Ed. note: Today’s blog comes from Catherine Tyson, Managing Consultant, Energy, Sustainability, and Infrastructure at advisory firm Guidehouse. Catherine’s expertise is in the social side of responsible sourcing. She is a former colleague of mine.
Much of the conversation on environmental, social, and governance (ESG) concerns in recent months has focused on reporting frameworks, climate impacts, and diversity, equity, and inclusion (DEI). However, companies must not lose sight of social risks within their supply chains as they seek to become more sustainable.
Social risks in supply chains are anything that could impede human rights, welfare & safety or community development. They include issues such as forced labor, excessive working hours, and infringement upon free, prior, and informed consent of indigenous populations in natural resource development. Social risks can vary greatly between industries and suppliers, and it can be challenging to know how to identify and effectively manage these risks.
Actions that companies can take to identify social risks:
- Incorporate industry and material-specific risks into supplier due diligence. Although most companies have already identified immediate legal and regulatory risks, they may be unaware of social risks heightened by physical sourcing locations of suppliers and the materials being processed. For example, social risks present at a supplier in Norway are very different from those at a supplier in Madagascar, and the social risks in Madagascar vary further depending on whether it is providing tantalite or mica. Once companies understand risk variations across a given supply landscape, they should incorporate those risks into supplier due diligence processes.
- Expand supply chain traceability beyond Tier One suppliers. Expanded traceability is a company’s most critical tool in risk identification; if you do not know the tiers in your supply chain, then you do not fully understand your social risk exposure. While Tier One suppliers may have systems in place to prevent or address social risks, lower tier suppliers tend to have fewer resources and requirements. Traceability to the point of raw material origin may not be possible in all production processes; however, in those cases, understanding the last point in the process where origin identification is possible is instrumental for targeted supplier engagement.
- Conduct ongoing due diligence. Risk identification is an ongoing process – and it is no different for social risk identification in supply chains. At a minimum, you should review your current supply chain for the presence of social risks on an annual basis, especially if your due diligence includes verification that social compliance or other critical audits have been completed satisfactorily.
Actions that companies can take to manage social risks:
- Require that suppliers demonstrate compliance to social and human rights criteria in their operations and their supply chains. The difference between encouraging suppliers to abide by stringent social requirements and requiring them to do so often means the difference between addressing risks and letting them go unabated (and the difference between a higher score and a lower score in certain ESG rankings). Companies should use third-party audits to verify that these requirements are met – another valuable input into social risk identification. While some companies opt to put their own audits in place, companies should explore leveraging reputable industry audit schemes where available to reduce audit burden on suppliers, which may undergo the same exercise for multiple customers each year.
- Require suppliers to monitor their own supply chains and ensure that their human rights and other social requirements are satisfied as well. This can be a difficult undertaking for suppliers to pursue on their own, but companies can partner with their suppliers to ensure that long-term risk management is taking place throughout the supply chain.
- Establish long-term relationships with suppliers as stakeholders in your business. Building long-term relationships with suppliers is critical for providing the business case that suppliers need to comply with social requirements and for companies to support capacity-building on social risks with suppliers and within their own organization. Learning about social risks and maturing processes in the supply chain takes time and resources that suppliers often do not have with small, short-term contracts. In addition, long-term relationships help companies mature in understanding how their requirements as customers may undercut efforts to manage social risks. For example, if a supplier is pushed to meet an incredibly short deadline by the company, the supplier may be left with no option but to force workers into excessive overtime to meet demand.
- Engage in multi-stakeholder action to address systemic challenges to remediating social risks. Ultimately, there are social risks that no single company can effectively address on its own and that require engagement from multiple actors to drive resolution, such as the use of child labor in cobalt extraction or forced labor in cotton picking. In these cases, companies should engage in public-private partnerships or multi-stakeholder initiatives that harness collective attention and resources to grapple with these broader challenges to industry.