ESG Summit: Holistic approach to supply chain risk an ‘investment differentiator’

Alexis Huseby, vice president and research analyst of environmental, social, and governance (ESG) at Lazard Asset Management, described the holistic approach to supply chain risk management as asking the question, “Your peers are paying attention to this—are you?” She said this approach could be an “investment differentiator imperative going forward.”

From Huseby’s perspective, without buy-in from asset managers and corporations they own, a shift in the sustainability space is unlikely.

“The combination of sustainability and financial markets is where some very interesting change can be driven,” she said.

Since the onset of the Covid-19 pandemic and Russia’s invasion of Ukraine, supply chain risks have increased exponentially, which makes mapping the supply chain more significant as business is conducted at a faster pace.

“Up until two years ago, compliance officers saw supply chain as a pretty smooth thing,” said Frank Meehan, managing director of ESG and climate at software provider FiscalNote. “Things took care of themselves. … There really wasn’t a sense of disruption on supply chain as there is now. Now, everything has completely changed.”

Mapping the supply chain has also become an increased point of emphasis from a governance and regulatory perspective.

“We do see new proposed rules coming out of the European Union regarding forced labor. I think that’s going to require more data,” Huseby said. “We see the United States already has bans in place on certain geographic regions of the world—that requires more data and reporting.”

In the United States, the Uyghur Forced Labor Prevention Act took effect in June and bans any goods mined, produced, or manufactured in whole or in part in the Xinjiang Uyghur Autonomous Region of China from entering the country.

Going forward, Huseby said with businesses moving toward a “shorter timeline for supply chain management,” having proper best practices and benchmarking becomes imperative.

“It’s all about data,” said Meehan, who added companies “can’t be looking at data that’s six to eight months old. … You absolutely have to be looking at it from a real-time perspective.”

Internal data is paramount under these circumstances, along with understanding risk in a supply chain “even before the supplier does,” Meehan noted.

“When I’m looking at the supply chain management of a company … I’m really looking for supply chain mapping. I’m looking for all the reporting from the get-go,” Huseby said. “I’m looking if they have a methodological and clear process in place for mapping suppliers and organizing those suppliers into tiers.”

Huseby added some companies have created extra transparency by publicly releasing all their Tier 1 suppliers and implementing ESG language into contracts and know your supplier practices. Scorecards and proper risk audits can also help, she said.

“There are a lot of qualitative things you can do in addition to the quantitative data gathering … that allows resilience in the face of future disruption,” Huseby said.

Huseby also discussed issues from companies marketing sustainability initiatives, which often can be exaggerated.

“In many places, the chief marketing officer gets halved as being the head of sustainability. There is absolutely a level of marketing to it,” Huseby said. “But the problem is it’s very obvious to us when it’s just marketing.”

When evaluating a company, Huseby asks the following questions:

• What percent of your supply chain is covered by your scorecards or rolling risk audits?
• What is the year-over-year change in companies that are noncompliant with your risk audit?
• What’s the framework for addressing noncompliance?
• What is your percent closure for open cases for noncompliance?

“Looking at these sorts of things help us establish an image of how healthy your supplier ecosystem is and also how well you are shored up to mitigate future disruptions,” Huseby said.