The developing supply chain landscape

There is growing pressure on companies to address the negative impacts their supply chains have on environmental, social and governance (ESG) related issues, including human rights. While ESG reporting is still not mandatory, stakeholders increasingly demand greater visibility when it comes to related risks. This influence, as well as wider public expectation, mustn’t be underestimated as impetus for change, as this study outlines. 

War in Ukraine, the COVID-19 pandemic and climate crisis all contribute to this growing focus; each creating significant commercial, operational, financial and organisational disruption. As such there is growing momentum for governments worldwide to improve sustainable and ethical practices in the global economy.

Mandatory due diligence

In the EU, many countries are adopting new due diligence rules to limit environmental and labour risks. At the start of next year, as part of European Commission (EC) proposals, Germany’s Supply Chain Due Diligence Act comes into force. Companies will need to adapt and update their compliance, purchasing and contract drafting processes, identifying and preventing human rights and environmental abuses within their own and their direct suppliers’ operations. In 2024 the act will expand to smaller companies, further tightening compliance.

In the U.S., proposed SEC rules to enhance and standardise climate-related disclosures for investors will have significant supply chain implications. Companies will be required to obtain and analyse climate risks and climate impact data related to upstream (in the supply chain) and downstream (the product use phase) suppliers.

It is likely that both the EC and SEC proposals will become important regulatory drivers internationally, and recommended that companies start implementing processes and procedures that allow them access to their climate-risk and impact related supply chain data.

Helping the planet

Supply chains are crucial when it comes to transitioning towards a net zero economy. According to the UK consultancy Carbon Trust, up to 90% of an organisation’s environmental impact lies in its value chain – either upstream or downstream. Though some estimates are lower, the key takeaway is that companies seeking to reduce their carbon footprints need to engage with their suppliers and review the entire value chain.

What this means for investment managers

In order to anticipate supply chain challenges, fund managers need a ‘birds eye view’ facilitated by direct and on-going engagement with investee companies. This might involve sharing best practice, or provide the opportunity to question companies on their climate policies and practice, or on ensuring that human rights are respected. Collaborative engagement is also important, taking the form of advocacy or collective lobbying to bring about change.

The greatest challenges to measuring and managing ESG performance revolve around data, according to this Deloitte survey of senior executives. As investment managers find themselves increasingly accountable for evidencing sustainability, technology can provide the solution.

SI Engage captures relevant data and turns it into meaningful insight. Fund performance can be tracked to confirm end-to-end sustainability of investee company supply chains, and demonstrated in stakeholder reports that are easy to generate and digest.

If you’re looking to enhance disclosure, we’ll have a solution. Get in touch today.

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