Demand for commodities and products bounced back from the COVID downturn so rapidly that manufacturers can’t keep up. Supply shortages in semiconductors, timber, steel and even chicken have made headlines in recent weeks. As pressure mounts within these supply chains, company commitments to supplier ESG mandates will be tested like never before.
What Are the Risks?
Record timber prices may be a motivation for illicit harvesting, increased deforestation and easing of safety standards leading to higher injuries/fatalities in the field. It also threatens forestry-based carbon offset commitments because timber owners may try to harvest trees before committed offsets are achieved in order to take advantage of the current market. Without on-going monitoring of forest-based offset assets, buyers of these offsets are in the dark about whether contractual obligations are being met.
Rapid production ramp-ups can contribute to reduced diligence in training (especially safety training) leading to increased injuries, fatalities and degradation of workplace conditions. Diversity, equity and inclusion initiatives may be set aside. Community programs may be shelved as the company expends all available energy on production. Energy efficiency gains and water/fuel use reductions are likely to be erased for a period of time. Manufacturing emissions, waste generation and chemical usage (along with employee exposure) are sure to climb.
Conformance to corporate policies and even basic environmental and safety compliance can take a back seat in these situations. But with investors and customers demanding transparency about supply chain issues, and growing expectations that data will be accurate and even subject to third-party assurances, I would caution you not to relax your internal controls or compliance concerning ESG performance. It’s better to meet these conflicting interests head on than to have to play defense down the road.
Where primary and approved suppliers can’t meet demand, second-tier suppliers should not be engaged without adequate due diligence on their business, reputation, sourcing/labor practices and operations. Even where you have pre-approved secondary vendors, remember they are facing the same pressures. There’s a heightened risk that they’ll make compromises not aligned with your company mandates.
What You Can Do
Balancing business needs with legal requirements and policy commitments is always a challenge, but this rapid recovery increases the difficulties. Let’s face the reality – flexibility within these competing priorities is necessary. Companies facing this struggle would be prudent to:
- Review existing ESG commitments as a purchaser of materials/products from suppliers and as a supplier to your customers. These requirements may be in contracts, PO terms and/or in supplier codes of conduct.
- Have difficult candid conversations about how best to operate in the current business climate while meeting ESG commitments. Choices may need to be made – involving counsel and senior management is a must.
- Adapt supplier and production monitoring processes to reflect any change in operations, procurement or concerns you may have about particular suppliers.
- Double down on internal controls and monitoring of operational ramp up. This applies to your own production activities as well as how suppliers are meeting their obligations.
- Determine the communications strategy based on the decision. The company’s relevant stakeholders – employees, customers, suppliers, investors and the public – should be kept updated on matters such as:
- Reiterating that ESG performance expectations will not be eased, which could result in further business delays/disruptions. Alternatively, disclose that short term relaxation of certain ESG mandates may be necessary (if applicable) in order to fulfill contractual production requirements.
- Confirming that production start up/ramp up will be done in a manner that does not compromise worker safety, environmental compliance or community health.
- Explaining how supplier/production monitoring changes will be implemented.
- Reinforce the commitment internally with frequent messaging from legal and senior management to employees/workers, and taking rapid corrective action when needed.