Supply chain ESG improvements have been a major topic of discussions for at least a decade, so shouldn’t we see progress? Depending on what ESG metric you are concerned with and who you ask, progress has been made. Or, it hasn’t.
EcoVadis recently released the seventh edition of the EcoVadis Index, which “provides insights from the sustainability ratings of more than 62,000 companies assessed between 2018 and 2022. Based on data from over 100,000 assessments, this summary report showcases that companies across sizes, industries and regions have been consistently improving on our core sustainability themes: Environment, Labor & Human Rights, Ethics and Sustainable Procurement.”
An overview of the report from ESGToday stated that:
“Sustainability performance at companies across all geographic regions, sectors and sizes has improved over the past few years… [and] dramatic growth in the number of companies seeking assessments, with a 134% increase in assessments since 2018. According to EcoVadis, the increase in companies comes as ‘awareness around supply chain due diligence grows and more companies begin to assess and monitor their suppliers.’”
This is a generally rosy picture, but it may not be fully reflective of the situation. For instance, Follow The Money published a report earlier this month about one specific company – Patagonia – claiming:
- “…Patagonia, described as being sustainable, manufactures its clothing in low-wage countries in the same factories as fast-fashion brands such as Primark and Zara.
- The company’s code of conduct states that workers cannot work more than 60 hours a week. Follow the Money visited a Patagonia supplier in Sri Lanka and spoke to workers and union leaders who said the workload in the factories is high and workers are being harassed by managers.
- Patagonia aims to pay everyone working on their clothing a ‘living wage’ by 2025. At present, this is the case in a mere 40 per cent of factories. A recently approved supplier of Patagonia in Sri Lanka pays its employees only a quarter of a living wage.”
The article states that Patagonia disavows responsibility for its supply chain because “it has no authority over how much textile workers get paid, as they are in no way, shape or form the employer of these workers.” This isn’t the first time I’ve heard a company make that same argument. While technically true, other companies have successfully influenced suppliers to change employment and wage practices.
Child labor in the US doesn’t appear to be improving. Bloomberg reported that “[t]he US has joined a list of mostly emerging-market countries where ESG supply-chain risks are ‘high,’ after the world’s richest economy failed to provide adequate protections for vulnerable populations including migrant children…”
This is according to a new study by consulting/auditing firm Elevate. Key findings from the report include:
- Developed markets like the US are no longer considered low risk for supply chain ESG risks;
- Supplier transparency is declining, despite rising scrutiny from more stringent legislation; and
- While some companies are beginning to decouple from China, critical risks remain for new sourcing markets.
It isn’t just working conditions, forced labor or even greenhouse gas emissions in supply chains where progress is inconsistent at the very least. Diversity in supply chains of US companies has stalled. Another report from Bloomberg last month stated:
“Three years ago, corporate America pledged nearly $80 billion to diversify its supply chain by granting contracts to minority-owned businesses — but money spent hasn’t necessarily translated into long-term success for those companies… it’s been a challenge to get promises from the top of companies to translate into spending from the bottom. Many companies only open up low-margin commodity purchasing to suppliers and are less likely to tap under-represented groups for high-margin tasks such as managing investment funds…”
What This Means
I haven’t even touched on Scope 3 GHG emissions and other environmental matters in supply chains (although the EcoVadis report does to some extent). It may be a difficult time to enforce ESG demands on suppliers: inflationary trends are putting tremendous cost pressure on companies and increasing diversification from Chinese suppliers into minor or nascent manufacturing centers may push ESG down the priority list. There remain more challenges and obstacles to improving ESG profiles in supply chains than there have been successes in my opinion.
While there are rays of sunshine, significant risks and problems remain and may get worse as inflation woes continue and as the face of globalization changes. It is just as important as ever to remain committed to supply chain responsibility, the nature of which itself is evolving.