The Business Value of Supply Chain Due Diligence: Sustainability Commitments, Regulatory Compliance, and Operational Efficiencies
Contents
- What is supply chain due diligence?
- Sustainability Commitments
- Regulatory Compliance
- Operational Efficiencies
- How Anthesis Can Help
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What is supply chain due diligence?
Supply chain due diligence is the process by which an organisation investigates and evaluates each stage within their supply chain to ensure ethical and responsible sourcing practices. This may extend anywhere from 1 Tier (or step) to tens of Tiers, depending on an organisation’s complexity and geography.
Historically, visibility into each stage in a supply chain was simple, when production was localized, and relationships were personal. Now, many companies lack visibility past their Tier 1 suppliers, and as a result, face risks of modern slavery, deforestation, and other environmental and social concerns which lie within their supply chain without their knowledge. Proper due diligence can provide the assurance and verification required to understand and mitigate these risks, align with voluntary frameworks like the UN Guiding Principles on Business and Human Rights (UNGPs), and help fulfil regulatory requirements like the Uyghur Forced Labor Prevention Act (UFLPA), Securities and Exchange Commission (SEC) Climate Disclosure, German Supply Chain Due Diligence Act (LkSG).
Although certain regulations requiring supply chain due diligence, namely the EU Corporate Sustainability Due Diligence Directive (CSDDD), have faced pushback and are being watered down from initial legislative proposals, there is still immense value in organizations conducting due diligence.
The Business Value of Supply Chain Due Diligence
Sustainability Commitments
More than ever, consumers, investors, and business partners are demanding sustainable performance from the organizations that they buy from and work with. As a result, organisations are increasingly held accountable for how they are – or are not – fulfilling promises or ambitions they have made regarding their responsible social and environmental performance. Empty promises are no longer acceptable – and this links to the making of accurate and truthful green claims.
Supply chain due diligence can help organisations uphold their sustainability commitments by helping them understand risks and gaps in responsible sourcing, as well as how to address those gaps.
If an organisation does not conduct – or does conduct and chooses to disregard the findings – then it exposes itself to a myriad of risks, including fines and penalties, regulatory sanctions, loss of licenses, legal actions and reputational risks.
Regulatory Compliance
Regulations may vary across numerous jurisdictions, industries, and specific products and/or services. However, they often share key supply chain due diligence requirements. This can help organizations crosswalk several regulatory requirements they are required to comply with.
The requirements can be largely categorised into three key sections:
1. Identification of Supply Chain Risk and Management of those Risks:
Forcing organisations to identify the potential adverse social and environmental impacts associated with their supply chain means that they can no longer bury their heads in the sand; if there is a known issue, it is expected that organizations will address it. Supply chain due diligence also formalises the assessment and monitoring of suppliers to set expectations and enable prevention, mitigation, and remediation of issues – with a key focus being on remediation rather than simply changing to a new supply chain, with different issues.
2. Engaging with internal and external stakeholders, and building their capacity
Supply chains are full of different actors, and there are various people external to organisations that understand what is happening on the ground in those supply chains. The regulations encourage the dots to be joined between actors and issues, and supports building the capacity of relevant stakeholders, like workers or suppliers, to understand and implement responsible business conduct practices.
3. Integrate due diligence principles into organisations policies and procedures
Another mechanism the regulations use is for all organisations to set expectations of the levels of due diligence required, ensure that organizations are transparent about their actions, and to formalise these expectations and transparency in their policies and procedures. This, combined with the building of capacity of stakeholders, leads to a robust management of risks, promotes the needed transparency to understand supply chains, and improve them over time.
Operational Efficiencies
Whilst supply chain due diligence can be related to attaining and maintaining, it has a place all of its own. It helps organisations understand their risk and exposure in their supply chains and make informed and strategic decisions for mitigating the risks, thus allowing the organization to promote greater sustainability, resilience, and competitiveness. Some of the ways supply chain due diligence drives positive impacts for organisations are:
Risk Mitigation:
Drives long-term sustainability by encouraging responsible business practices that minimise the negative social and environmental harms, while simultaneously uplifting sustainable supply chains that support the well-being of communities, protect natural resources, contribute to overall economic development, and many other positive outcomes.
Promotes risk mitigation by helping organizations identify and mitigate various risks, including sustainability, compliance, operational, financial, and reputational risks. Proactively addressing risks helps organisations minimise potential disruptions and losses.
Improves standards and fosters innovation:
Advances competitive advantage by helping organisations meet high standards for ethical sourcing, environmental stewardship, and social impacts that can attract new customers, investors, and business partners. Fosters innovation and collaboration through engagement with suppliers, partners, and stakeholders that can result in new solutions, stronger relationships, enhanced technologies, and refined business models that generate new value for the organisation.
Optimises processes and procedures
Optimises processes and procedures to help promote cost savings by identifying inefficiencies, vulnerabilities, and opportunities for improvement.
All in all, there is a huge amount of value in organizations being on top of the conditions and risks in their supply chains, and we commend any organisation that is taking the time to improve their impacts on the ground throughout their supply chain.
How Anthesis Can Help
As a team of sustainability experts, Anthesis offers a tailored approach to supply chain due diligence. We take into account our client’s current state, identified needs, and potential blind spots. We then draw on our knowledge of social and environmental risks and regulations, and advisory expertise across industries and products to provide a holistic approach to due diligence. This approach may include the following exercises:
- Establishing the context: Building a shared vision of success and gathering the key stakeholders and materials we need to conduct supply chain due diligence. Activities could include a regulatory readiness assessment, stakeholder mapping, and value chain reviews.
- Identify gaps: Leveraging findings form the context finding exercises to identify where the organisation is compliance and what gaps they need to fill through activities like an organisational current state assessment, stakeholder engagement, supplier mapping, and gap assessment.
- Plan for change: Create a tailored, strategic, and prioritized list of actions needed to conduct supply chain due diligence. Develop a roadmap to implement strategic programs that close gaps, engage key stakeholders, and collect essential information about the organisation’s supply chain.
- Build capabilities: Implement due diligence policies, programs, processes, data requirements, disclosures, and other actions through a change-centric and digitally agnostic approach. This will often include supply chain mapping, executive education, policy drafting, governance building, risk assessments and management, climate risk screening, impact assessments, climate transition planning, and more.
- Report: Develop robust reporting and disclosures that meet requirements and are bolstered by evidence packaged for audit purposes.
All of our activities are bolstered by our numerous in-house digital solutions that have been specifically designed for supply chain engagement and assessment, including the Anthesis Compliance Suite (ACS), Supply Chain Modern Slavery Assessment Tool, and the Anthesis Activator Academy.
We are the world’s leading purpose driven, digitally enabled, science-based activator, and always welcome inquiries and partnerships to drive positive change together.