Corporate supply chains, and private equity investment portfolios alike are garnering increasing sustainability scrutiny from their respective stakeholders. This is due to a variety of factors, including higher levels of consumer concerns about ESG related issues, or the implementation and enforcement of legislation to combat corporate social negligence, for example.
In the face of this pressure, corporates must be able to demonstrate that they are both aware of their impacts, and the impacts of their supply chains on different sustainability metrics, and that they are able to act upon these circumstances.
Here we will consider these ideas, particularly the first element concerning identification of impacts, through a discussion of risk factors and resilience indicators which we believe to be key to the issue.
What is supply chain risk and resilience?
Managing risks and resilience is crucial to business sustainability and future proofing your organisation.
What is business risk? Business risks are those factors that pose a threat of damage to your business. This can include things that have already happened.
These represent the possibility for downfall, and since the 1970s have been a key part of business strategy. They may not always be controllable, and your businesses exposure may not always be clear. Nonetheless, management of their impact and the threats is possible and necessary.
What is business resilience? Business resilience refers to those features of your business that safeguard it against threats. Generally, this is a consideration for the future. Implementing an anti-corruption policy would have this effect.
These are steps taken to ensure business longevity. Resilience is less prominent in conversation, but no less important. It involves businesses upholding positive positions which enable future business profitability and operation.
Here lies a complex relationship between risk and resilience. If a business tolerates elevated levels of risk, stakeholders will consider it as lacking in resilience. Likewise, a resilient policy may be implemented to counter risk. In this way, the two are in flux.
Of course, there are several types of business risk. Compliance, finances, reputation, operations, economics, and competition are all areas that might pose risk to your organisation.
Consider the implementation of a new piece of legislation in your industry, such as the forthcoming German Due Diligence Act, for example. This may present a threat to your business or supply chain in that you may be liable to damage for non-compliance. Equally, in this area, you may be compelled to implement policies to ensure compliance and resilience, thus safeguarding your business against threats. An example might include putting in place a compliance officer to improve your compliance procedures and boost resilience.
Global Supply Chain Management
It is important to consider risk and resilience factors with regards to third-party suppliers. In this instance, it is often preferable to consider risk and resilience as separate areas, rather than as interchangeable.
This is due to the way each is measured and perceived by stakeholders.
From your business point of view a supplier that has been involved in a recent corruption case would be considered to pose a corruption risk.
No doubt, it is pertinent that your business is aware of this risk. Uncovering these risks, and alerting you to their existence, involves a process of negative media search to discern which risks each third party may present to your operation.
Indeed, finding these suppliers, and their risks is a crucial step in any effective due diligence process.
Implementing such due diligence procedures enables your business to fully understand the level of risk each third party presents your organisation. Certain suppliers will present distinct levels of risk – this needs to be ranked and would be clear in their frequent media mentions. Here it is worth remembering that not all risks are equal, they can vary in severity, propinquity, likelihood, or proximity, for example.
Conversely, businesses can display their resilience through their policies. By this, we refer to active efforts to implement legitimate actions which will safeguard their business and production of documentation detailing these actions.
This is the kind of action that brings resilience.
For example, if a business upholds stringent anti-corruption policies and properly documents them on their website, we will consider this business to be resilient against anti-corruption.
The practice helps to ensure the businesses future profitability, and is an encouraging sign for stakeholders, including those who care about ESG performance.
Checking the existence of this documentation, both in terms of negative media risk and resilient policy documentation, is an important first step in due diligence. This is true both of corporates conducting supply chain risk assessment, but also private equity investors looking to gain portfolio insight.
This is the beginning of the process. Any business cannot rely on top-level materiality searches for the entirety of their due diligence. While there is a certain value in these searches, they are not absolute.
There are two concerns here -from a risk perspective, these searches do not provide a detailed picture of the profile of a company. Regarding resilience, these searches do not gain enough insight to ensure against greenwashing.
So, while gaps may be found, more must be done.
So far, we have discussed a reasonable platform to begin due diligence escalation processes. In any instance, this escalation process would depend on the risk appetite of the business in question.
It is conceivable that some businesses would only want to conduct thorough due diligence on high-risk suppliers. Others may want detailed reports on every supplier.
In any case, detailed due diligence is needed to protect your business from risk and ensure resilience. It is not acceptable to stakeholders to have prominent levels of risk in your supply chain, or to run a supply chain that will not prove resilient to common business circumstances.
For this, the first step is identification and measurement of risk, before considering deeper management of risk, and then through to progression to better scenarios, before displaying progression.
ethiXbase’s Solution to risk and resilience
We have developed a suite of services to progress your supply chain to a more sustainable future and help you on this journey – from end to end.
ESG GreenLITE guides your organisation through an initial mapping of your supply chain or portfolio, through the identification of potential risk areas, before providing any due diligence escalation processes that may be needed.
In time, this will provide you with all the information you need to action due diligence and display sustainable supply chain progression.
The platform is configurable to your organisation’s specifications and risk appetite – and is lauded by some of the largest companies in the world. Through its use, you will be able to highlight a genuinely significant improvement in your supply chain ESG standing.