When a law is enacted – or an international compliance standard agreed – all parties wanting to satisfy it generally have an idea of what compliance looks like. The various parties can readily establish what evidence they need to present during any ‘show and tell’ associated with an independent audit to demonstrate they are performing at the right level.
ESG performance by a company within its own boundaries can be qualified. But what about its supply chains? These often cross continents and influence actions taken by a range of distant connected international supply chain actors.
There are no all encompassing laws for qualifying ESG performance in supply chains and only a range of sector specific and often ‘E’ or ‘S’ or ‘G’ specific standards, but no generalised approach. The problem is that ESG performance in supply chains encompasses a massive slew of issues. There is no consensus on where in the supply chain to look; what to measure; and how to measure the ESG risks associated with it. Or how to report those risks. And these qualifications need to be undertaken in a manner that can be seamlessly replicated across a widely heterogeneous supply chain population.
Perhaps those that are currently debating this topic are all trying too hard to seek perfection – when perfection is the enemy of progress.
Practical methodology that works
Track Record Global (TRG) has been assessing risk in supply chains for the last 15 years. Although the focus was initially on ‘G’ alone (European Union Timber Regulation 2013) the same approach is successfully being used to qualify the full gamut of ESG risks in supply chains that deliver cotton, leather, recycled plastic, recycled paper; animal products (and other materials) by many of the UK’s leading retailers. The same approach is also used to qualify Forced Labour and Modern Slavery supply chain associated risks.
The TRG methodology consists of 3 principal steps:
Step 1: Structured on a basic pre-knowledge of the supply chain, from marketplace to raw material source, TRG estimates the supply chain Inherent Risk.
Step 2: TRG then reaches out to the supply chain actors and gathers specific and appropriate mitigating documentary evidence to ameliorate the identified Inherent Risk – where possible. Suppliers are allocated a specific time over which they need to submit the mitigating documentary evidence. As part of this process TRG maps the supply chain, identifying all the supply chain actors – however ‘networked’ the supply chain is.
Step 3: Finally TRG assesses all information submitted across the supply chain (by the supply chain actors) and estimates the Residual Risk (Residual Risk = Inherent Risk less the level of mitigation provided by the Documentary Evidence). If the Residual Risk is lower than the level set by the law, or corporate policy, or the standard requirement then the supply chain is regarded as compliant or Low Risk.
Why this approach has brought results for our clients
Technology-enabled supply chain transparency is the key to monitoring, managing and mitigating the associated ESG risks. Technology driven solutions (like TRG’s) keeps costs low, efficiency high, makes the Assessment results accessible – being visible to clients, their shareholders/investors, customers, auditors and supply chain actors alike. Simplicity is key. There must be no ‘black box’ based risk results. Of course there are judgements about the appropriate documentation needed to mitigate risks. But if such judgements are science- or logic- based and completely out in the open then experience demonstrates there are no serious disagreements over the outcomes.
Complex indexes or algorithms should not be used if all the involved parties need to agree with the Assessment outcome.
And when high risks are identified, our client’s have been able to:
- Work with and improve performance of specific problem supply chain actors
- Swop out a poor performing supply chain actors for a better performing ones
- Replace irredeemable high risk supply chains in their entirety with ones proven to be low risk.
There will always be ESG risks in supply chains that initiate in countries or traverse countries where the regulatory capacity is low. But there are often means of effectively and objectively managing those risks.
We believe regular, repeatable supply chain risk monitoring, mitigation and management methods that are technology enabled, using a consistent transparent methodology, are a necessity for a business’s long term credibility – in the eyes of its investors, consumers, staff and auditors.
~ Frank Miller, TRG Managing Director