Introduction

Supply chains are complex, and becoming more so, but they are crucial for access to essential goods and services. Whilst local and regional-scale sustainability initiatives champion local and Indigenous producers, for many corporate enterprises, technological advances and trade liberalisation have made it easier to source goods and services from overseas. However, this has added to the opaqueness of supply chains and the ESG challenges associated with many tiers of suppliers.

Every link in the supply chain has its own supply chain. It is no wonder that supply chain management and logistics is a specialised discipline, particularly with technological trends towards digitalisation, automation spurred by artificial intelligence (AI) and the Internet of Things (IoT), and the growth of big data. However, the potential for supply chain management to create positive impact is also recognised, with the release of ISO 20400 – Sustainable Procurement in 2017. Importantly, the Gartner 2021 Supply Chain Top 25 criteria allocates a 15 per cent weighting towards environmental, social and governance (ESG) metrics.

This article considers how an organisation's supply chain affects its sustainability, and vice versa. It highlights the issues that need attention now and the opportunities for business leaders to effect positive outcomes for these issues, including climate change mitigation and modern slavery. It does however require navigation through a complex network, which as with all things sustainability, starts with strategy…

Set your supply chain sustainability strategy

Transformational business leaders recognise increasing stakeholder expectations for sustainability and the potential benefits for an organisation that sets environmental and societal standards. They have identified their material risks, set measurable targets for those risks - notably carbon reduction, and contribute to voluntary (e.g., GRI, CDP, TCFD, SBTi, Climate Active) or mandated reporting (e.g., NGERs and modern slavery) and global partnerships (e.g., RE100, Business Ambition for 1.5°, Race to zero, Alliance 8.7).

Therefore, whilst most organisations have a sustainability or environmental policy, material risks and opportunities need to be embedded in an organisation’s strategic plan and operating model. We have written before about designing systems to align with organisational strategy and the need for systems to be agile and resilient in today’s dynamic environment. This means Board and executive commitment and investment in strategic initiatives including forging good relationships with supply partners.

Supplier-related ESG issues are interwoven through material risks and targets. One integrative approach is sustainable procurement, which as described by ISO 20400, is the process of making purchasing decisions that meet an organisation’s needs for goods and services in a way that benefits not only the organisation but society as a whole, while minimising its impact on the environment. The standard defines the principles of sustainable procurement including accountability, transparency, respect for human rights, and ethical behaviour, and outlines the steps required to integrate social responsibility into the purchasing function.

This approach is echoed in the Global Reporting Initiative standards GRI 308: Supplier Environmental Assessment 2016 and GRI 414: Supplier Social Assessment 2016. Organisations applying these standards hold themselves, their partners, and their suppliers accountable for achieving sustainable practices but also develop strong relationships that can drive the change that is needed.

Know your suppliers

“Supply chains are networks of firms participating in the process of transforming inputs into final products that are delivered to consumers”, says the Productivity Commission in its interim report (March 2021) on Vulnerable Supply Chains in Australia.

Supply chains also play a major role in an organisation’s sustainability targets and we are seeing a trend in Australia where industry is being challenged to evaluate general contractors, equipment providers and service providers about their own sustainability objectives and goals.

Supplier assessment – Guidance on types of suppliers likely to feature in any supply chain is provided in GRI 308: Supplier Environmental Assessment. These include primary producers, manufacturers, wholesalers, distributors, and consultants as well as labour suppliers such as contractors and home workers. This standard requires disclosures on how suppliers have been assessed for a range of environmental criteria such as impacts related to water, emissions, or energy. GRI 414: Supplier Social Assessment requires disclosures on screening new suppliers using social criteria and negative social impacts in the supply chain and actions taken to address any negative impacts identified.

The B Impact Assessment also has a series of questions that can guide an organisation in getting to know its supply chain. This includes whether the entity undertakes social or environmental screening of suppliers, and if yes, what topics are screened for? Topics include compliance, governance, positive practices beyond compliance and third-party certifications. This assessment also delves into outsourced support services with questions about labour practices – including for low-hours/short-term independent contractors and evaluating the social or environmental impact of these services.

Supplier diversity – is critical for maintaining supply chain resilience, reducing risk, and helping organisations improve sustainable outcomes. The Productivity Commission’s interim report, for example, lists supplier diversification alongside stockpiling, contingent contracting and developing domestic capability, as a key mitigation strategy for preparing for supply chain risks resulting from disruption.

Supply Nation champions diversity as a way of harnessing planned and budgeted procurement spend and redirecting it to traditionally under-represented businesses for social good, with a focus on Indigenous-owned businesses. As described by Supply Nation, supplier diversity drives a range of business benefits including sustainability, flexibility, innovation, and value. They do this by implementing a verification process to ensure that businesses registered on Indigenous Business Direct are Indigenous owned, and offer a membership to support a level playing field for Aboriginal and Torres Strait Islander suppliers.

Going beyond Tier 1 – there may be multiple layers in a supply chain, such that a tier 1 supplier might supply the business directly, while a tier 2 supplier supplies a tier 1 supplier, and so on. A higher number of tiers makes a supply chain more complex, decreases transparency and increases the vulnerability of a supply chain. The Productivity Commission referenced a survey of firms (SCM World 2017) that found 43 per cent had a good level of visibility within their tier 1 suppliers only, 46 per cent within tier 1 and 2 and only 11 per cent for all tiers of suppliers.

The Best & Less Group is one of Australia and New Zealand’s largest retailers of family clothing. They have 3704 suppliers, 3548 suppliers of non-trade goods and services, 156 merchandise manufacturers from 188 audited factories across six countries and 28 concession brands. While they have direct relationships with all their tier one manufacturers (other than department store Concession Brands) they recognise the heightened risk (of modern slavery) among tier two and tier three merchandise suppliers, where visibility is not as clear.

Form stronger partnerships

According to RMIT – Supply chain best practice examples – an important practice is for supply chain teams to create stronger supplier relationships, through two-way communication and fair and equitable negotiation at all times. In terms of a sustainability or sustainable procurement strategy, these are long-term partnerships with suppliers that are themselves committed to sustainability and social responsibility, and in turn communicate their expectations to their supply chains, e.g., tier 2 and tier 3 suppliers.

While these requirements might be stipulated in a supplier agreement, elements of a successful sustainability partnership include auditing environmental and labour practices to ensure continuous improvement, training and education programs, and partnering with agencies to deliver specialist programs such as gender equality and empowerment of women. Other initiatives might use local strategic communications providers in the supplier’s country (and language/s) to build trust and enable fast response to reported issues.

Collaborate for the greater good

Sector partnerships are important to learn and share knowledge and to avoid making mistakes that others have already made. Participation in industry forums may help to:

• assess common product impacts

• identify alternatives

• communicate new and future product requirements

• aggregate demand for products, innovation, and new suppliers

• align supply chains to the expectations of customers and to achieve operational efficiencies.

The Supply Chain Sustainability School is on a mission to enable socially, environmentally and economically sustainable supply chains for all organisations in Australia and New Zealand through open access to educational resources. It is financially supported by fellows (partnership organisations) who set their strategic direction, identify critical issues, develop training and resources, and ensure good governance.

Such collaborations align with the UN’s Sustainable Development Goal 17 (revitalise the global partnership for sustainable development), including target 17.17 – to encourage and promote effective public, private and civil society partnerships, building on the experience and resourcing strategies of partnerships.

Calculate scope 3 emissions

Climate action is a material risk for all organisations, which puts scope 3 greenhouse gas emissions in the spotlight. Guidance for calculating these emissions has been around for some time; the Greenhouse Gas Protocol released its Corporate Value Chain (Scope 3) Standard in 2011. However, expectations have accelerated as stakeholders, including investors, seek climate-related financial risk disclosures including scope 3 emissions.

According to reports produced by the Net Zero Momentum Tracker, scope 3 emissions comprise 80 per cent or more of emissions from companies in the resources sector (e.g., fossil fuel exports) while in the energy sector, gas retail is a significant source of indirect emissions when gas is used by their customers. In the retail sector, 25 per cent of emissions are attributable to transportation of goods and the property sector needs to account for embodied carbon in building materials. However, this also means that adjustments to scope 3 activities may bring longer term opportunities for improving sustainability and the possibility of financial benefits.

Lendlease is an industry leader with a target of absolute carbon zero by 2040. By absolute they mean – no greenhouse gas emissions from their business activities, no offsets, and application to scope 1, 2 and 3 emissions. Scope 3 emissions cover those generated in upstream activities such as the manufacturing of building materials, or downstream activities such as from business travel, tenant power consumption or transporting materials. This necessarily includes collaboration with supply chain partners to set pathways towards achieving this goal. In their Europe roadmap to absolute carbon (regional roadmaps to come), Lendlease plan to transform the industry between 2025 and 2040 by mandating that all supply chain contracts include requirement for Absolute Zero by 2040.

Tackle modern slavery

Modern slavery is a material risk for organisations that are subject to mandatory reporting under the Modern Slavery Act 2018, but arguably for all organisations in susceptible sectors, such as cleaning, hospitality, agriculture, textiles production and some types of manufacturing (see iSystain blog here).

One of the outcomes of the Modern Slavery Act 2018 (MSA 2018) is the publication of modern slavery statements by reporting entities (i.e., consolidated revenue >$100 million). This register provides a valuable resource for all entities looking for case studies on supplier engagement and how to drive change where modern slavery issues are identified. Like scope 3 emissions, a good starting point is to identify and partner with ethical suppliers that comply with MSA requirements.

FairSupply evaluated the first 446 published modern slavery statements and identified six critical trends. Critical trend #5 is that only six per cent of entities assessed the risk of modern slavery beyond tier 1 of their supply chain, as indicated by the Best & Less Group example above.

The BGC Group (construction, manufacturing, and transport sectors) delved a bit deeper. It considered the depth of tiering in their initial risk assessment and found the most elevated occurrence of modern slavery risk is likely to accumulate at tier 2 and tier 3, but also tier 1 for certain building materials sourced overseas. This initial assessment was based on supply chain mapping (up to tier 10 suppliers) for over 900 suppliers (using external consultants).

Go digital

According to RMIT, supply chain digitisation is one of the five future trends for supply chain management: “Digital technologies are creating more integrated and transparent supply chains”. The Digital Economy Strategy 2030, released by the Australian government this year, also highlights the role and benefits of digitisation in supply chains including:

• flexible supply chains that change how businesses participate and compete in the global marketplace

• the role of large businesses in supporting the digitalisation of SMEs in their supply chains

• the use of automation, software, robotics, and data analytics to improve supply chain efficiencies

• to assist organisations in making decisions about trusted suppliers and the transparency of their own products.

On the last point, the Australian Government is also developing Critical Technology Supply Chain Principles in consultation with industry. The principles fall under the three pillars of transparency, security-by-design, and autonomy and integrity.

Conclusion

Best practice involves a data-led process of supply chain mapping, identification, assessment of material risks and potential for positive impact. Introduction of these procedures and innovations can only assist organisations to better understand the environmental and social sustainability of their supply chains by:

·       knowing their suppliers

·       going beyond tier 1

·       collaborating for the greater good

·       calculating scope 3 emissions, and

·       tackling modern slavery.

Supply chains are everywhere, don’t be blinkered into thinking that you don’t have any; who cleans your offices or factories, makes your uniforms, or mines the minerals to create your technology?

Written by Shelley Anderson, a freelance certified Environment Practitioner and sustainability professional with experience in Australia and the UK. This experience includes environmental risk assessment and management, due diligence, and reporting across a broad range of industry sectors. Shelley was also a Director of the Cotswold Canals Trust (UK) where she led the Natural Environment team and applied her skills to charity governance and impact.

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