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August 9, 2021 – A few days go by without a new high-profile report on issues that fall under the broad concept of Environment, Social and Governance, or ESG. ESG has become so prominent in business, political and economic agendas, as well as in public consciousness, over the past two years that businesses, financial institutions and professional service providers are ignoring the trend at their risks and perils.
There are many ESG elements, often interrelated and overlapping; indeed, the concept is, and will probably remain, fluid. But, we write this series of articles with the belief that the recent emphasis on the common themes of sustainability, responsibility and accountability will continue and grow.
A remarkable feature of the growing importance of ESG is the breadth of contexts in which it is applied. It is no longer enough for a company to examine and address ESG issues within its owned and controlled company. Instead, companies are increasingly expected to report on the performance and shortcomings of associated companies, especially those operating within its supply chain. A brand or global companies can have most of their ESG impact in their supply chain.
In this series of articles, we will examine the risks and opportunities associated with ESGs specifically in the context of complex global supply chains, including with respect to security and resilience, and the potential exposures in different jurisdictions that may arise. , such as litigation and regulatory risks. ; political and commercial risks; financial and operational risks; and, of course, market and reputational risks.
Supply chains have always been a fundamental aspect of doing business; however, their importance has been highlighted by the COVID-19 pandemic. It quickly became evident that traditional – often inflexible – supply chain structures, especially those that involved less strictly regulated markets and jurisdictions than others, were, or could become, vulnerable, in many ways. Some of these vulnerabilities and issues were directly attributable to the pandemic and the associated bottlenecks and restrictions, while others were long-standing features of certain supply chains, but had not previously received the level of attention and control that emerged.
In any case, the importance of ensuring that supply chains are flexible, resilient and transparent, and that they meet the increasingly demanding standards required by lawmakers, regulators and society in its together, is now widely recognized. While ensuring robust supply chains has traditionally focused, quite narrowly, on the cost and quality of the product, as well as the costs, speed and reliability of delivery, it is increasingly important to take into account a much wider range of factors related to ESG, including, for example, well-being and workplace protections of the workforce; any “red flag” suggesting bribery or corruption; practices harmful to the environment of upstream producers; and the impact of the activities of these producers on local populations and societies.
The ESG goals – sustainability, responsibility and accountability – are laudable and should be celebrated on their own, but the other good news is that it is already becoming evident that companies that proactively adopt this approach are starting, at least to anecdotally, to take advantage of better operational performance. Conversely, those who are perceived as failing in this regard may, and increasingly do, find serious consequences, whether in terms of operational difficulties, regulatory sanctions, corporate criminal liability, risk of litigation between shareholders and securities due to a high share price. drops, or very significant damage to the brand and reputation.
It will be difficult to achieve sustainable, responsible and ethical supply chains. This may require lengthy processes involving, for example, multiple risk and exposure assessments to be performed in the different jurisdictions involved in the particular supply chain, followed by verification of current and potential suppliers within those jurisdictions. to assess their ESG credentials, as well as reviewing current corporate governance frameworks and implementing measures specifically focused on ensuring ESG compliant behaviors and practices throughout the supply chain. These are not simple endeavors, but they can be crucial.
An essential first step in identifying and addressing emerging supply chain risks is to ensure awareness and appreciation of the impacts of rapidly changing legislative and regulatory frameworks in relevant jurisdictions. Since reporting obligations, customs, tariffs and other trade regulations promote ESG considerations, it is important to anticipate and respond to these developments.
This is a rapidly evolving field. Significantly, recent weeks have seen the European Commission’s final proposal for a regulation establishing a European Union Carbon Border Adjustment Mechanism (CBAM), as part of the broader European Green Agreement, for example which it intends to regulate the greenhouse gas emissions embodied in the “covered products”. (including cement and some iron, steel and aluminum products) imported into the EU. It also discusses due diligence guidance on the risks of forced labor in supply chains, while the German parliament in June passed the “Business Due Diligence in Supply Chains Act” in June. (Lieferkettensorgfaltspflichtengesetz). In the United States, the US Customs and Border Protection (CBP) has increasingly issued “release orders” to exclude goods under Section 307 of the Tariff Act of 1930, which prohibits importation. goods extracted, produced or manufactured by forced or contract labor. .
Regardless of the industry or jurisdictions in which a particular company operates, sourcing and sourcing strategies should integrate and focus intensely on ESG criteria. This will likely include developing robust, effective and measurable corporate policies and business processes around governance, and working closely with suppliers across multiple levels of the supply chain, to develop common goals and objectives. unified goals.
Putting in place effective monitoring and auditing protocols will become increasingly important, as monitoring performance and behavior within supply chains becomes a central consideration to improve organizations’ ESG benchmarks and reduce consequently the associated risks and exposures.
The rise of ESG, and the corresponding emergence of ESG factors playing an important role in supply chain management, is a trend that will continue in the months and years to come. This undoubtedly presents challenges for companies that depend on complex global supply chains, but it also presents exciting opportunities for these companies to review and improve their policies and arrangements, and develop best-in-class practices. that will contribute to increased resilience and versatility, and reduced legal, regulatory and reputational exposures.
We will focus on these questions in more detail in future articles in this series.
The opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the principles of trust, is committed to respecting integrity, independence and freedom from bias. Westlaw Today is owned by Thomson Reuters and operates independently of Reuters News.