Supply chains - your reputation in their hands

How well do you know the vendors and suppliers your organisation chooses to work with? Could they prove your Achilles heel when it comes to making claims regarding your environmental or social performance? A key part of any organisation’s sustainability strategy is to maintain appropriate due diligence over its supply chains. There is a need to continuously reconfirm that you are working with businesses with similar standards and values, especially if you are making claims about your own credentials.

The dependencies on others within an extended supply chain and the vulnerabilities this can cause is a well understood concept for manufacturing organisations, especially when disruptions to just-in-time deliveries lead to shortages.

Unfortunately, cases such as Mattel’s_¹ recall in 2007 of die-cast toys covered in lead paint, is an example of where an extended supply chain let down a major brand. This was a situation where a potential crisis situation was set up by the organisation’s brand being put on the line, which had a much bigger reputational risk than the short-term impact of disrupted product flow. In this case, critical safety standards were not followed and Mattel had to step up its quality assurance processes as a result.

However, virtually every organisation is reliant on an extended-enterprise, be it a wide range of service providers, advisers, off-shored resources and technology platforms. Even a medium sized organisation can have over 1,000 vendors and partner organisations. The reputational challenge can come in many shapes and sizes. Organisations of any size need to be able to demonstrate that their partners abide to appropriate standards and regulations be in the Modern Slavery Act 2015, the Bribery Act 2010 and a wide range of voluntary or best practice codes, such as International Labour Organisation standards.

The recent controversy where a small pressure group, Mighty Earth, took on a Brazilian meat product, JBS², is a good example of what can happen where sustainability related claims are not actually being adhered to. In this particular case, the allegation is that investors who supported Green Bonds, were misled regarding the organisation’s credentials, the controversy centring on the measurement of greenhouse gas emissions (GHG) related to its suppliers. These Scope 3 GHG emissions can be hard to capture accurately, and it is an area where disclosures can be particularly misleading.

This type of situation is now being described as ’Greenwashing’ and not surprisingly, stakeholders are being increasingly sceptical about sustainability claims as more and more examples of marketing spin being applied to sustainability credentials are uncovered.

Increasingly your performance is not judged by what happens within the boundaries of your own organisation, but is based on your end-to-end value chain, which may involve many external dependencies. The challenge then becomes, given the number and variety of vendors, outsourced service providers and other partners, how do organisations set about gathering sufficient evidence about their extended enterprise to be able to make meaningful statements?

In a world where many organisations have signed up to Net Zero commitments, they now find they need to work with many other parties to understand their external, Scope 3 GHG emissions. The answer is that the gathering, verifying and sharing of data is becoming a key part of delivering a Net Zero transition plan. The challenge will not be limited to climate-related data, and would equally apply to ethical supply chain questions such as ensuring financial crime, child labour and other inappropriate practices are avoided. However, GHG emission data capture does provide a useful case study of what is involved. 

The data challenge is in three parts

1. Data completeness: How to go about gathering information from all key vendors and partners?

   Even the largest procurement functions will struggle to gather appropriate information from 100% of its vendors, so some type of prioritisation will be required. In the absence of initial information on your vendors performance, this would typically be done based on procurement spend, focusing on the larger commercial relationships. Clearly there is still a fairly high likelihood that some vendors will not respond to these types of requests and there will need to be protocols in place to deal with this eventuality. Over time, the provision of due diligence information on a regular basis may have to become part of the terms of conditions for provision of services.

2. Data reliability: How to ensure that the information secured is accurate and verifiable?

   Vendors’ information, even when provided, may not be as reliable as hoped. The data may be based on assumptions rather than measurement. It can be helpful through the data gathering and due diligence processes to seek to gain assurance over their information. This may be done in a number of ways, by for example, requiring them to operate to certain recognised international standards, or to provide independent assurance over their disclosures by having them verified by an external party.

3. Data attribution: How to determine what your organisation’s fair share of your supply chain’s emissions should be?
   In this regard, a number of best practice standards are being produced. Increasingly this can be addressed by being transparent about how you have performed the calculation, what assumptions have made, and what standards you have adopted.

Given the importance of data and its capture and analysis, it will become increasingly important to plan how best to request, capture and manage what will become a significant volume of sustainability and ethical performance data. In other words, unstructured approaches will not be sufficiently robust or reliable enough. So how will the data be requested in terms of questionnaire tools, how will it be collated and reviewed and finally how will it be extracted and reported against? This work will inevitably need to be carefully planned and organised by a cross-functional team.

Hopefully from this analysis, it is clear that procurement has a critical role to play in any sustainability programme, through the entire lifecycle of the goods and services provided. In on-boarding new suppliers, it will be important to ensure that an appropriate level of due diligence over all sustainability and ethical issues are addressed, and that contracts allow for the ongoing provision of performance information where this is appropriate. The ongoing management of the vendor relationship will need to address the need for step-wise improvement, so that their performance objectives align with your organisation.

Finally, organisations need to recognise that they are likely to be required to report on their supply chain performance from a sustainability and ethical perspective. Therefore, these processes need to be set up in a way that allows the information to be disclosed in a reliable manner. There will increasingly be an expectation that this reporting is subjected to the scrutiny of external independent assurance. The need for such assurance will inevitably drive up standards in terms of the rigour with which data is captured and documented.