Retail supply chains worldwide have a key role to play in addressing environmental and social issues related to carbon emissions, pollution, water shortages, deforestation, labour violations, worker health and safety, and more.
Supply chains, by their nature, are a complex network of tiers of suppliers that are heavily interdependent and interconnected. In a large corporation, each supplier might require inputs from thousands of sub-tier suppliers. The more intricate the supply chain, the more prone an organization is to uncertainties and hidden risks, depending on where they operate and which sub-industry they operate in.
Yet, according to the Evocadis 2019 Sustainable Procurement Barometer, only 38% of large multinationals are evaluating their partners every year. It may not come as a surprise, then, that the UN Global Compact has named supply chain practices as the biggest roadblock to achieving sustainability.
This should be cause for concern for both investors and advisors alike. Poor supply chain management affects sustainability performance, which in turn diminishes a company’s potential for future growth. If retail companies expect to continue successfully doing business, they will need greater transparency and accountability when it comes to their supply chains, especially if they hope to maintain the support of customers, investors and regulators.
How do supply chains in the retail sector impact ESG issues?
On average, retail supply chains have a greater adverse effect on environmental issues than the company’s own operations. According to McKinsey & Company, supply chains account for more than 80% of greenhouse gas emissions and more than 90% of the impact on air, land, water, and geological resources.
When it comes to social issues, such as human rights, many companies fail to conduct adequate due diligence in their supply chains, in accordance with the United Nations Guiding Principles on Business and Human Rights. Today, an estimated 24.9 million people globally are victims of forced labour, generating $150 billion in illegal profits in the private economy, according to KnowTheChain, an online resource for understanding forced labour in global supply chains. In the apparel and footwear sector alone, 54% of companies have faced allegations of forced labour in their supply chains.
The pandemic has only exacerbated these issues, including exposed weaknesses through labour shortages, logistical problems and stock delays. Ultimately, navigating the challenges brought on by COVID-19 has underscored the fact that you are only as strong as your most vulnerable supplier. To lessen the environmental and social impacts of supply chains, companies, especially in the retail sector, need to pay more attention.
Why should investors care?
At the most basic level, investors should care about supply chain issues because poor management can lead to environmental and human rights violations. On the one hand, there’s the financial perspective, and the failure to effectively manage the environmental and social elements of supply chains can lead to regulatory scrutiny, as well as serious reputational and economic losses. Essentially, once companies lose the confidence of their customers, they lose their brand value. The bottom line is that poor supply chain management is a financial risk for investors.
On the other hand, companies taking clear action in their supply chains to reduce incidents of pollution, lower their environmental footprints and increase overall efficiencies will see progress in their overall environmental performance. These companies will demonstrate stronger financial resilience to investors and be better poised for growth over the short, medium and long term.
What are some companies doing right?
One of the best ways to learn is by watching others who are leading the way. One of the current industry leaders to watch is the 1.5°C Supply Chain Leaders initiative, which is a coalition of big corporations like Ikea, Microsoft and Unilever. The coalition encourages small- and medium-sized enterprises (SMEs) to drive down their emissions, which will, in turn, help larger companies to meet their net zero goals. Through the SME Climate Hub portal, the coalition provides free resources and tools to support suppliers in their switch to more sustainable business practices.
Ikea, one of the founding partners of the initiative, has been a leader in its own right, most recently for its re-commerce, or reverse commerce, efforts to reduce throwaway culture. In August 2021, the company began testing a furniture buyback and resale program in the United States, with the hopes of eventually making it a permanent service in all its U.S. stores. As the circular economy takes root globally, retailers must incorporate sustainability into their entire supply chain.
At Desjardins Global Asset Management, we have our own role to play as an investor. That includes understanding and assessing the main environmental and social risks associated with supply chains, and engaging companies in dialogue on how to improve their due diligence when it comes to supply chains.
What does this mean for the future?
Consumers increasingly want better traceability, transparency and sustainability from the brands they spend their hard-earned dollars on. In response, the investment industry will demand greater engagement around supply chains through dialogues, shareholder proposals and collaborations. The retail industry will no longer be able to downplay or avoid scrutiny of its supply chain practices. For companies already on top of their supply chains, this will be an opportunity to shine. However, for companies which are lagging, it will be harder to hide in the shadows when it comes to environmental and social performance.