The Power of the Sustainable Supply Chain
The supply chain is a core process in modern-day economies. The United Nation (UN) Global Compact’s Supply Chain Sustainability guide states, “Supply chains continue to be one of the most important levers for business to create positive impact in the world, with an estimated 80% of global trade passing through supply chains.” Thus, supply chains hold enormous power in manipulating the well-being of companies, communities, and nations. Increasing demands by customers for transparency and responsibility in the supply chain process compounds the power of supply chains. Companies that construct effective supply chain sustainability reports will harness this power, thereby increasing their reputation, diminishing their supply chain risks, and reaping the monetary benefits of a sustainable supply chain.
As stakeholders continue to demand moral supply chain conduct and as supply chain sustainability takes a more prominent position in environmental, social, and corporate governance (ESG) reporting, companies must determine how best to address and report on the complexities of their supply chain sustainability. This article explores three common frameworks used to report on and track supply chain sustainability. These frameworks, along with a real-world example, will provide ideas and resources for building a robust supply chain sustainability framework.
UN Global Compact
The UN Global Compact (UNGC) promotes ten principles of sustainability organized under four topics: human rights, labor, environment, and anti-corruption. The organization holds that corporations have the power, and thus the responsibility, to support and follow these principles of sustainability (UNGC principles). UNGC’s Supply Chain Sustainability: A Practical Guide for Continuous Improvement, Second Edition shows how to implement UNGC goals throughout the supply chain. This guide is applicable to all companies striving for supply chain sustainability and is a helpful starting point for companies to establish reporting procedures and track the sustainability of their respective supply chains. The supply chain-specific steps included in this guide fall under the UNGC’s four core sustainability actions: commit the business to sustainability, assess which areas pose the greatest risk, define and implement an action plan, and measure and communicate performance. Additionally, the guide provides a list of resources such as assessment tools, case studies, and webinars, which can further propel a company toward greater supply chain awareness (UNGC guide).
The Sustainable Accounting Standards Board Standards (SASB Standards) are another tool for sustainable supply chain reporting. These standards identify financially material ESG information for over seventy industries and provide industry-specific guidance for reporting on ESG issues. The SASB Standards outline disclosures, accounting and activity metrics, and protocols which create a clear and consistent path forward in the reporting process; all companies that follow the SASB Standards create standardized reports comparable to other companies in the same industry.
The SASB Standards examine core business inputs and identifies areas that require company innovation. For example, the SASB Standard may note that palm oil is a controversial substance used in household products and explain the community damage caused by the irresponsible use of palm oil. Additionally, the SASB Standard may outline the potential risks faced by the company for the use of the palm oil. By providing both specific expectations for the use of palm oil and measurable accounting metrics for palm oil related disclosures, companies in the household products industry can be mindful about where they may source products and examine their use of palm oil, identify methods of innovation to become more socially or environmentally friendly, and consider how to increase transparency in reporting (SASB Materiality Finder: Household & Personal Products).
Along with describing challenges unique to an industry (such as the palm oil example above), the SASB standards also provide additional guidance relating to supply chain reporting, covering topics such as environmental impact, labor conditions, and supplier location (SASB: “About Us”). For more information on which supply chain complexities may apply to your company’s industry see SASB’s Materiality Finder.
The Global Reporting Initiative Standards (GRI Standards) also provide a reporting framework related to ESG topics. These standards were recently updated and are effective for all reports published on or after January 1, 2023. This revision of the 2016 GRI Standards improves the consistency and usability of the GRI Standards, integrates core human rights disclosures and environmental due diligence reports, and increases their overall relevance. The requirements for supply chain reporting remain the same between the two versions; however, the updated Standards provide a more effective and organized outline for implementation (GRI Universal Standards 2021 FAQs).
The revised GRI Standards consist of three sections: Universal Standards, Sector Standards, and Topic Standards. The Universal Standards outline general reporting requirements, describe required disclosures, and provide guidance in identifying material topics. The Sector Standards will eventually consist of specific guidance for 40 industries (Introduction to GRI Standards). The Topic Standards are most relevant to supply chain reporting; GRI 204: Procurement Practices contains nearly identical guidance as provided in the 2016 GRI Standards.
GRI 204: Procurement Practices centers on the economic impact of an entity’s supply chain decisions. It recommends recording interactions with suppliers by describing qualitative and quantitative aspects of the company’s supply chain; these records include topics such as the quality of relationships with suppliers and the company’s purchasing habits. The GRI Standards also place a heavy emphasis on supplier inclusion—that is, the GRI framework recommends using local suppliers and favoring suppliers consisting of marginalized or minority groups.
Part two of GRI 204 outlines disclosures specific to supply chain sustainability and reflects the importance placed on using local suppliers. Companies must disclose the percentage of the supply chain budget spent on local suppliers for “significant locations of operation.” To maintain transparency and consistency, companies must define both “local supplier” and “significant locations of operation.” Additionally, disclosures should apply the same data used in audited financial statements or accounts; this practice will likely contribute to a more reliable and comparable supply chain sustainability report. The GRI Standards for supply chain sustainability theorize that supporting local suppliers and marginalized groups enhances the economic well-being of the community and improves the company’s relationships within the community.
SEC Required Disclosures
Securities and Exchange Commission (SEC) requirements related to supply chain sustainability are limited; in fact, three primary regulations are notably applicable to the responsibility and transparency of a company’s supply chain. The first is Section 1502 of Dodd-Frank Act. This section requires that all SEC-reporting companies disclose products made with conflict minerals such as tantalum, tin, gold, or tungsten from covered countries, as the purchase of conflict minerals is known to fund conflict in the DRC region (SEC Fact Sheet).
The second is Item 105 of regulation S-K, which is crucial for companies reporting their publicly traded securities. This has become increasingly relevant as the COVID-19 pandemic garnered scrutiny from SEC reviewers regarding supply chain disruptions as risk factors for many companies.
Finally, a SEC proposed rule change would, if implemented, require additional disclosures in registration statements and periodic reports including the following:
Information about (1) the registrant’s governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements (SEC Press Release).
While limited in scope, these regulations reveal SEC’s movement towards requiring company responsibility and transparency in sustainable supply chain decisions.
Structured, usable, and relevant sustainable supply chain reporting empowers companies to take control of their supply chain. Each framework has a distinct approach to sustainable supply chain reporting—companies must identify the needs, principles, and goals which are most relevant and important to their stakeholders and then act accordingly. No matter the reporting structure used, supply chain reporting should center on measurable action items. Proper implementation for supply chain reporting will increase customer confidence and improve business ESG responsibilities.