ESG Feature – Supply chains
those countries to enforce higher standards of working practices, then corporates will have to manage such risks them- selves. “When you incorporate suppliers within developing countries, it elevates certain risks as regulation in many emerg- ing nations is lacking or not robust enough,” Isleib says. “In addition, many third-party providers don’t necessarily have insights into companies within emerging markets, making it even more critical that the company holds its own independent audit reviews with feet on the ground.
“One of the reasons why we have regulation is to make compa- nies within a country more competitive,” he adds. “Regulation will come through over time, but we should not rely on it. “Some companies will put a representative directly into a sup- plier. That gives good visibility on what is happening,” Isleib says.
Data dilemma
Another option is using data and reports from companies that specialise in supplying such information. An alternative is for corporates to constantly monitor the operations of the compa- nies in their supply chain themselves. Isleib has heard mixed reviews about third-party ESG data, but this does not put him off. “It is a good first step to get that initial third-party review,” he says. “I like to understand if companies are conducting au- dits, do they have teams that are going out to their suppliers to
visually understand what’s going on, speaking to the employ- ees on the factory floor, that type of stuff? It’s what I like to see. “The number of audits that can be completed on an annual basis is somewhat limited, but those who do that have a better visibility into their supply chain. “Visibility can be difficult, especially if suppliers are small or are not a public company,” Isleib adds. “Companies need to understand that announcing when they are going to turn up is a potential risk. If you feel that’s hap- pening, then perhaps it does not make sense to use that supplier. For Investors to assess supply chain operations, they need to be aware of a corporate’s value chain. “If you map out the supply chain from the virgin suppliers all the way to the retailer, you can get a good idea of what’s happening by speaking to the companies involved and understanding what their processes are for managing human capital development challenges. What are their practices around quality control? And then if you do that, through each of the steps of the supply chain, you can get a pretty good idea of what is happening. “Now, that is typically tier-one suppliers,” he adds. “When you get to tier two and three suppliers, it is difficult to understand what is happening, and you need to rely on the larger company.”
Customers will blame major firms for supply chain scandals – and this inherited blame will affect whether they buy from the firm in the future.
Professor Sabine Benoit, Surrey Business School
Bad move Perhaps investors encouraging corporates to demand higher social and environmental standards is preferable to moving to suppliers closer to home. It could push people in the emerging world into poverty. ESG should not be a guide to move money out of developing nations, it should be a guide to raise environ- mental and social standards. To help make this happen, size matters. When it comes to making the world a better place. “As an organisation, the larg- er you are, the more influence you have over your suppliers,” Isleib says. “The ability to influence suppliers to be more sus- tainable can be a powerful force.”
Isleib points to an undisclosed large US retailer as an example. “It was the first company that I saw driving changes to make suppliers more sustainable,” he adds. “This large company had made commitments to the public about what they were going to do, the result of which was to push that requirement down on its suppliers.
“Their suppliers had a choice: they could say that they do not have the resources to do it, and risk losing the business, or find a way to do it and retain that retailer as a customer. “We see this playing out in carbon disclosures and de-carboni- sation pathways,” Isleib says. “Companies realise that they can- not achieve their net-zero commitments if their suppliers pro- vide carbon intensive products.”
36 | portfolio institutional | November 2022 | Issue 118
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