Building ESG certainty into supply chains in a complex world

Rachael Bolton

Sponsored: No job is more steeped in risk than one charged with spending tax dollars. The responsibility to allocate public money in line with policy is one thing, but to do so without inadvertently sponsoring child labour halfway around the world and three tiers down the supply chain is quite another.

With more focus than ever on ensuring secure and ethical procurement throughout the complex web of supply, it has never been more crucial to access reliable and accurate due diligence.

“Supply chains really only become news when you can’t get something,” says Refinitiv government sector director Phillip Malcolm, and he’s right about that.

Prior to 2020, supply chain logistics was not exactly a dinner table conversation. You need something; you find a supplier and fill that need. Simple.

Refinitiv government sector director Phillip Malcolm

The global market is coming to terms with the jarring realisation that supply is neither as reliable nor as secure as previously imagined. Combine that with a heavy focus on Environmental, Social and Governance issues (ESG) and the task of procurement suddenly gets a whole lot more complicated.

“I think quite often people didn’t understand just how global their supply chain was,” Mr Malcolm said. “They might have known their direct suppliers, but as soon as we go down a few levels, those suppliers could be anywhere in the world”.

“It becomes quite difficult for organisations to understand where different components will come from and what human rights abuses or environmental impact that may have,” he said.

“That’s what a lot of people are looking at now – even before they start looking at all the other obligations they have on their supply chain – it’s just a general understanding of where things are and how far down it goes.”

This is the new reality and coming to terms with the challenges of procurement from here on and requires a level of understanding of distant suppliers’ that is alien to most purchasing specialists.

The changes and amplification to risk in government supply chains are similar to those in the private sector.

“Human rights, environmental crime, modern slavery, and regulatory oversite all need to be measured and understood,” says Mr Malcolm. “There will be more scrutiny on the integrity of suppliers. By this I mean connections to corruption, organised crime, sanctions, fraud and the like, not just at the firsts level but throughout the supply chain”.

“Operational risk will also be very high on the list of risks being scrutinised.”

Mr Malcolm says factors that will need to be considered are things like the industry presence of all suppliers, not just their quality but a thorough understanding of their reputation and business continuity plans.

“Business continuity planning has been amplified by the pandemic and the current geo-political unrest and will remain a crucial factor in choosing a supplier moving forward,” he says.

“For the last 20- or 30 years people were generally okay to relocate factories to China, Taiwan or Vietnam; or wherever was cost effective, without a huge amount of concern about whether they will be nationalised or become inaccessible due to regional instability.

“There was a general sense that the US or some European countries would help if there was a problem, I’m not sure that can be assured now.”

There are, of course, also the immense challenges presented by an increased in cyber threats. Cybercrime is up 600 per cent on the back of the pandemic.

Data breaches reached a 17-year high in 2021, costing victims an average of US$4.24 million per incident, according to a report by IBM. As a result, monitoring the safety of your data at points of vulnerability throughout supplier relationships is vitally important.

Global political instability, the physical interruptions caused by component and staffing challenges, and mounting cyber risks have conspired to produce a moment that requires a sudden and comprehensive readjustment in the ways that all companies and governments approach procurement.

Refinitiv Due Diligence reporting collects thousands of data points to produce rankings that offer fact-based clarity on supplier viability.

“Our sanctions data is used by the world’s leading financial institutions, corporates and government to ensure compliance,” Mr Malcolm said.

“We look at the financial health, cyber capability, ESG capability and peer ratings. We scrutinise ultimate beneficial ownership, operational risk, capability and integrity to give a clear picture of the company our client plans to do business with.”

He says that given the cost pressures on all departments to find the best deal wherever possible there is a risk that due diligence will suffer, unintentionally introducing risk into the supply chain.

“Effective due diligence on suppliers is one area that should not be compromised. The costs of mistakes, be they financial, reputational, operational and ultimately political can be large and far-reaching.”

This sponsored article was produced by InnovationAus in partnership with Refinitiv.

Do you know more? Contact James Riley via Email.

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