve and show leadership in improving supply chain transparency and management. Those companies that do will ﬁnd it does not just mitigate risks, but also generates opportunities.
Recognising the challenges
Encouragingly, a survey of 800 corporate executives headquartered in eight countries (China, Germany, Hong Kong, Italy, Japan, Singapore, South Korea and the US) conducted for the report shows that an increasing number of ﬁrms see the value of taking a more responsible approach to their supply chains: nearly eight in 10 respondents say their ﬁrms have responsible supply chains.
However, the survey also revealed a worrying degree of complacency by executives over how responsibly managed their supply chains were. For example, less than a quarter of respondents say their companies address issues such as climate change or child labour in their supply chains while only a third of respondents say they target corruption and bribery. Some examples are shocking: only 12% of respondents in China say their companies address child labour in their supply chains; and only 14% of respondents in Italy address gender equality.
Clearly, corporates need to do more than simply accept their corporate responsibility for supply chains: they actually need to take action. But companies claim the complexity of today’s global supply chains makes monitoring and control difﬁcult: 49% of survey respondents cite it as the number one barrier to responsibility. Experts from academia and consultancies disagree and note that new technologies and the emergence of external specialists mean complexity is no longer a valid explanation for inaction.
Regardless of the merits of these arguments, companies seeking credibility with an increasingly well-informed and critical consumer base need to stop making excuses: it is unacceptable that 30% of survey respondents have decreased their focus on supply chain responsibility in the last ﬁve years. Greater responsibility also needs to be taken by the other parties involved in setting, monitoring and enforcing standards: they must consider how best to incentivise and support companies.
What is supply chain best practice?
Deﬁning best practice for responsible supply chains is tricky, and there are inevitably nuances across industries and even from ﬁrm to ﬁrm. Nevertheless, there are three concrete steps that all companies can take to ensure that more sustainable supply chains become more than just ﬁne words.
1) Allocate supply chain responsibility to a core business executive
Where the person with ultimate responsibility for environmental and social standards is in overall leadership, operations, ﬁnance or risk, ﬁrms are more likely to address social and environmental issues than where a corporate social responsibility, marketing/public relations or legal executive is in charge.
2) Engage with all suppliers
Rather than simply applying social and environment standards to direct suppliers (as per 42% of respondents to the survey), companies need to cascade supplier standards throughout the supply chain. This is challenging: ﬁrms must require suppliers to write standards into their own contracts and penalise under-performing suppliers.
3) Engage with third parties
Even a large ﬁrm has a limited effect on the overall supplier base – and many companies change suppliers frequently. Consequently, corporates must work with third parties to make responsible supply chains more widespread. Ideally, ﬁrms should cooperate with peers on supplier standards but where competition issues make this impossible, third-party certiﬁcation schemes can be valuable. It is important that external monitoring supports, rather than replaces, internal checks.
Digitisation can play an important role in helping companies to implement responsible supply chains. New technologies, including blockchain, cloud computing, Big Data, predictive analytics, artiﬁcial intelligence and sophisticated modelling can enable companies to better utilise and understand data associated with their supply chain. By improving transparency, digitisation of the supply chain allows companies to monitor the ongoing sustainability of their supply chain partners and spot trends, risks and opportunities as they emerge. Using analytics, they can even anticipate problems before they arise.
One challenge associated with using data as an enabler of sustainable supply chains is the incompatibility of much of the data associated with supply chains. While there have been signiﬁcant technology advances toward inter-operability in recent years, there remain important challenges to resolve. To this end, the International Chamber of Commerce (ICC) has set up a working group to focus on the acceptability of data versus documents; making sure ICC rules are e-compliant; and ensuring that digital platforms are able to connect faster with each other, not just in terms of technology but also relating to legal frameworks, liability and information security.
A business case for responsible supply chains
In a world in which 69 of the world’s 100 largest economic entities are corporations rather than countries, there can be no more excuses for working to improve supply chains and introduce best practice. There is a clear moral imperative to act.
However, there is also a growing business driver towards improved social and environmental sustainability. Mounting opposition to globalisation and the increasing economic threat of climate make a heightened focus on supply chain responsibility a sound business decision. An increased emphasis on the ethics of doing business will also play well in an era of growing consumer expectations; it may even help companies win the attention of the best millennial recruits, who prefer to work for companies seen as socially responsible.
Creating a more sustainable supply chain is not straightforward: each company is different and there is no single blueprint for success. However, as this report shows there are clear steps that every ﬁrm can take; some companies are already reducing their supply chain complexity in order to make tackling social and environment risks easier. Ultimately though, companies need to recognise that responsible supply chains are both a business necessity and an enormous opportunity: they ignore them at their peril.