Investors should put pressure on private companies over ESG (environmental, social and governance) risks in their supply chains.
A report from responsible investment organisation the Principles for Responsible Investment (PRI) calls on investors to ask investee or potential investee companies more questions about ESG risks in the supply chain and develop monitoring procedures.
At an event launching the guide – Managing ESG Risk in the Supply Chains of Private Companies and Assets – PRI policy and research director Nathan Fabian said ESG issues were “not an optional extra”.
“They are a core part of the fiduciary responsibility of an investor,” he said. “Global supply chain issues are interconnected and problems on the other side of the world can matter as much to companies as to the communities they happen in.”
He added that investors should be challenging companies over their supply chains as sometimes firms “take risks or do the wrong thing”, citing the example of cobalt mining for electric vehicle batteries in the Democratic Republic of Congo.
“In the fight for companies to remain competitive, supply chain issues can get pushed down the agenda,” he said.
Fabian said that while historically companies had usually got on top of supply chain issues “reactively”, after a scandal for example, investors could pressure them to be more “proactive” in managing ESG risk.
Speaking at the event, CIPS director Andrew Coulcher said managing ESG risk was “not CSR, but business critical”, citing statistics from the Business Continuity Institute that 70% of companies reported at least one significant supply incident in the last 12 months.
He agreed investors could play a role in encouraging firms to take supply chain issues more seriously. “What gets measured gets done,” he said. “I don’t see enough pressure on procurement and supply chain professionals around sustainable procurement, ethical sourcing and governance issues. This is a great opportunity for the investment community to hold organisations to account.”
The panel agreed that investors should look beyond due diligence and contracts and dig deeper into company culture and the many tiers of the supply chain.
“If you’re relying on contract clauses to make a change, you are fighting a losing battle,” said Shami Nissan, director of responsible investment at Actis. “Due diligence is just the beginning. We don’t ask people to promise nothing will go wrong, but that they are working to improve things.”
The PRI guide advises investors to ask companies detailed questions about supply chain complexity, how ESG issues are embedded into contracts and SRM, and how people internally are trained in managing specific ESG risks.
It also advises investors engage with procurement decision-makers to get answers to more technical supply chain management questions.
Coulcher said that as managing risk can be “an overwhelming task” for procurement managers, categories and suppliers should be segmented by how much ESG risk they present. “Take a segmented and proportional approach,” he advised. “It’s not a case of one size fits all.”
He added that complexity meant risk was a constant, shifting challenge for procurement, with areas like modern slavery, bribery and corruption and cyber security all needing to be considered. “The transparency, visibility and accountability of this is going to rise up the agenda,” he predicted.