In a 2019 LinkedIn article, Dr. Yossi Sheffi from MIT wrote, “No self-respecting company is without a sustainability strategy, and at the center of these strategies lies the supply chain.” We’re now approaching 2024 and the focus on sustainability continues to grow, driven by many factors, including new regulations and legislation. What are the key trends and developments in this area? What actions should companies take to respond, as well as to prepare effectively for what comes next? Those are the key questions I discussed with Daniel Smith, Director of Sustainability and ESG at e2open, on a recent episode of Talking Logistics.
Environmental, Social and Governance (ESG) Legislation
Since so much of ESG activity is driven by government action, I began our discussion by asking Daniel about the most recent legislation in this field. Daniel summarizes current legislation into two areas – disclosures and risk mitigation. “In other words, laws that require companies to disclose things and laws that compel companies to take action,” Daniel explains.
“For many investors, ESG topics correlate with risk. For example, having high CO2 emissions is a risk for companies operating in areas focused on decarbonization. Regulators require companies to disclose those risks to create an even playing field for investors. Indirectly, reporting requirements compel companies to reduce their emissions.”
Daniel notes that the regulations are coming from states, the Securities and Exchange Commission (SEC), and EU bodies. The challenge is that most of an average company’s carbon emissions come from its extended supply chains. He also notes how carbon taxes and forced labor regulations are making global supply chain management much more complex, with extensive reporting requirements.
For example, in the short clip below, Daniel highlights the Uyghur Forced Labor Prevention Act (UFLPA) in the United States.
“Under the UFLPA, due diligence means you have to prove the absence of any forced labor touching any aspect of your product,” explains Daneil. “Due diligence isn’t reasonable care, it’s proof positive now…but how do you prove the absence of something?” He shares more insight on that question in the episode. He also cites a recent German rule on forced labor that requires any company not in compliance to pay a fine of up to 2% of their global revenue and prohibits access to any government contracts for three years.
Daniel’s comments point out that today the definition of supply chain visibility must go beyond product or shipment visibility to incorporate visibility to sustainability metrics and forced labor issues.
Defining Good Compliance
In this new environment, what does compliance look like?
Daniel explains that these new regulations aren’t just extensions of existing requirements but are instead a whole new set of compliance issues that require new processes, including extensive supply chain mapping. He explains, for example, that asking your Chinese suppliers for their compliance information isn’t enough. You might also have suppliers in other countries that source parts or materials from China.
This new process of complete supply chain mapping also applies to tracking emissions (including Scope 3) and sustainability compliance. Beyond tracking, if you want to reduce emissions and enhance sustainability, there are additional processes and decision-making that must be built into your systems.
“To answer your question, good compliance involves building deep sub-tier visibility and collaboration capabilities with suppliers, distributors, and channel partners. It means collaborating in real-time and making lightning-fast decisions that balance the various needs of the business. There is no ‘easy’ button here.”
International Sustainability Standards Board (ISSB) Standards
ISSB is the body that sets international standards for sustainability. It is notable because it is tasked with setting a single set of standards to replace the multitude of country and industry standards that have sprung up to deal with sustainability. And ISSB is part of the International Financial Reporting Standards Foundation (IFRS) which means its standards will be geared toward investors and shareholder value. Compliance with these standards will be reported as part of financial statements, which means it will be audited, and thus will help to eliminate unsubstantiated claims (i.e., “greenwashing”).
Measuring Greenhouse Gas Emissions
An important subset of ESG is greenhouse gas emissions. As Daniel explains in the short clip below, a key issue with reporting or comparing emissions is the different methodologies used. These are generally defined as a spend-based method or a life cycle assessment method, both of which are averages rather than actual measurements.
The spend method assumes every dollar spent in the supply chain equates to a certain amount of emissions. It’s not very accurate and is not helpful if you want to reduce emissions.
The life cycle assessment method equates certain levels of emissions to each type of product. A little more accurate than the spend method but still just an average. And, again, not very helpful for reducing emissions.
“To achieve meaningful reductions, much more accurate mapping and tracking of emissions will be required,” says Daniel.
Future Developments and Compliance
What future developments are coming in ESG? What will this mean for compliance? What opportunities does this create? And how do circular supply chains fit into this? Daniel shares some great insights on these topics, so I recommend that you watch the full video for all the details. Then keep the conversation going and share your perspective and experience on this topic.