Supply Chain: Risk Exposure

Have you ever heard of ESG? These three letters have become a trend on the financial markets and at meetings of the world's largest companies. Together they stand for good environmental, social, and governance practices. It is a way of valuing corporations that take sustainability and social responsibility seriously, and punishing those that do not.

In less than two decades, ESG investments already amount to US$35 trillion and are expected to reach US$53 trillion in the United States alone by 2025. All this because investors want to bet on companies that positively impact society. Certifying the commitment of companies is necessary and constant, because any slip-up will destroy investor confidence.

Can't ignore supply chains

To accurately measure a company's ESG risks, one must turn their eyes to their end-to-end operations: from the supply chain to the end consumer. Most ESG rating agencies do not measure the ESG performance of global supply chains that support large corporations.

Want an example?

Bloomberg's recognized ESG measure lists "supply chain" as an item under the "S" (social) pillar. Thus, supply chains are not evaluated on relevant criteria such as carbon emissions, climate change effects, and human rights. Since there is no standard for sustainability reporting many companies tend to value environmentally responsible suppliers and hide unqualified ones by manipulating supply chain data.

Carbon emissions are another example. Many companies have been successful in reducing emissions from their own operations. However, emissions from their supply chain partners and customers, known as "Scope 3 emissions," can remain high and hidden. It can be seen that without taking into account a company's entire supply chain, ESG measures fail to reflect the commitment of corporations.

What to do?

To improve consistency, ESG rating agencies must consider what may be environmentally damaging and unethical operations throughout the global supply chain. European governments are already beginning to require companies to look into social and environmental issues arising from their global supply chain networks. This includes bans on child labor and forced labor, attention to health and safety throughout the supply chain.

It is only a matter of time before the ESG performance of the entire supply chain counts in the image and value of large companies. This is an invitation to corporate leaders to plant the seed of social and environmental responsibility and set an example for smaller companies and the planet.