Sustainable Supply Chains — Is Your Business Ready?

Around the world, governments have begun to enact sustainability and supply chain laws holding companies responsible for the environmental and social impacts of their value chains. And if the Securities and Exchange Commission (SEC) has anything to say about it, the United States may soon follow suit.

In recent years, companies have taken great strides in unlocking the value in their environmental, social, and governance (ESG) strategies. Still, depending on the industry and organizational maturity, companies face plenty of challenges in adopting sustainability practices.

Meanwhile, the regulatory environment continues to evolve rapidly. With proposed SEC rules on the horizon, companies need to take action now to prepare for future disclosure requirements.

The evolving international regulatory landscape

Coming into effect in 2023, with an expansion in 2024, Germany's new Supply Chain Due Diligence Act requires large companies to ensure social and environmental standards are observed in their supply chains. The act will require large companies to identify, prevent, and address human rights and environmental abuses within their own and their direct suppliers' operations.

In February 2022, the European Commission adopted a proposal for a directive on corporate sustainability due diligence, which aims to drive corporate responsibility, as well as more ethical and sustainable behaviors, throughout global supply chains. Large businesses (small and medium-sized enterprises [SMEs] are excluded) will be required to identify and, where necessary, prevent, end, or mitigate adverse impacts of their activities on human rights, such as child labor and exploitation of workers, and on the environment.

Proposed changes in the United States

In March 2022, the SEC proposed new rules aiming to enhance and standardize Climate-Related Disclosures for Investors. The proposed rule changes would require registrants to incorporate certain climate-related disclosures in their registration statements and periodic reports, such as information about climate-related risks reasonably likely to have a material impact on their business, results of operations, or financial condition.

Phased-in with compliance dates dependent on the registrant's filer status, the proposed rules would cover both Scope 1 and Scope 2 and require registrants to disclose information about their direct greenhouse gas (GHG) emissions and indirect emissions from purchased electricity or other forms of energy.

In addition, if the registrant (or the material they use) has a greenhouse gas (GHG) emissions target or goal that includes Scope 3 emissions, registrants will be required to disclose GHG emissions from upstream and downstream activities in its value chain. Again, smaller reporting companies are exempt.

Driving sustainability through your value chain

Because of competitive pressures driving a need for cost reductions, supply chains have long since transitioned from linear and mostly domestic supply chains to intricate and interdependent global networks.

As some countries are known to be higher risk, with a history of human rights abuses, along with unstable governments and corruption, now-common practices like Low-Cost Country Sourcing (LCCS) have greatly increased the ESG risks that lay within a company's value chain.

Meanwhile, according to IBM, purpose-driven consumers select brands based on how they align with their personal values and demand more information than ever before. With sustainability now a deciding factor, consumers are doing more than just checking labels. They want information on sourcing, how products are made or processed, and how they're delivered.

However, because of increased supply chain complexity and the challenges of gathering data through disparate systems, limited supply chain visibility beyond tier 1 remains a very real threat. "Many organizations are leaving themselves exposed to potential supply chain disruption and margin erosion by having limited visibility of their supply chains beyond the first tier," reports a Deloitte survey.

Poor supply chain visibility makes it difficult for companies to mitigate their risks, report on or improve their sustainability efforts, and provide customers with important information.

Supply chain mapping; the first step in mitigating your risks

To combat the threats of opaque supply chains - and the unforeseen risks that impact profitability, brand reputation, and long-term viability - and prepare for upcoming legislation, many are now looking to map their supply chains. Mapping your end-to-end, beyond tier-1 supply chain allows for increased transparency and more effective risk mitigation. Critically, it also opens the door for the collaborative efforts required to drive innovation and improvements and meet corporate sustainability objectives.

Cloud-based digital solutions are now leveraging AI to access - and assess - publicly available supplier risk data such as financial records and ESG performance for real-time supply chain monitoring and more proactive risk management.

Although it's impossible to mitigate all of your risks, and you're not likely to garner full end-to-end transparency on the first try, today's technology allows for improved governance. And by providing companies with a systematic process that utilizes automation to quickly onboard suppliers, these digital solutions are empowering companies to increase supply chain transparency, and perform the deep due diligence customers, employees, and investors expect.

As scientists warn that the world is driving perilously close to tipping points that could lead to irreversible climate effects, time is of the essence. To drive sustainability through their value chain, mitigate operational and reputational risks, and prepare for regulatory requirements, procurement and supply chain leaders must work collaboratively with supply chain partners, leveraging technology to increase transparency and battle greenwashing with data.

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