Sylwia, sustainable supply chain has no secrets for you – you have been working with this topic for several years. I’m glad to see that with the integration of ESG (environmental, social and governance) elements into decision-making, the topic is gaining traction. So let’s start at the beginning – what is a traditional supply chain? What elements does it consist of?
Thank you for the invitation. I am happy to share my knowledge, opinions and observations.
When talking about the supply chain, the first thing that comes to our mind is the transportation of products, raw materials and components from producer to recipient, i.e., the company, warehouse or store. And this is of course the case, but we have many elements that make up this process. The most important is the aforementioned flow of goods and logistics, extraction of the raw materials and its transport or production.
According to the OECD Guidelines (on Due Diligence for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas) – the term 'supply chain’ refers to a system encompassing all activities, organisations, actors, technologies, information, resources and services related to the extraction of raw materials, production and distribution of products into the hands of the final consumer. Thus, we have a whole network of producers, consumers and services that all share the same goal – to produce and sell a product – and a series of events that make this possible.
So how would you define a sustainable supply chain? How it differs from the traditional one?
While a sustainable supply chain includes all the elements discussed above, it requires action at each of these stages with the knowledge that there is a risk of environmental and social impact. Each stage of the supply chain has an impact on stakeholders: greenhouse gas emissions, soil exploitation when extracting raw materials, pollution during extraction and production, transportation, energy consumption, water consumption. At each stage there are risks regarding human rights violations, e.g., child labour, illegal labour, unpaid labour, without safety measures or with risks to life.
These challenges are so numerous because supply chains often span continents. Companies looking for cheaper production options choose raw materials or factories with lower costs. As it happens, the cheaper labour and raw materials are most often from countries where environmental or worker rights/regulations are lacking or not fully respected.
Thus, a sustainable supply chain is first and foremost one in which (1) all producers and customers are aware of these risks, (2) it is an accurately described supply chain – how many suppliers there are, where they are located, what they deliver (3) it complies with legal requirements, global standards, guidelines, (4) in which potential risks are identified and countermeasures and mitigation are described for them. Finally, a sustainable supply chain is also one where we have a dialogue with suppliers, our organisation’s policies on the subject, clearly communicated requirements for suppliers, and the support we give our suppliers so that they can meet these requirements. Then there is the monitoring of the supply chain, whether new risks have emerged and whether our existing methods are simply working.
The pressure to introduce sustainable supply chains is growing, but the amount of work to be done can be overpowering. So how do we get started?
The pressure is increasing, but so are global guidelines, legal requirements, consumer awareness, I can say that – finally! When we talk about ESG (i.e., environmental, social and corporate governance elements), various measures are introduced. Unfortunately, supplier issues are often left to the end or kept to a minimum – for example, the only requirement for suppliers is to sign our policy or code of conduct is introduced. This is a bit weak, especially in the case of complex supply chains, where there are many risks of environmental or social impact on the way our product reaches the end customer. I have also observed that it is not uncommon for companies to declare that they have a sustainable supply chain because they also count their carbon footprint in terms of 3. This is important, but is it enough? I am throwing out a rhetorical question here.
How do we implement a sustainable supply chain? I don’t think there is one specific answer, as it depends on our business. But certainly, the first steps are to evaluate our business, products, stakeholders, whether we have our own factories and, if so, where they are located, in which regions, whether there is political unrest, conflicts, climate risks, whether there have been scandals related to production in the area before. Similarly, with regard to our suppliers’ factories. This is very important and will certainly allow us to answer – what my business (including suppliers) is most influenced by and what has the greatest impact on it. The next stage is to describe our supply chain in detail – how many suppliers we have, what we buy from them, where they are located and where the raw materials come from.
The next stage is the aforementioned risk assessment with an emphasis on industry risk assessment. What product or material is the core of our business, whether it is timber, clothing, electronics, food and going further – what raw material is key here and at the same time, is it coming precisely from regions of e.g., conflict or otherwise at risk. The next step is to have a company policy clearly stating in which direction we want to go and guidelines/code of conduct for suppliers. We need to define what we want from them and how we will verify this.
It is also very important to appoint people responsible for these activities, either internally or, of course, when the organisation is not ready to hire new people and does not have the knowledge internally – to seek support from external consultants.
Let us now go into detail. What environmental and climate issues should we be paying attention to in the supply chain? What are the biggest challenges with these topics?
The answer depends on the type of our services, products and suppliers and their activities. At the outset, it is worth noting whether suppliers are already covered by ESG reporting obligations, whether they have an environmental policy and management system, in which case it is easier here to focus on those issues already known to them. According to the WSE Guidelines for ESG reporting, the most important issues are, in addition to policies and procedures, greenhouse gas emissions and whether there are KPIs (key performance indicators) to reduce them, energy and water consumption and plans to reduce them, impacts on biodiversity, waste – how much, what type and how it is managed, the type of packaging introduced, product safety and chemical substance management.
Most of these issues are reported by organisations that are covered by this requirement, so similar elements can be required of our suppliers, maybe not all at once and with support from us. Because the biggest challenge in these aspects is their awareness, especially among smaller suppliers, as well as lack of human or financial resources to measure these indicators. So, from our side it is important to understand our suppliers, what stage their organisation is at, what they are able to measure, to put in place.
How do we require our suppliers to implement pro-environmental and pro-climate measures? How do we assess them?
If we demand, let us lead by example. It is worth starting with dialogue, explaining why environmental, climate issues are important to our business, what impact they can have on stakeholders. It is worth communicating what our organisation is doing on this subject, what we measure and want to improve. Then clearly communicate our requirements to suppliers. It is worth introducing them gradually, e.g., start with key suppliers, introduce requirements at the tender stage when we select new suppliers and, over time, extend them to the entire supply chain.
There are many methods, probably the key ones and the most practised are codes of conduct for suppliers, which they are obliged to familiarise themselves with and sign, regular training on our requirements, a dialogue to identify customers and which challenges the code entails.
For a precise assessment of the fulfilment of our requirements, the best way is through supplier forms with questions on ESG issues (environment, climate, human rights, employees, business ethics). There are several external platforms that provide such forms, tailored to the size and type of company. These include, for example, EcoVadis, Sustainalytics, Sedex, CDP. As much as possible, you can choose such a service and use it as a tool in our supplier verification process, and those answering the questions on the platforms have the assurance that the data is stored securely. In addition, the analytics are there, which makes verification easier for us, and the answers can be updated regularly.
By far the best method of verification are audits, either internal ones (i.e., performed by company employees) or outsourced to external companies. It also gives the opportunity to find problems and their causes, and thus many good opportunities to introduce corrective measures.
The letter S in supply chain is a huge area. Let’s start with human rights – how is it possible that they are not respected all the time in the 21st century? What are the most common problems companies face?
This is a very good question – how is it possible that we still have any human rights violations at all. I am going to be quite harsh in my judgement, this is due to the desire for profit of some, with no consideration for what price others have to pay here. The desire for profit and ignorance. Unfortunately, also a bit of handwashing. If it’s not in my backyard, it’s not me. Fortunately, there is now enough awareness among companies, among consumers, that organisations are beginning to introduce requirements in themselves and in their suppliers. Companies are responsible for the products they put on the market, not only in terms of their quality, guarantees or safety, but also in terms of the conditions under which they were produced.
The problem is mainly that with complex organisations it is not easy to identify the whole supply chain and all its levels. We may know our direct suppliers, but do we know their raw material suppliers, do we know where these raw materials come from, have there been no human rights violations at the level of extraction? In practice, very deep in supply chains there are still many problems.
What tools do we have to identify and counteract problems? What indices indicate to us the risks of a country versus individual companies?
In terms of country risk, first whether there are conflicts, political instability or sanctions imposed, it is a clear signal that issues such as human rights or climate are not a priority at all. In addition, there are industry guidelines, for example the OECD Due Diligence Guidelines for Responsible Supply Chains of Minerals from Conflict-Affected Areas (…). This document clearly defines which countries are risk regions here – in the case of conflict minerals, the Democratic Republic of Congo and neighbouring countries in the Central African region.
Speaking of companies and institutions, the lack of a policy or any statement on respect for human rights, the lack of awareness of this in the organisation, the lack of consideration of at least the well-being of employees in the business strategy, can be a red flag for a company if, for example, we are considering working with a certain supplier.
The social and labour area is also strongly described in directives and international codes. Tell us which companies should follow when creating their supplier policies, for example?
Here, documents and guidelines abound, the most important being the UN Guiding Principles on Business and Human Rights, the OECD Guidelines, the International Bill of Human Rights, the Conventions of the International Labour Organisation. In addition, the10 Global Compact Principles, examples of which on social and labour aspects below:
- to support and respect human rights as adopted by the international community
- the elimination of all human rights violations by the company
- respect for freedom of association
- elimination of all forms of forced labour
- abolition of child labour
- effective action against discrimination in employment
It is worth being aware of these documents in our organisations, referring to them and respecting them in our own backyard, then moving out into the supply chain where these, in fact, basic human rights, should be required and respected.
We have already discussed the challenges that companies face in the supply chain. Now let’s say, how can any company contribute to sustainability by vetting its suppliers? Is auditing already a necessity?
Sustainability has many elements, from environmental issues to climate risks, social, labour, human rights, product safety and compliance to corporate governance. These topics need to be taken care of in our organisation, but as mentioned earlier – companies are responsible for their products really throughout their life cycle. Therefore, companies can contribute to sustainability, largely by addressing these issues throughout the value chain. In supply chains it is often `what is unknown`, it is hard to know if ESG topics are addressed by our suppliers. It is the responsibility of the organisation to be aware that this needs to be verified, to spread this knowledge throughout the value chain and to work with suppliers to introduce the requirements and support them in meeting them. Whether an audit is already a necessity, in my opinion, depends on the size of our organisation and the number of suppliers, the type of products and their risks. For multinational complex companies – it probably is, or will become within the next few years.
Sustainable supply chain issues are so important to the European Union that it has proposed a Corporate Due Diligence Directive. What is this due diligence?
That’s right, earlier this year the European Parliament presented a Proposal for a Directive on corporate sustainability due diligence (https://eur-lex.europa.eu/resource.html?uri=cellar:bc4dcea4-9584-11ec-b4e4-01aa75ed71a1.0005.02/DOC_1&format=PDF)
To date, some EU companies have been linked to adverse impacts of their activities on human rights as well as on the environment. These have included, for example, forced labour, child labour, unsafe or even life-threatening working conditions, greenhouse gas emissions and lack of plans to reduce them, pollution, destruction of biodiversity and probably many others. This due diligence, which is already being sought at the regulatory level, is the need for organisations to implement procedures to mitigate the risks of their activities.
The proposal for a Directive aims to create better risk management processes by companies – by identifying, preventing and mitigating adverse/potential impacts of their activities on human rights and the environment, as well as being responsible for impacts already caused and responding to potential complaints or violations.
Please tell us what requirements this Directive introduces for companies and who will be covered by it?
The general requirement is to create procedures to better manage risks – to anticipate and mitigate them. However, the Proposal for a Directive mentions 6 key steps that companies should put in place:
- Mainstreaming due diligence into the company’s policies (description of the company’s approach to due diligence in the long term, a code of conduct for stakeholders, description of procedures that implement due diligence and how compliance with the code of conduct is to be verified),
- Identify actual or potential adverse impacts (within own operations and supply chain operations),
- Prevention of potential adverse impacts and containment of actual adverse impacts and minimisation of their extent(development of preventive and corrective action plans with clear deadlines and qualitative and quantitative indicators to assess improvement, seeking contractual assurances from the business partner on compliance with the code of conduct, in the event of violations – commitment of companies to compensate individuals or communities affected),
- Establish and apply a complaints procedure,
- Monitoring the effectiveness of the due diligence policy and measures put in place,
- Communication on due diligence to the public, reporting.
Companies which meet the following conditions will be covered by the Directive:
- in the most recent financial year for which annual accounts were drawn up, the undertaking had on average more than 500 employees and had worldwide net sales revenues of more than EUR 150 million,
- had an average of more than 250 employees and, in the most recent financial year for which annual accounts are drawn up, had worldwide net revenues of more than EUR 40 million, provided that at least 50% of those net sales revenues were generated in one or more of the following sectors:
- production and wholesale of textiles and leather (footwear, clothing),
- agriculture, forestry, fishing – production and wholesale of crops, live animals, timber, food, beverages,
- extraction of mineral raw materials, production of basic metal products, wholesale trade in mineral raw materials.
- The Directive also applies to companies in third countries with net sales in the Union of more than EUR 150 million in the financial year preceding the most recent financial year.
Your life is divided between Poland and Sweden, which I personally associate very much with sustainable development. What differences in approach to the Sustainable Development Goals (SDGs) do you see in Polish versus Swedish companies?
True, I have worked professionally both in Poland and Sweden which is a great opportunity to observe ESG practice really in different environments and at different stages. My conclusion is that at the corporate level, I mean big corporations – the awareness and approach to sustainability is really at a similar level. It is slightly different for smaller, local companies, there is more work to be done in Poland. I am already explaining why this may be so. I believe, after several years of work, observations, conversations and following trends, that ESG is not just about companies’ actions or regulations. It is everyone’s daily choices, it is something that is practised (or not) in the society. Is there environmental education, do we, as individuals, have the knowledge, the need and all the tools to e.g. segregate waste, use less packaging, treat our colleagues with dignity at work. If so – then it is already a simple way to build ESG into our organisation’s operations, after all, a company is made up of its employees. Legal requirements for ESG are being introduced at EU level, so indeed here both countries will have to adapt. But the history of Poland and Sweden is different, Sweden has had more time to focus on environmental protection, here people have been aware of the need for responsible choices for a long time. In Poland this is happening, and I am really optimistic here, while a lot depends on the tools that are available and, most importantly, affordable for every resident. I think the biggest problem in Poland is the low use of clean energy. Of course, there are solutions, but they are completely unaffordable for a large part of the population. This has been known about for a long time, so the role of the state, which should treat this as a priority, is huge here. It really is an environmental (and health) disaster that fossil fuels are mostly used to heat homes in Poland. In conclusion, if there are opportunities available in the country to make greener choices, I think everyone would be happy to follow them. And there is still a lot of work to be done here.
Sylwia, thank you so much for sharing your knowledge with us.