The supply chain is often a key risk area for businesses and even before the COVID-19 pandemic, businesses were receiving more scrutiny from customers and regulators. Businesses are likely to see a confluence of challenges across the next 12-24 months, with new risks arising around Brexit and supply chains coming to terms with the supply and demand-side shocks of COVID-19.These problems are likely to exacerbate existing issues in already stretched supply chains. As recent media investigations have highlighted, some businesses may already be pushing the boundaries of legal and ethical practice. So how can businesses protect themselves from supply chain malpractice?
There are clear legal requirements that businesses demonstrate what they have done to check their supply chain, employees and how they avoid and/or deal with instances of dubious practice.
These regulatory laws include;
The Bribery Act (UK) (impacts on procurement, manufacturing and business payments);
Modern Slavery Act (UK) (impacts on personnel, procurement and manufacturing);
The Animal Welfare Act (UK) (impacts on the use of animal products);
Grenelle II regulation (France) (impacts on energy consumption);
REACH (EU) (impacts on chemicals usage);
Additionally, internationally focused retailers have to comply with many other regulations including recently updated California legislation such as Proposition 65, which regulates the use of certain materials in consumer products.
Depending upon the outcome of the trade talks between the UK and EU, it is possible that UK retailers may have to comply with additional layers of regulation in order to continue to do business with EU member states as 'third country' trading partners. Especially as the EU is currently consulting on industry standards for ESG.
The Trust Test
In light of COVID -19, many believe that there will be a sea-change in consumer behaviour and customers will want to use businesses with supply chains they can trust.
As part of this 'trust', environmental and social governance (ESG) must be considered by businesses in increasingly complex supply chains.
Many ESG factors can impact corporate supply chains, including environmental practices, energy usage, social responsibility, human rights, child labour, trade security, anti-bribery, health and safety, conflict minerals, and product quality assurance.
Risks might impact companies across industries and geographies, or they might be industry- or country-specific.
Some of these are not simply legal requirements, but also present reputational risks to an organisation. Businesses must look at these in detail to protect themselves both legally and commercially in the future.
Some investors have until relatively recently been focused upon EBITDA at all costs (with some notable exceptions) with many prepared to ride the wave and deal with the supply chain issues that might extend to slavery or environmental abuses as and when they arose.
Many businesses, investors and now ratings agencies have pivoted and see a real value in investing in ESG, not merely for the 'sake of it' or as a box-ticking exercise but taking a multi-stakeholder approach with a focus on a legal and longer term ethical responsibility.
Businesses and investors should be commended for putting this first and designing supply chains around these issues in a similar way that many leading data-led businesses have structured their privacy controls, that is, by design.
By building in these controls from an early point, businesses can maintain margin growth while avoiding the need for heavy capital expenditure on reversing procedure or retraining. A government mandated licensing scheme may not be a suitable resolution to this.
Business should take responsibility for its supply chains and compliance in both a legal and moral setting. This way, consumers will vote with their feet and as the issues of equality and environmental protection grow in the minds and behaviours of shoppers, those businesses with strong track records will prosper.
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