To achieve ESG objectives, your company must also consider its suppliers

The race to save the planet has given urgency to corporate efforts to make and meet net zero carbon commitments. But for their companies to be truly sustainable, CEOs need to focus not only on the E of ESG, but also on the S and G. Human rights, workplace safety, fair pay for a fair working day, ethical business practices… some of the social and governance issues that CEOs need to address in their company and in the companies they do business with, their suppliers.

It’s not just about complying with regulations. It is about fulfilling the conditions of a tacit social license to operate. But doing the right thing is difficult. To help CEOs, we’ve identified a series of actions they should ask their CPO and procurement team to take in order to address social and governance issues.

As a first step, companies should define their social and governance expectations in their supplier code of conduct, alongside their environmental expectations. They should then build these expectations into their contracts with suppliers, establish a clear reporting process, require their own local managers to monitor suppliers, and commission formal (and ideally third-party) audits on a regular basis.

If evidence of human rights abuses, poor working conditions, or bribery and corruption is uncovered, the CPO should send personalized letters to supplier CEOs, demanding immediate improvement and offering support and business training. Dell Technologies takes great care in assessing the risks of the factories where Dell products are manufactured and assembled. It helps suppliers to take corrective measures if necessary and accompanies them in the development of new capacities.

In 2020, for example, Dell commissioned third-party audits for 346 high-risk suppliers in its supply chain. Auditors spent several days on site, reviewing documents, observing day-to-day work practices and conducting interviews with thousands of supplier employees. Improve supplier compliance with the code of conduct established by the Responsible Business Alliance, a non-profit organization whose members have combined annual revenues of more than $7.7 trillion, directly employ more than 21.5 million people and manufacture products in more than 120 countries. Dell has asked several factories to set up tailor-made “corrective action” programs and put 1,439 supplier employees through “capacity building” programs.

Sometimes vendors fail to improve even after receiving substantial support. In these cases, CPOs should suspend the relationship and review the situation. Sometimes suppliers refuse to commit in any way. In these cases, CPOs should not hesitate to terminate the relationship. Apple has done this many times. The tech giant works to improve working conditions in mining communities around the world where it sources vital metals and minerals. Accordingly, miners, smelters and refiners must assess and identify risks in accordance with Apple’s Supplier Code of Conduct and its Responsible Raw Materials Sourcing Standard.

In conflict zones, such as the Democratic Republic of Congo and neighboring countries, where Apple sources tin, tantalum, tungsten and gold, suppliers must guarantee that they have not directly or indirectly funded or benefited armed groups. As part of this reassurance process, they are required to participate in traceability and third-party audit programs designed to address and mitigate identified risks. In 2020, Apple kicked seven smelters and refiners out of its supply chain because they failed to meet its responsible mineral sourcing requirements or were unwilling to participate in or complete an audit by a third.

Traceability is essential, and it can also be difficult to achieve. Apple pledges to “one day” use only “recycled and renewable minerals and materials in its products and packaging.” Until then, he is working with ITSCI (the international tin association) and RCS Global Group, an auditor specializing in responsible sourcing. The company acknowledges that “the challenges of tracking specific mineral quantities throughout the supply chain continue to hamper the traceability of any specific mineral shipment throughout the product manufacturing process.”

Similarly, in the jewelry industry, which also has to deal with suppliers in conflict zones, some companies are working to improve the reliability of their track and trace processes. The issue of conflict or blood diamonds – those that have been mined in a war zone and sold to fund the activities of a warlord – has become acute. To solve this problem, Tiffany, the US-based jeweler, assigns each diamond a unique serial number which is laser engraved on the surface of the diamond and provides a record of its provenance. In a competitive industry, however, these actions may not be drastic enough. In 2021, Pandora, the world’s largest jeweler, not only unveiled its first collection of lab-grown or man-made diamonds, but also announced that it would no longer use mined diamonds. To do this, it is starting to overhaul its supply chain.

Sustainability is no longer just about doing the right thing. More and more, it’s about doing business, period. If companies ignore the principle of “becoming truly sustainable by partnering with your suppliers to meet environmental, social and governance standards” and fail to take appropriate action, they had better hope that their customers, and citizens countries where they operate – don’t look. It could mean the end, or the beginning of the end, of their business. After all, a business that is unsustainable is by definition unsustainable. This is why companies and their suppliers have every interest in helping each other to comply with all environmental, social and governance standards.

Reprinted with permission from Harvard Business Review Press. Adapted from Enjoy the Source by Christian Schuh, Wolfgang Schnellbächer, Alenka Triplat and Daniel Weise. Copyright 2022 by The Boston Consulting Group Inc. All rights reserved.

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