Sustainable supply chains: How to turn regulations into opportunity. By Dr.Madhav Durbha

Time to get ready

A multitude of events over the past two years have caused worldwide disruptions and put supply chains in the spotlight. For a couple of decades, businesses have centered their supply chain design around ‘just-in-time’ delivery, but the past few years have forced them to re-evaluate their approach.

Despite ongoing disruptions, this refreshed focus on supply chain networks has provided companies with an opportunity to assess and improve their networks, not only from an efficiency standpoint, but also from an environment, social and governance (ESG) perspective.

The rising focus on ESG
Although some leaders may still fail to recognize the term as more than a buzzword to their own detriment, ESG is becoming a vital regulatory requirement and a key business priority – especially for those who are focusing on a purpose beyond generating profits.

It’s not only because it’s the right thing to do but because of pressure driven by customers and investors. There’s also growing regulatory pressure from governments on companies to meet ESG objectives, with the introduction of new laws that push businesses to act on reducing their carbon emissions and prevent environmental degradation or ethical misconduct. This is not only within their operations but also with direct and n-tier suppliers, as well as subcontractors throughout their supply chain. Companies that fail to comply with these regulations will face stiff penalties.

One example of new regulation is Germany’s Supply Chain Due Diligence Act. Starting January 2023, it will require large businesses operating in the country to monitor their supply chain for human rights violations and compliance with environmental standards – otherwise they’ll be met with hefty fines. In the US, the Securities and Exchange Commission (SEC) has proposed the introduction of ESG reporting rules and requirements. This would also require companies to disclose certain information about climate-related risks and emissions.

However, the regulatory trend shouldn’t be viewed as a burden. It’s an opportunity for companies to have a positive impact on the world and begin the process of assessing and improving their supply chains – a perfect time to push forward their ESG priorities. Especially as social and governance standards are typically well established in large western companies already, yet their supply chains often generate far greater emissions than the company’s direct emissions. For any business that has the goal of achieving ‘net zero’, the sustainability of their supply chain is vital.

Pushing forward with ESG
But are companies committed to meeting their ESG priorities and if so, what challenges are they facing? Insights from research conducted by Coupa discovered that most enterprises do care about ESG concerns and they’re committed to their objectives. For example, globally 91 percent of businesses stated that reducing emissions is important to them and 89 percent said the same about eliminating modern slavery. Looking at the US data, it’s aligned with the global statistics, with 89 percent responding that both are important.

Nevertheless, many companies are suffering from major blind spots in their supply chains, making it impossible for them to make meaningful progress toward their ESG objectives. Specifically, 61 percent of US companies cannot tell if their closest supply chain partners are meeting any kind of ESG standards. Additionally, 53 percent admit to not having an effective risk management system in place to accurately assess ESG integrity in their supply chains. Given the large number of companies that may need to comply with Germany’s Supply Chain Act, this could be a major challenge.

Diving deeper into the blind spots, US companies need to become faster and more agile to replace supply chain partners which fail to meet ESG standards too. Only 18 percent can do it within a couple of days, whilst 43 percent would need a couple of months or longer, if possible. What’s more, when asked about how they assess the ESG risk and compliance of their supply chain partners, 61 percent find their current solution inadequate.

Next steps to improve your supply chain
Businesses need to pay closer attention to their supply chains so they can meet their ESG objectives and comply with legislation. But how can they do that with several major blind spots?

First thing first, businesses must invest in their people, processes, and technology to meet legislative requirements, such as implementing effective third-party risk management solutions.

Secondly, they need to look at their supply chains and implement better tools for designing and planning them. A great example of this is digital twin technology which uses Artificial Intelligence (AI) to create virtual models of a company’s supply chain which can help improve resilience. Companies can use it for scenario planning and stress testing to discover if, and where, there are weak links and to assess the potential operational and financial impact from risky suppliers. This technology can deliver sustainability benefits too, such as helping to plan more fuel-efficient routes for the transportation of goods or reducing wastage by optimizing inventories and capacities.

Lastly, companies must engage in industry-wide collaboration and data sharing on suppliers’ ESG credentials. All the US companies surveyed agreed that this would be useful information to have. Collaboration would save the duplication of work, as well as ensure that it’s collected efficiently and in the hands of decision-makers when they need it.

Modern technology platforms can make such data sharing easy, secure, and automated. They can feed real-time, third-party data to customers from organizations that monitor suppliers for ethical malpractice or environmental damage. For instance, if a supplier has committed an offence, it can automatically flag this to customers working with the supplier. Such high levels of transparency inform businesses if they’re working with a company that represents an ESG risk.

Many businesses have already spent time assessing, re-evaluating, and fine-tuning as they navigate the disruptions they’ve faced. However, businesses that want to have a resilient supply chain must pay close attention to their ESG standards, especially if they want to be ready for the incoming regulations.

For a list of the sources used in this article, please contact the editor.

Dr. Madhav Durbha is VP of Supply Chain strategy at Coupa. Coupa is the cloud-based Business Spend Management (BSM) platform that unifies processes across supply chain, procurement, and finance functions. Coupa empowers organizations around the world to maximize value and operationalize purpose through their business spend.