Written by Bjarne Keytsman & Peter-Jan Roose
On the 23rd of February, the European Commission put forward its proposal for a Directive on corporate sustainability due diligence, with the aim of increasing sustainable and responsible corporate behavior throughout global value chains.
While these new rules will directly target a narrow group of big corporations, it could indirectly impact more companies which are down their supply chain. With this directive in the pipeline and aimed to be translated into member states law in 2 years, it’s clear that ESG will remain in focus of legislation for the coming years. So how can you make sure that your organization is prepared for the challenge ahead and even bend potential risks into opportunities?
Our in-house expert Peter-Jan Roose is launching a sustainable finance series in which he discusses the most important upcoming regulations in sustainable finance. Register now and receive the episodes in your mailbox.
The benefits of a more sustainable, and thus transparent, supply chain
Studies [1] have shown that good corporate management of ESG issues typically result in improved operational metrics such as ROE, ROA, or stock price [2]. When zooming in on supply chain management, we observe five main benefits[3][4]:
Increased stakeholder confidence and more trusting partnerships
Improved risk management in multiple areas: business continuity, reputational damage …
Reduced environmental impact
Facilitates innovation throughout the supply chain
Allows quicker response to emerge regulations or long-term political, environmental, and social risks, which also protects licence to operate
Leveraging your supply chain when it comes to ESG will unlock the potential to create long-term value.
Step-by-step process on inbound supply chain ESG Due Diligence
To allow you a clear view of the risks & opportunities that lay in your inbound supply chain, BrightWolves has developed the following framework to guide you through an ESG Due Diligence of your inbound logistics.
Map your suppliers, from the first-tier supplier (partners that you directly do business with) to the last (suppliers or partners further removed from a final product). Typically, only first-tier suppliers are being scrutinized in the hope they do the same to theirs, creating a sort of due diligence cascade. This is however very hard to realize in practice [5]. If possible, map trends & pressures in your suppliers’ local & regional geographies.
Benchmark each company on its non-financial reporting standards. Three dimensions should be considered here: global reporting standards (GRI, SASB, SBTI …), industry norms or certifications and ESG-related clear actions (memberships, pledges …). If possible, compare with competitors.
Perform a deeper Environmental, Social and Governance analysis of your suppliers. Resulting in a list according to the ESG dimensions with potential risks, initiatives, and their corresponding status & impact.
After this exercise, you should have a clear overview of the ESG issues that exist or might come up in the future in your supply chain. Finally, you could summarize this by mapping your suppliers along a risk matrix to maintain an overview, albeit simplified and track over time
Now is the time to act
Interested in a deep dive into your supply chain, but not sure where to start? Reach out to Peter-Jan Roose!
ROE: Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets. ROE is considered a gauge of a corporation's profitability and how efficient it is in generating profits. (Investopedia)
ROA: Return on assets (ROA) refers to a financial ratio that indicates how profitable a company is in relation to its total assets. Corporate management, analysts, and investors can use ROA to determine how efficiently a company uses its assets to generate a profit. The metric is commonly expressed as a percentage using a company's net income and average assets. A higher ROA means a company is more efficient and productive at managing its balance sheet to generate profits, while a lower ROA indicates there is room for improvement. (Investopedia)
Sources [1] https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021%20Rev_0.pdf [2] Wang, Zhihong & Sarkis, Joseph. (2013). Investigating the relationship of sustainable supply chain management with corporate financial performance. International Journal of Productivity and Performance Management. 62. 10.1108/IJPPM-03-2013-0033. [3] https://www.cips.org/supply-management/opinion/2019/july/five-benefits-of-a-sustainable-supply-chain/ [4] https://www.unpri.org/download?ac=1894 [5] https://hbr.org/2020/03/a-more-sustainable-supply-chain