In 2022, an area that is likely to strain companies’ transition toward a resilient, sustainable economy is the ESG risks in the supply chain. Companies must now closely monitor issues stemming from climate change, labor rights and health and safety throughout the procurement process.

Supply chain due diligence

Until recently, the management team’s focus on supply chain and procurement has been primarily on technical quality, cost-effectiveness, speed of delivery and reliability. However, the awareness of supply chain risks emerged as domestic and international regulations around workforce health and safety incidents, raw material procurement and environmental hazards increased.

In 2017, the United Nations Principles for Responsible Investment emphasized the importance of due diligence on supply chains, first to trace transactions among countries to examine environmental impacts. Eventually, the institution found that the supply chain is a crucial business function that tracks human rights and corruption. However, some malpractices induced more significant operational problems such as procurement suspension, and reputational risks from labor issues that could exceed the impact of environmental externalities.

The European Parliament published a Sustainable Finance Report in early 2018 by highlighting the importance of improving business practices for stakeholders. It recommended establishing sustainable strategies and targets through materiality assessment and appropriate due diligence in the supply chain. The mandate called for an overarching, mandatory due diligence framework that includes a duty of care to be fully phased in within the transition period.

Germany approved the Supply Chain Due Diligence Act last summer by incorporating UN Guiding Principles on Business and Human Rights. Other national governments and global institutions such as the Responsible Business Alliance are reinforcing supply chain management in minerals, labor and factory operations to enhance sustainable production.

Social performance

In the business world, the demand for improved social value through better inclusion and transparency is making companies comply with these trends. Large multinational corporations with extensive supply chains in the semiconductor industry such as Intel and Lam Research explicitly require their top tier suppliers to conduct the same level of supply chain risk assessment by implementing the international principles.

The global economy witnessed how the COVID-19 crisis exposed critical supply chain weaknesses, particularly among suppliers with poor workplace health and safety practices. Now that supply chain has become a more critical issue than before, companies are strategically embracing the concept to help companies gain economic resilience. Corporate manifestations around procurement with purpose and supply chain diversity are increasing to emphasize how supply chain management can further derive value and profit. 

A recent trend report by Sustainalytics detailed how global companies are conducting more in-depth and end-to-end supply chain due diligence. Lacoste, Calvin Klein and Adidas had to respond to immense operational and reputational risks when their lower-tier suppliers were found dumping chemicals into Chinese rivers. Following these incidents, multinational firms recognized the importance of enhancing ESG visibility of their lower-tier suppliers’ social performance.

Fortunately, a greater number of companies are also realizing that supply chain risks can turn into a significant opportunity factor if well managed. IBM, Microsoft and Aldi Nords actively pursue supply chain diversity and net-zero supply chain -- a net negative for the company itself -- as part of their ESG priorities under a procurement with purpose scheme.

Stricter enforcement for health, safety

While supply chain management is becoming more critical abroad, South Korea is enforcing a stricter rule for large enterprises on health and safety. Starting next year, the Serious Accident Punishments Act will bring responsible executives or owners under criminal and civil liability of severe accidents that cause serious bodily harm at the worksite or in public.

SAPA is purposed to protect all workers, including those in partnering companies, as well as ordinary people. It also includes any accident occurring from raw materials and products, public facilities and transportation for the negligence of supervision on any defects caused in stages of the supply chain such as design, manufacturing, installation and maintenance.

Korea’s SAPA may seem as pervasive supply chain management regulation focused on health and safety issues. Nevertheless, the requirement to install stringent risk preventive systems beyond the company’s supply chain is what society demands for businesses in South Korea following tragic events like a warehouse blaze in Icheon, Gyeonggi Province.

Recently, the Global Reporting Initiative, one of the most widely used reporting frameworks, announced its 2021 amended criteria by integrating elements of the supply chain disclosure. Other initiatives are likely to follow and recommend companies to disclose information about supply chain management alongside their ESG risks in the report. 

As regulations and pressure increase, companies should think of more creative ways to align ESG strategy with risk management. Materiality assessment, where companies evaluate all stakeholder issues around sustainability imperatives, is a starting point in strategizing ESG. It will help companies to oversee ESG risk not only as costs, but a chance to enable value-driven growth. 

Lee Yeon-woo
Lee Yeon-woo is an expert adviser at the Korean law firm Bae, Kim & Lee. -- Ed.