Supply Chain Risk Management Blog

Time for a fresh approach to ESG supply risks?

Are traditional supply chain methods failing when it comes to companies’ environmental social and governance (ESG) policies? It depends on what you count as success, according to a recent report by the University of Sheffield, picked up by The Guardian.

It suggests  traditional ESG auditing approaches to supply chains are “working for corporations, but failing workers and the planet”. The report’s assessment of corporate schemes using independent auditors to monitor factories, develop codes of conduct for suppliers and publish transparency and ethical reports is damning.

“Audits are ineffective tools for detecting, reporting, or correcting environmental and labour problems in supply chains,” the authors write. “They reinforce existing business models and preserve the global production status quo.”

One issue the academics have with such “benchmarking regimes” is that they are voluntary. This allows corporates to focus their attention where they see the best returns in publicity and efficiency; they argue it has led firms to prioritise environmental concerns over labour market worries, for example. (And one can argue about how well they are doing even when it comes to the environment, according to another recent report.)

Another problem noted is that the “auditors” of these voluntary standards, reliant on the companies for business, have no real power. As it quotes interviewee: “[Y]ou cannot open a locked drawer … you can look at a record that says something but you wouldn’t be able to go and find out whether it’s actually true”.

That’s reinforced by cases it notes of sites that have passed audits only to have major violations revealed or catastrophes soon after. It’s certainly worrying reading.

Catching it early
Despite this, it’s hard to agree with the report’s authors entirely. One note of caution is that the report’s scope is not huge – 25 interviews over a two-year period with ethical auditors, business executives, NGOs and supplier firms. That, though, doesn’t invalidate some of the points raised.

The key problem, rather, is that it’s difficult to accept the conclusion: that the regime is “working” for companies, despite the failures it outlines. If the auditing regime is not effective in picking up and preventing scandals such as the collapse of the Plaza garment factory in Bangladesh in April 2013 or revelations of slavery and human trafficking in the Thai shrimp industry in 2014 (to use its examples), then it is failing companies, too.

As those examples show, abuses that are allowed to persist ultimately result in scandal or tragedy. Neither benefits businesses, which have commercial as well as moral reasons to prevent them. If the auditing approach is failing, businesses have every reason to drill down to their supply chains and try to put that right.

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