ESG: Are your partners ready?

The last two years of expediting, scrambling, and grabbing­—let’s call it “ESG” in the supply chain industry—have taught us that we were not prepared for “black swan” events like pandemics, wars (trade and military), and rapid climate change. The initial impulse has been to simply diversify suppliers and routes.

The problem appeared to be the over-reliance on a single-source company or country for products and services. Many industry analysts lamented our drive to be efficient in global sourcing that has resulted in a lack of a “Plan B.” And that can kill our sustainability as players in our markets. In a multi-tiered supply chain, the answer is not that simple. In 2020 and 2021 the focus was on disease. A great deal of the pain in 2022 has been the result of actions by governments and organizations outside of our supply chains.

In a recent presentation to the World Affairs Council, Kevin Cassidy of the UN’s International Labor Organization (ILO) stated that if manufacturers, distributors and service providers are to be sustainable, they need to demonstrate environmental, societal and governance (ESG) management.

Keep in mind that environmental management is broader than use of renewables and recycling. It speaks to the environment that organizations choose to set up shop in. When deciding where to source, it’s important to go beyond labor, building costs and local tax incentives to look at the health of the local economy, environment and people. Find out how the local leaders react to changes in conditions.

Two key environmental factors are, first, the availability of alternate sources in raw materials, transport, and processing. A vertically integrated supplier might be efficient until they’re hit with a sudden change in people, processes and technology to which they cannot easily adapt. Second, is the environment of the workplace. In 2022 we saw millions of workers leave for greener pastures. Others are forming unions and voting to strike for a better workplace.

Societal factors to be assessed include guaranteed freedoms, mobility, public perception of your business and labor laws. What’s the propensity to lock down facilities or for labor strife? Are there protections against child labor and abuse of people due to their ethnic, religious, gender or economic class? In 2022, we saw huge disruptions in capacity and cooperation. When service providers with control of large portions of a market are trying to quickly adapt, they will likely affect those customers with few if any alternatives.

Governance touches on the rules of behavior in the broad, governmental sense, but also how parties to supply chain contracts work during the term of their agreement. When black swan events occur, how do the parties adapt and innovate together to sustain the mutual business and continue to serve the customer. Use of data to jointly monitor operations, committed resources for innovation, and transparency as to intentions and operational limitations is critical.

Rather than insisting on multiple service and product suppliers, smart players are working with one or more key vendors to ensure their mutual supply chains are ESG compliant.

All levels in the supply chain need review. After 2022, we now have three new “what if” scenarios: disease, war and climate events to “stress test” our networks. There will be more. Are you and your partners ready? How about your partners’ partners?