‘Supply chain’. You might think you’re safe to assume that this phrase implies a direct link between a company and its suppliers. However, in reality, supply chains are more like a network of waterways, with thousands of tiny tributaries converging into large rivers of production and sale. This complexity and scale is one of their strengths; when you have a problem in one part of chain, you simply reroute elsewhere. And the best supply chains are also the best kept secrets– you only have to see the success (and secrecy) of Amazon for this.
Scale brings speed. You’ve forgotten a friend’s birthday, and you need that present tomorrow, no problem. But scale also makes addressing sustainability concerns challenging.
But how do you manage the risks associated with labour conditions or the environmental impact of a distant company manufacturing on your behalf? You also need to bear in mind that the environmental impact of a corporation’s supply chain often far exceeds that of the organisation; CDP estimate that supply chain emissions are typically 5.5x more than a company’s direct emissions.
But it’s not all bad news. The complexity of supply chains can make sustainability difficult to address, but that doesn’t mean it’s impossible. Companies are increasingly targeting their largest suppliers on sustainability. In many industries, corporations share the same suppliers with their peers which offers the opportunity to collectively leverage better supply-chain sustainability. Especially in the technology sector, where the likes of Apple, Microsoft, and Salesforce all buy products from the same semiconductor and hardware manufacturers who are mostly based in Asia-Pacific.
So this is why, when we think about supply chain issues for a given industry, we always consider the nature of the customer-supplier relationship and what are the incentives for both parties to address sustainability concerns. Suppliers that are financially dependent on customers with strong sustainability practices are also likely to be under the most pressure to adopt similar practices themselves. This dynamic is strong in tech, whereas, in sectors like apparel, relationships tend to be shorter and incentives therefore typically less (although there are always exceptions).
At the cutting edge of all this, the most advanced corporations are working on enabling innovative financing mechanisms to support their closest suppliers efforts to adopt more sustainable practices. (In return they are required to report on various sustainability metrics.)
Suppliers therefore ignore sustainability at their peril.
- This year, 43% of CDP supply chain program members confirmed that they currently deselect existing suppliers based on their environmental performance.
- A further 30% indicated that they were considering this in the near future.
Let’s hope these broad efforts slowly ripple upstream through the many tributaries of supply chains.
Source:Bloomberg, Greening the supply chain: New moves companies are making, March 2019
About the author
Ryan Smith is Head of ESG Research. He joined Kames Capital in October 2000 as an SRI analyst and was appointed to his current position in September 2002. He has 18 years’ industry experience*. His role involves managing the team that conducts the ESG screening process for our Responsible Investing funds. Ryan’s team also provides corporate governance screening and research for all equity investments, and conducts research into environmental and social issues. Before joining us, he worked as an environmental chemist for Severn Trent Water. Ryan has an MSc in Environmental Chemistry from Nottingham Trent University and is a CFA charterholder. *As at 30 November 2018.