Your Supply Chain ESG Risk May Not Be Where You Think It Is
Last week’s frontpage New York Times report on child migrant workers in the United States should be a wake-up call to corporations to better “Know Your Suppliers.” In an era of increasing focus on corporate ESG due diligence and performance, companies can no longer afford to claim ignorance of the “S” – or working conditions – in their supply chains. On the contrary, corporations are expected to have greater visibility than ever and to be aware of risks before they occur. And these risks may lurk in unexpected places.
Some companies have begun to make Responsible Sourcing a centerpiece of their business strategies, especially given increasing global pressure from regulators and investors. But there are many misconceptions about where supply chain and procurement risks exist, and a critical first step is to ensure that your business understands where your suppliers are and what ESG risks they are exposed to in each of those locations – recalling, as the NYT report emphasizes, that risks are often very close to home.
Once you map your supply base, in order to ensure that it’s not your company on the next front-page exposé, you should ensure you are managing this risk by: 1) Getting your scope right – focus not only on direct suppliers but on subcontractors and service providers; 2) Focusing on where the risk is – ensure that Responsible Sourcing efforts concentrate not only on international suppliers but on “western” vendors; and 3) Understanding and responding to the realities of migrant workers (foreign and domestic) in supply chains.
Subcontractors and Service Providers Are Part of Your Supply Chain
Neither casual readers of the Times’ piece nor investors will distinguish between companies cited for child labor in their supply chains, in their own operations, or with secondary suppliers to their main suppliers. Nor will regulators: The Biden administration has already announced that it will begin holding buyers, not just suppliers, responsible for workers’ rights violations.
Meanwhile, new supply chain due diligence laws and bills abroad and in the US are increasingly requiring companies to take as comprehensive a view of the definition of “supply chain” as possible. Companies should therefore apply an investigative lens with equal vigor as they do to Tier 1 suppliers to the subcontractors and service providers in their supply chains.
Risks at Home
As the New York Times piece showed, workers face grave risks in the United States. Even during stable times, child labor is one of the most pernicious, difficult-to-treat problems within supply chains, and it is a perennial issue in the U.S. In less-than-stable times, the problem is exacerbated. This played out in recent years as macroeconomic volatility and violence remade the risk management landscape, increasing the risk of child labor in 18 countries between 2021-2022, including in the U.S.
While the U.S. government – along with other governments – is tightening regulations around the forced labor conditions of goods produced overseas, it is also increasing standards on and expectations related to worker recruitment practices within the U.S.
U.S. companies’ Responsible Sourcing programs should therefore focus on supply chains in all countries where risk is identified, including the United States, Canada, Europe, and Australia.
Accounting for Migrant Workers
Many of the ESG supplier audits currently relied on by industry are not fit-for-purpose in places where there are significant migrant worker populations. Moreover, most Responsible Sourcing programs are still driven primarily by audits when there is a host of other tools that companies should be deploying to assess and address risk. Leading companies have been expanding their diligence on sites with solutions like migrant worker assessments, worker voice or grievance mechanisms, and by deploying programs and tools specifically aimed at understanding the role of labor agents and their practices, including for services within companies’ own operations such as cleaning and landscaping.
Where We Go From Here
The time for Responsible Sourcing was yesterday. If your company has not yet embedded the “Social” aspect of ESG into purchasing decisions through steps like risk-based procurement, monitoring – for example, through audits or grievance mechanisms – and effective remediation, you should start doing so now. Failing to do so puts companies at odds with the law, and at grave reputational and therefore financial risk. Recent legislation requires companies to engage in supplier due diligence and additional steps or else risk punitive measures like shipment seizures by U.S. Customs and Border Protection (CBP) or fines from the Department of Labor on domestic sites, and this regulatory trend will continue.
None of this is to say that Responsible Sourcing is easy. Global supply chains are complex and challenging to navigate. Most companies have prioritized efforts with their direct suppliers – long assumed to be the highest risk when it comes to working conditions. But expectations are changing, and companies need to allocate more resources toward monitoring and improving working conditions across more suppliers. Risk cannot be outsourced, and the inexorable flow of regulatory developments appears to be forcing a new paradigm in Responsible Sourcing Programs, whereby companies are expected to have visibility and address risk at all levels of their direct and indirect operations.
Given the rapidly accelerating pace of changes to regulations, investor interest, and customer expectations, 2023 and 2024 will likely prove to be transformational years in global ESG supply chain management. Now is the time to make sure that your company is prepared.
We at ELEVATE, an LRQA Company, develop and implement strategies to help companies stay ahead of supply chain sustainability risks and opportunities. If you have questions or would like to discuss working with us, please contact ELEVATE here.
These blogs are written by ELEVATE staff members or associates and the views and opinions expressed are not necessarily those of ELEVATE.
Photo by Arno Senoner on Unsplash
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