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ESG and Supply Chain Management: A Global Responsibility 

31/05/2024by admin0Read: 5 minutes

In today’s Australian business landscape, the integration of Environmental, Social, and Governance (ESG) principles into supply chain management is becoming increasingly critical. As companies across various industries struggle with the challenges of sustainability and social responsibility, it is crucial to understand the role of supply chains in driving positive change.

Let’s delve into how ESG initiatives is shaping supply chain practices among Australian and global businesses.

The ESG Shift in Australian Supply Chains

Australian businesses are facing mounting pressure to address ESG concerns within their supply chains. With consumers, investors, and regulators placing greater emphasis on sustainability and ethical practices, companies are re-evaluating their approach to procurement, production, and distribution.

Hence, supply chain and procurement are becoming central to any ESG program. From ensuring proper disclosure to selecting suppliers and using suitable agreements, businesses must understand and document the environmental, social, and governance aspects of their supply chain.

The risks and opportunities within the supply chain are unique to each organisation, and influenced by industry, region, workforce demographics, regulatory environment, and business culture. Key considerations include human rights (such as Indigenous community engagement), climate mitigation, environmental impacts, bribery, corruption, and other regulatory compliance.

Need for Integrating ESG Principles into Supply Chain 

The responsibility of boards, executive teams, and business owners to manage environmental, social, and governance (ESG) risks and drive sustainable outcomes has never been greater. Companies have various strategies to address this challenge, including sustainable financing and carbon offsets.

Reimagining supply is a challenging task due to the complexities of global supply chains and often poorly integrated operational processes. Adding an ESG perspective increases this complexity, and many procurement teams lack the visibility into their suppliers needed for effective risk assessment.

While Scope 1 and 2 emissions have long been part of ESG policies, Scope 3 emissions—those resulting from activities of assets not owned or controlled by the reporting organisation—highlight the importance of supply chains in a company’s ESG strategy. Governments and regulators are increasingly focused on stakeholder and community demands, compelling organisations to measure and report on their ESG performance.

ESG Supply Chain Management for Businesses

Effective ESG supply chain management can differentiate a business and create opportunities, but it also poses substantial risks. Failure to manage these risks correctly can result in significant fines, litigation, or regulatory action, especially in jurisdictions with strict regulations. Additionally, misjudging ESG issues can severely damage a company’s reputation.

Assessing ESG-related risk exposure and identifying opportunities is complex, requiring a global perspective and understanding of increasingly stringent regulations and global sanctions. Businesses must also manage increased transparency from suppliers and be agile enough to adapt to changing cross-border sanctions that can affect global supply chains.

How can ESG initiatives help Manage Supply Chain Risks?

Traditionally, procurement teams are focused on:

  1. Contract management.
  2. Reducing risk.
  3. Securing supply.
  4. Lowering costs.
  5. Increasing efficiency
  6. Improving quality

Common ESG considerations across industries include:

  1. Corporate governance
  2. Greenhouse gas emissions
  3. Certified social and Indigenous suppliers
  4. Poor workplace conditions (safety, hours, and pay)
  5. Modern slavery and human trafficking

Organisations can leverage these considerations to achieve their ESG outcomes.

Businesses should manage the usage levels of supplies and influence suppliers to optimise their value chains to drive environmental and social outcomes through the supply chain:

Each stage of the supplier lifecycle—Sourcing, On-boarding, Performance Management, Risk Management, and Off-boarding—is an opportunity to assess ESG risks and pursue ESG strategies.

ESG and Risk Management in a Multi-Party, Multi-Tier Digital Supply Chain Network

Effective risk management is a primary driver for organisations to establish a multi-party, multi-tier digital supply chain network capability. This capability enhances the ability to identify and manage potential risks across the trading partner ecosystem and promotes full supplier collaboration, becoming a fundamental aspect of ESG and sustainability initiatives.

With a focus upstream in the network, mitigating raw material risks and related supply chain disruptions has become imperative in today’s market landscape. Addressing these disruptions leads to increased productivity and efficiency, alleviating costs that arise from supply chain disruptions.

Moreover, both upstream and downstream issues can damage the manufacturer’s brands, necessitating advanced ESG supply chain networks for effective management. By mitigating risks, ESG and sustainability initiatives not only enhance shareholder value but also benefit all partners across the supply chain network by reducing variability in demand and supply, as well as information and physical supply chain lead times.

ESG Considerations for Australia’s Industrial & Logistics Sector

The Industrial & Logistics (I&L) sector is the next frontier for ESG. Expectations for buildings and estates are rapidly increasing, extending beyond the physical structures themselves.

Developers, investors, and occupiers are focusing on fostering a sense of community within industrial estates and addressing mental health and loneliness issues associated with repetitive warehouse and logistics work. Owners and occupiers are increasingly focusing on not just the “E” but also the “S” in ESG, driven by the evolving workforce and a growing emphasis on health and wellbeing.

However, the I&L sector faces unique challenges and hurdles that differ from those in the office market:

  1. Power availability and record-low vacancy rates in Australia’s industrial and logistics sector have created immediate hurdles, hindering the achievement of ESG targets and the upgrading of existing stock.
  2. Another significant challenge in the I&L sector is that many assets lack access to public transport. Consequently, employees often need to drive to work and may find limited amenities available once they arrive.
  3. Vehicle traffic and traditional design have made some estates not particularly pedestrian-friendly.

However, more owners are finding solutions to address these challenges. They are incorporating cycle tracks alongside truck routes and planting trees on-site to enhance the environment and provide outdoor spaces for people.

Internationally, there are examples of initiatives aimed at addressing social issues. For instance, in Japan, efforts to improve gender diversity in multi-storey warehouses include incorporating childcare centers into new and existing facilities.

In Australia, an industrial estate has achieved a Green Star Communities rating from the GBCA (Green Building Council of Australia.), becoming the first of its kind, earning the highest possible rating of 6 Stars.

Role of Organisations in ESG Supply Chain Management

1) Social Responsibility and Fair Practices

With an increasing awareness of human rights issues and ethical labour practices, companies are working to ensure fair treatment and decent working conditions throughout their supply chains.

Australian companies are implementing supplier codes of conduct, conducting social audits, and collaborating with stakeholders to address social challenges such as forced labour and modern slavery. By fostering partnerships with local communities and Indigenous groups, businesses are striving to create shared value and promote inclusive growth.

2) Governance and Ethical Standards

Governance and ethical practices play a vital role in ESG-driven supply chain management in Australia. With a focus on transparency, accountability, and regulatory compliance, companies are enhancing their governance structures and ethical frameworks to mitigate risks and build trust with stakeholders.

Australian businesses are strengthening their due diligence processes, implementing anti-corruption measures, and promoting ethical decision-making at all levels of the supply chain. By upholding high standards of corporate governance and integrity, companies can safeguard their reputation and ensure long-term sustainability.

3) Supplier Engagement and Collaboration:

Organisations are engaging with their suppliers to ensure alignment with ESG principles. This involves fostering collaboration, providing support, and encouraging suppliers to adopt sustainable practices throughout their operations.

 4) Risk Assessment and Management: 

Organisations are conducting thorough risk assessments to identify ESG-related risks within their supply chains. They develop strategies to mitigate these risks, such as supplier diversification, supplier audits, and contingency planning.

5) Transparency and Reporting:

Organisations are increasingly becoming transparent about their supply chain practices and ESG performance. They disclose relevant information to stakeholders through sustainability reports, compliance documents, and other channels, demonstrating accountability and progress towards ESG goals.

6) Innovation and Continuous Improvement:

Organisations are driving innovation and continuous improvement in ESG supply chain management. They invest in research, technology, and initiatives that promote sustainability, efficiency, and resilience across the supply chain.

Thus, by integrating ESG principles into their supply chain practices, Australian businesses can enhance their competitiveness, mitigate risks, and create long-term value for society and the environment. Through collaboration, innovation, and collective action, they can pave the way for a more sustainable and resilient future for generations to come.

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