Ryan Lynch, Practice Director, Sustainability, BSI
BSI’s latest annual Supply Chain Risk Insights Report poses five questions we need to answer in 2022. Here, I’d like to highlight some aspects of the second question: “As regulatory regimes evolve, how do we ensure we make the supply chain decisions that can shape business success and support a cleaner, greener planet?”
Understanding supplier risk
Business leaders need to consider the environment in which they and their suppliers operate and where risk is present. A specific country, province or city may have a greater likelihood of certain types of risk because of the legal regime or enforcement. Global organizations need to know what controls their suppliers have in place and how aware they are of the risks to their workforce and their local community – and as a consequence of this, what impacts their clients’ organizations.
Decarbonization
The backdrop to 2022 is the climate crisis. In the wake of COP26, organizations of all sizes and sectors are increasingly aware of their impact in this area and the expectations of their stakeholders that they decarbonize their operations and value chains.
In the past 12 months, I’ve seen organizations willing to invest time and effort in decarbonizing, whether that be with regards to energy production, food production, transportation or the built environment. They want a clear understanding of their own impact and their current baseline and how they can drive change. It is a trend that will only increase as organizations seek to decarbonize their supply chain.
Regulators like the US Securities and Exchange Commission (SEC) are starting to ask whether greenhouse gas emissions should be included as a mandatory part of financial disclosures. This opens up more granular questions around scope – from direct Scope 1 and Scope 2 emissions, such as burning fuel and purchasing electricity, to less direct Scope 3 emissions which might include upstream supply chain activity, raw materials, transportation, and supplier production, but also downstream, such as the emissions from product use and disposal. So, there’s a greater focus on these factors beyond the direct control of the organization, and a big uptick in the desire of companies to establish practices to account for those Scope 3 emissions.
As companies look to transition to sustainable and renewable energies in their supply chains, it’s important to understand where the materials used for these green energies come from. For example, the informal nature of many of Latin America’s mining industries contributes to environmental and human rights risks when sourcing from the region. Chile, Brazil, Peru and Mexico account for 85% of metal and mineral exports in Latin America, while according to our own risk assessments – based on data from BSI Connect Screen, the world’s largest proprietary global supply chain risk intelligence database – each of these countries faces significant risks to environment protections. Most also have similarly serious threats to human rights protections.
Intelligence is key
Amidst all the uncertainty organizations and suppliers are facing on a daily basis, one thing is certain – regulations will keep changing. We’re seeing constant evolution of laws, governing everything from modern slavery to greenhouse gas emissions. If you can anticipate the regulations coming down the track, you can put appropriate measures in place before they become mandatory and get your supply chain ready for them too.
It’s crucial to have the right data and intelligence in the early stages of decision-making to make informed decisions about how to allocate resources. In the past, there was an assumption that they couldn’t get this kind of information on their suppliers’ energy usage, greenhouse gas emissions, water consumption, or waste generation. Now, we’re seeing our clients gain an improving and more granular understanding of environmental and people-related risks.
You clearly can’t be on the ground with a thousand suppliers every day, 24 hours a day, so you have to decide who to engage with and how deeply. ‘One size fits all’ is not the answer, so you have to assess who you spend more time with based on the risk, impact, or opportunity. If you’re smart, you’re thinking about what the world’s going to look like in ten or 15 years, and what fundamental changes you need to put in place now. That way, you can reduce risk, enhance opportunity, and increase organizational resilience.
