FUTURE-PROOFING SUPPLY CHAINS: SUPPLY CHAIN SUSTAINABILITY AND KEY TRENDS IN 2021
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Future-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021
Future-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 2
Future-Proofing Supply Chains:
Supply Chain Sustainability and Key Trends in 2021
While corporate sustainability was a key focus of many companies before
2020, this past year made it clear that managing environmental, social, and
governance (ESG) issues must be at the forefront of a company’s operations.
The COVID-19 crisis has exposed critical supply chain weaknesses, particularly
among suppliers with poor workplace health and safety practices. Global calls for
greater inclusion and transparency resulted in firms with alleged human rights
violations throughout their supply chain or lacking diversity within their workforce
coming under public scrutiny. Increasing regulatory and consumer pressure for
climate action prompted companies to make a record number of sustainability
commitments. These events underscored the importance of sustainable,
resilient, transparent, and legally compliant supply chains.
However, while a company may adhere to the highest ESG performance
standards in its own operations, many of its suppliers may not hold similar
practices. Studies have estimated that up to 90% of a company’s sustainability
impacts originate in a firm’s supply chain.1 These impacts can hold considerable
risk: companies such as Nike2, Marks & Spencer3, and Hershey’s4 have
experienced firsthand the reputational and financial fallout caused by ESG-related
scandals in their supply chains.
Given the benefits to gain and the risks to lose, corporations are turning towards
their supply chains to incorporate ESG considerations. This guide summarizes
the rationale behind integrating ESG considerations into a company’s supply
chain management practices and outlines the key supply chain sustainability
trends for 2021.
Future-Proofing Supply Chains
Future-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 3
Future Value:
The Business Case for Supply Chain Sustainability What does a supplier’s ESG performance include?
Supply chain sustainability shifts the focus from short-term financial
Environmental refers to the resources a supplier uses, the waste it
considerations to long-term value creation, and considering and managing produces, and the resulting consequences of those activities on the
the ESG performance of one’s suppliers. By including such non-financial planet. This includes water management, greenhouse gas (GHG)
considerations, sustainable supply chain management not only benefits the emissions, and the use of dangerous chemicals
environment, but also reduces risks, mitigates impacts, and realizes reputational
and financial benefits, such as cost savings, brand goodwill, and customer loyalty
Social refers to how a supplier manages its relationship with internal
(see Table 1 for an overview). and external stakeholders. This includes labour relations, employee
training and education, reputational issues, and how a supplier fosters
Moreover, ESG performance is increasingly considered a component of – and
proxy for – resilience. Companies with strong ESG performance often have
positive relationships within the broader community
robust governance frameworks, manage social and environmental risks well, and Governance refers to a supplier’s internal framework of procedures,
have stronger relationships with suppliers. Weak ESG performance, on the other practices, and controls. This includes internal processes utilized to
hand, can carry significant reputational and operational risks for a company. govern itself, comply with regulations, conduct external audits, and
Prioritizing supply chain sustainability can, therefore, reduce general risks for
corporations, including minimizing operational disruptions due to environmental guide decision-making
risks, regulatory risks, or reducing reputational risks caused by labor issues.5
Table 1: Impact of supply chain sustainability on companies
Company with weak supply chain sustainability Company with strong supply chain sustainability
Risk management Increased likelihood of unexpected financial and reputational risks Greater ability to identify, avoid, and manage potential risks, including
better distribution of risks by greater collaboration with suppliers
Operations Unstable access to raw materials and increased chance of Reduced incidences and/or impact of supply chain disruptions
disruption to supply chain
Reputation Increased reputational risks, including loss of brand value due to Builds brand loyalty among customers and increases ability to
controversial events operate without disruption or negative media attention
Costs Increased costs related to supply chain disruptions Reduced costs due to increased efficiency and productivity
Shareholder value Potential decrease in shareholder value due to higher costs and Potential increase in shareholder value due to lower costs and
impacts of controversial events on share value reduced reputational and financial risks
Human resources Increased likelihood of workforce instability (e.g., strikes, low Decrease in employee turnover and greater stability in workforce
retention rates)
Future-Proofing Supply Chains
Future-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 4
Green growth:
Key trends in supply chain sustainability
1. Building greater resiliency
As markets rebound from the initial shock of the COVID-19 pandemic, buyers,
governments, and investors are calling for systemic changes in supply chain
management to prevent similar future disruptions. Shifting consumer demands
for transparency and increased stakeholder attention on the ESG performance
on a company’s suppliers have also placed pressure on companies to change Supply chain resiliency has increasingly been an ongoing focus in supply chain
how they manage their supply chain. management. However, in light of the widespread supply chain disruptions
caused by COVID-19 pandemic, companies are scrambling to accelerate
In 2021, companies will need to respond to these demands by making key ESG- resilience-building activities across their supply chains. According to a recent
related changes to their supply chain management practices. Here are the seven McKinsey survey of supply chain executives, an overwhelming 93% reported
emerging trends in supply chain sustainability that companies will need to pay they are taking steps to increase resilience across their supply chain in the
attention to this year, along with some practical tips and takeaways for supply coming years.6
chain and sustainability professionals.
Fostering supply chain resilience involves risk anticipation, impact mitigation,
redundancy systems, and building suppliers’ capacity to rapidly adapt to
changes. These measures enable an affected supply chain to regain full
functionality after a shock faster compared to less resilient supply chains. When
Key Takeaways the COVID-19 crisis began, companies with resilient supply chains were able
to resume or continue production quicker than companies that had not put
resiliency-related measures in place.7
1 Mitigate against disruption impacts: source from geographically
diverse suppliers, multi-source key commodities, and reduce the Building resilient supply chains will be paramount in the future as the COVID-19
number of unique parts required crisis is not an isolated event. Similar supply chain shocks are expected to
increase in frequency and magnitude over the coming decades, triggering
Implement redundancy systems: revisit safety stock parameters, supply disruptions lasting a month or longer every 3.7 years on average. These
2
build redundancies into transport routes, and establish secondary disruptions alone will cost an average company approximately 45% of its annual
supplier relationships profits over the course of a decade.8 Consequentially, companies have a strong
financial incentive to continue to build greater resiliency across their suppliers in
3 Increase your capacity to anticipate risks: plan for global scenarios the coming years.
and increase visibility across suppliers. Tools that quickly identify
suppliers with higher or lower material ESG risks across your entire
supply chain, like Sustainalytics ESG Assessment Platform, can
help supply chain professionals increase visibility.
Future-Proofing Supply Chains
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Microsoft went further and committed to removing its historic emissions by
2050, in addition to achieving a carbon neutral supply chain.13
2. Focusing on a green recovery Committing to a green recovery is not just good for the environment; it makes
financial sense. Green consumerism continues to gain momentum, especially
among consumers under the age of 40, with surveys showing that more than
two-thirds of those consumers don’t mind paying a premium for sustainably
In economic recovery plans across the globe, sustainability initiatives are being produced products.14 Reputational benefits present additional incentives to
placed at the center, with many governments investing significant amounts in embrace a green recovery and improve a company’s ESG performance, as
green recovery measures. The EU recovery package, for instance, includes funds sustainable companies can more easily attract top talent, boast higher retention
directed towards assisting green food supply chain strategies, green transport rates, and increase customer loyalty.15
options, and circular economy initiatives.9
Companies are capitalizing on these initiatives and using the recovery period
to ‘green’ their supply chains. Manufacturers are innovating with eco-friendly
packaging, while retailers are developing low carbon alternatives. In 2020, there
was also a dramatic increase in large manufacturers and retailers committing
to carbon neutral operations – including reduction commitments across their
supply chain operations.10 For instance, Apple and Novartis, committed to
being 100% carbon neutral across their respective supply chains by 2030.11 12
Key Takeaways
1 Engage leadership and set supply chain sustainability goals: have
senior leadership share the strategic value of a sustainable supply
chain to stakeholders, regularly communicate commitment to
suppliers, and set goals that align with organizational targets
2 Integrate environmental considerations into procurement
decisions: set environmental benchmarks for potential suppliers
and integrate ESG risk ratings into the procurement decisionshelp
supply chain professionals increase visibility
3 Analyze existing suppliers’ environmental performance: identify
high and low risk performers in terms of their environmental
stewardship and call for performance improvement, when needed
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3. Responding to increased scrutiny on suppliers’
social performance
Recent calls for racial inclusion and the protection of workers’ health and safety
have resulted in greater attention on the social performance of company’s
suppliers. Regardless of the buyers’ social performance, companies can face
“By proactively managing environmental issues within our supply
significant financial and reputational risks when their suppliers violate labor chain, we are safeguarding the continuity of sustainability at the
laws, discriminate, or negatively impact their local communities. Several fashion
brands, including Boohoo and H&M, faced intense public backlash in 2020 due
heart of our business.”
to the alleged use of forced labor by their suppliers.16 — DELL, 2019 33
In converse, companies committed to strong social performance across their
supply chains mitigate these risks, and benefit from positive publicity and brand
differentiation. IBM provides a good case in point: it attributes its supply chain
diversity as being a key factor in winning contracts.17 There are also numerous
campaigns and organizations dedicated to promoting companies that have
integrated social standards across their supply chain.
Governments are also increasingly considering a supplier’s supply chain
sustainability in major procurements and approvals for large, complex projects
such as infrastructure, mining, and energy projects. In Canada, purchasers in
the provincial government of British Columbia must consider social impact
Key Takeaways
– broadly defined as the use of purchasing power to create social value and
support social policy objectives – with respect to potential suppliers for all major 1 Communicate social performance expectations with suppliers:
requests for proposals.18 The US federal government mandates that contracts include messaging from senior executives and implement social
of a certain value be awarded to small businesses or include sub-contracting performance requirements in procurement contracts such as the
options to smaller businesses whenever possible, particularly to small Responsible Business Alliance Code of Conducts
businesses owned by women, disabled veterans, and in historically underutilized
business zones.19 2 Increase transparency with external stakeholders: publish
suppliers’ ESG ratings, which includes social performance metrics,
For those companies with strong social performance across their supply chain, on the company website and in annual reports
this presents an opportunity to set themselves apart from their competitors and
increase their likelihood of securing contracts.
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4. Reporting on suppliers’ ESG performance
This year will see wide-reaching ESG regulations enter into force in several
markets. The EU Taxonomy requires financial market participants and large
companies in the EU and UK to publicly disclose on their alignment with certain “Sustainability in the supply chain is one of our top priorities.
environmental objectives. Although the Taxonomy regulation does not extend This is reflected by the assessments of our managing
to a company’s supply chain at this time, companies are expected to be under
greater scrutiny by investors, consumers, and other companies for details on the directors, who ranked responsible supply chain practices…as
material issues affecting industry supply chains. one of the biggest challenges facing our future sustainability
Other regulation frameworks around the world also require companies to performances.”
guarantee that their supply chains are free from human rights abuses, such
as California’s Transparency in Supply Chains Act and the UK and Australia’s — ALDI NORD
Modern Slavery Acts, which mandate a firm report on the risk of modern slavery
in its operations and supply chain. With regulatory trends in supply chain
disclosures expected to accelerate in the coming decade, companies should
begin to collect relevant data and be prepared to report on their upstream ESG
performance. While not mandatory, many voluntary reporting standards such as the Global
Reporting Initiative (GRI), Task Force on Climate-Related Financial Disclosures
(TCFD), and Sustainability Accounting Standards Board (SASB) are also
integrating supply chain disclosure requirements. ALDI Nord, one of the
largest supermarket chains in the world, discloses detailed information on its
Key Takeaways suppliers in line with GRI Standards. The company has also chosen to publish
information on suppliers’ production facilities for selected product groups,
Improve data collection and data management of suppliers’ ESG allowing customers to trace the origins of ALDI Nord’s textiles and footwear.20
1
With 80% of Fortune 100 companies using the GRI standards to report on
performance: source quality data on end-to-end operations to
their sustainability-related activities, voluntary disclosures of a company’s
ensure compliance with current and future disclosure regulations,
supply chain sustainability are becoming commonplace and expected by many
as well as ease reporting requirements of voluntary standards, stakeholders.
e.g., GRI
2 Report using voluntary reporting standards: disclose using
internationally-recognized reporting standards to increase
transparency and create internal incentives for continuous
improvement
Future-Proofing Supply ChainsFuture-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 8
5. Integrating climate-related risks
Climate-smart supply chain planning is expected to play a significant role in key infrastructure to mitigate future supply chain disruptions after Hurricane
supply chain management in the next year and beyond. With the impacts of Sandy revealed the fragility of the state’s fuel supply to extreme weather
climate change being felt more acutely in the coming decade,21 companies are events.24 Global restaurant chains, including Chipotle and MacDonald’s, have
beginning to recognize the inherent risks climate change poses to their supply also commenced with integrating climate change risks into their supply chain
chains. Higher temperatures, extreme weather events, sea-level rise, and water management, including conducting water risk assessments along their supply
shortages affect the availability of crucial materials and resources.22 These chain and diversifying suppliers.25
climate-related impacts pose significant disruption risks across global and local
supply chains. As such, many investors are putting pressure on companies to
tackle climate-related risks in their supply chains.23
Companies will need to assess their exposure and vulnerability to climate-related
risks along their supply chain and put mitigation plans in place, including asset
protection measures and alternative material sources. For instance, in New
York, energy suppliers have begun building higher sand and gravel banks around
Key Takeaways
1 Identify risk exposure across suppliers: conduct a climate
vulnerability risk assessment or identify suppliers with weak
environmental management systems
2 Support suppliers’ in addressing climate-related risks to their
operations: build strategic partnerships with suppliers to jointly
work on implementing climate change mitigation and adaption
measures (e.g., the physical protection of key assets or moving
high-risk facilities)
3 Investigate alternatives for high-risk materials: source
substitute materials or secondary suppliers for material or
products at high-risk
Future-Proofing Supply ChainsFuture-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 9
arrangements with their lower-tier suppliers.29 However, thanks to advances
in artificial intelligence, machine learning, blockchain technology, and big data,
6. Gaining greater visibility across lower-tier companies can now leverage digital solutions to collect, aggregate, and analyze
suppliers ESG data on suppliers. These advanced technologies create opportunities
for businesses to identify problematic suppliers beyond Tier 1, avoid costly
controversies, and promote their sustainability efforts with the certainty that
their total supply chain will stand up to stakeholder scrutiny.
Traditionally, companies have demanded that their Tier 1 suppliers – the
manufacturer or service provider providing goods or services directly to the
company – comply with certain ESG standards, with the expectation that these
suppliers demand similar ESG performance from their own suppliers. In practice,
this cascading effect along the supply chain rarely occurs, with significant ESG-
related risks remaining further upstream in the supply chain.
Studies have shown that most lower-tier suppliers – those smaller companies
providing materials and products to Tier 1 suppliers – fail to mirror the ESG
standards expected from the end buyer.26 The intense stakeholder scrutiny
Adidas, Calvin Klein and Lacoste27 experienced when lower-tier suppliers were
found to be dumping chemicals into rivers in China or the public fallout Hewlett-
Packard and Apple28 weathered when allegations surfaced of hazardous working
conditions in suppliers’ factories are all potent examples of the risks that lower-
tier suppliers pose to a company.
Companies can mitigate these risks by analyzing their lower-tier suppliers
and addressing potential vulnerabilities. Gaining total visibility on end-to-end
operations can be challenging for a company, with approximately two-thirds of
companies reporting that they lack crucial information on business-continuity
Key Takeaways
1 Utilize data to improve end-to-end visibility: use enterprise
solutions that measure and analyze lower-tier supplier data
Build collaborative relationships with suppliers: this could
2 include formal and informal information exchanges to increase
visibility on upstream issues and develop a more collaborative
mindset to support each other in case of disruptive events
Future-Proofing Supply ChainsFuture-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 10
7. Supporting suppliers through access to capital
and capacity building
Many small and medium-sized suppliers may lack the knowledge or access
to financing to align their operations with a buyer’s ESG standards. This can
prevent some smaller suppliers from winning bids or cause them to fail “IBM’s global spending…presents an opportunity to promote our
compliance audits. To ensure that smaller suppliers can satisfactorily comply company’s values and help drive progress in environmental and
with their ESG standards, some banks and companies have begun providing
financing programs and capacity training to their suppliers to improve their ESG social responsibility throughout our supply chain.”
performance. The sports apparel company, PUMA, provides a financing program
— IBM, 2019 32
to suppliers to improve their environmental, health and safety, and social
standards.30
Capacity building also provides opportunities to promote diversity and inclusion
across the supply chain by empowering minority-owned small businesses
to supply to larger procurers. For instance, Nutrien, a Canadian agricultural
company, works with majority Indigenous-owned companies they call
‘Opportunity Partners’ and extends additional resources to allow them to be
more competitive in Nutrien’s supply chain.31
Key Takeaways
1 Provide training resources for suppliers: provide simple online
tools or in-person training, which equip suppliers with the skills,
knowledge, and systems to manage ESG issues
2 Investigate supply chain financing programs: provide loans to
suppliers, with loan terms conditional on the suppliers’ ESG
performance, in partnership with financial institutions or alternative
lenders to support each other in case of disruptive events
Future-Proofing Supply ChainsFuture-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 11
Shifting the Dial:
Supply Chain Sustainability in Practice
Given the accelerating trends in supply chain management, integrating
ESG considerations throughout the supply chain will be a key priority for
companies in 2021 and beyond. The COVID-19 crisis has demonstrated the
need for companies to rethink supply chain management practices, source
new suppliers, and embed sustainability criteria to ensure their supply chains
are future proof.
However, building a sustainable supply chain takes time and resources.
Companies can use enterprise software and other digital tools to increase the
efficiency and effectiveness of their transition to a sustainable supply chain.
These advanced tools utilize robust ESG risk data, sophisticated algorithms,
and machine learning to quickly analyze risks across the supply chain and
provide insight into the ESG performance of the entire supply chain, including
lower-tier suppliers. These enterprise solutions and other supply chain
sustainability practices mentioned in this guide can help build and maintain
supply chains that are able to weather the uncertainties of tomorrow.
Are you interested in learning about how our ESG Assessment
Platform can improve sustainability in your supply chain?
Contact us today to connect with our team of experts.
Future-Proofing Supply ChainsFuture-Proofing Supply Chains: Supply Chain Sustainability and Key Trends in 2021 12
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