How to build a responsible supply chain 

How to build a responsible supply chain 

Fri 07 Jul 2023

A responsible supply chain is where a business sources and processes products or provides services in an ethical, sustainable and socially conscious way. Traditionally, organisations have focused on their supply chain from an upstream perspective when looking to create a product or sourcing a service. Increasingly, however, organisations need to consider the downstream elements of the products and services they provide to customers through to the end of that product’s life or the completion of a particular service. A responsible supply chain now means taking into account the entire value chain. 

What’s driving the direction of travel? 

Regulatory authorities are increasingly looking at ways to protect consumers from greenwashing, where companies overstate a product’s responsible or sustainable credentials. At a national level, the UK’s Competition and Markets Authority (CMA) released its Green Claims Code in 2022. Strong enforcement plans are already in place, allowing the CMA to investigate green claims and implement fines. The other piece of UK legislation organisations must be aware of is the extended packing regulation (EPR). The EPR requires more important disclosures on packaging used in the supply chain. It is also intended to reduce packaging and map its life cycle to encourage a better approach to recycling and the circular economy.  

At the same time, the Task Force on Climate-related Financial Disclosures (TCFD) requires companies to understand and disclose their emissions and climate mitigation and adaptation strategies. Elsewhere, Germany has recently introduced the German Supply Chain Act, Norway has the Transparency Act, and New York’s Textile Act is set to drive greater sustainability in the textile and fashion industries.  

Forced labour import bans are another area organisations need to consider. The US has had a forced labour import ban for some time but has recently introduced an additional element which refers explicitly to products from China. Similarly, in the UK, an update to the Modern Slavery Act is expected to increase the scope and requirements placed on companies. 

While sustainability legislation is picking up at a national level, organisations must also monitor regional legislation. In Europe, for example, the Corporate Sustainability Reporting Directive (CSRD) is adding to the weight of legislation on disclosures companies need to make and increasing the number of companies required to report and give assurance on non-financial reporting for the first time. 

Consider the entire value chain 

The Corporate Sustainability Due Diligence Directive (CSDD) is another pan-European legislation currently in consultation. While not expected to apply until 2026, the CSDD will place particular requirements on companies regarding what they do to prevent environmental and social impacts in that supply chain. 

The key consideration for organisations regarding EU legislation is that while you may be registered in a country outside of the EU, if you are considered part of a high-risk sector or derive revenue from within the EU, you could come into scope and be required to comply. It may be that you are not directly impacted but form part of the value chain of another organisation that has to comply with sustainability legislation. In this case, you will be required to support that particular organisation in complying with the CSDD. As a result, organisations should expect to see an increase in supplier questionnaires coming through from the value chain. Such questionnaires will cover a wide range of information on non-financial reporting mechanisms through to what grievance mechanisms are in place across the value chain and what diversity and inclusion looks like. Importantly, organisation will not only be expected to answer such questions but also provide evidence. 

Steps to achieving best practice 

A strong understanding at board level of reporting requirements, how it impacts the organisation and where sustainability responsibilities lie across the entire value chain is vital. By developing a clear understanding of how to apply environmental, social and governance (ESG) principles to the supply chain, you can then prioritise the risks involved. For example, the United Nations (UN) Guiding Principles (UN GPs) on business and human rights make specific allocations for prioritising certain risks so that organisations can take action to enable operations to continue. 

Once you have prioritised risks, the next step is to develop appropriate policies and embed them across the supply chain. While this involves analysing contracts and management system controls, it also requires organisations to assess communication and training delivered to suppliers and service providers. A review of whether policies are being applied appropriately is a further consideration. This involves moving beyond an annual audit to understanding how policies work at any given point. To work effectively, it requires implementing a more robust level of collaboration with suppliers. 

A final step is to consider additional due diligence that you may need to put in place to cope with raised regulatory requirements. For example, in mapping out investments, boards should consider and justify those investments in terms of what value they will bring to the business. 

This blog is based on a webinar produced by Mazars entitled Committing to a Sustainable Supply Chain. Speakers included Alice Strevens, Associate Director, Human Rights and Social Impact, Mazars, James Omisakin, Co-Founder of Compare Ethics and moderated by Chris Fuggle, Global Head of Sustainability, Mazars.