Failed the Smell Test: Understanding ESG Importance in Global Supply Chains

Date Posted:Tue, 4th Jun 2024

The use of child labour in manufacturing perfume is the last thing any of us wearing perfume would want. Unfortunately, this issue recently made the headlines when an undercover journalist caught several children working in the early hours picking flowers, which would ultimately be used to make perfume.

What does this have to do with ESG and the Green Spotlight?

The UN has defined Sustainable Development (SDG) Goal 8 as promoting inclusive and sustainable economic growth, employment and decent work for all. Target 8.7 specifically aims to eliminate unethical practices such as child labour, forced labour, and modern slavery.

Manufacturing processes are notoriously long, complex and often opaque due to the multiple links in the chain. Service industries such as financial services or process outsourcing are also at risk for unethical practices such as unfair wages and unfair working hours and as such are not exempt from this goal or its targets.

How can organisations address such ESG challenges?

Organisations must ensure that there are no unfair or unethical practices throughout the production of their goods or delivery of their services. An organization may have an indirect risk of unethical practices by working with a supplier or a partner (i.e., third party) that engages in such activity.

• ESG reporting and monitoring: Publicly listed organisations are required by regulations to report on their ESG plans and activities. Non-listed entities should voluntarily practice this to avoid embarrassing and damaging reputation headlines. All organisations who wish to be good corporate citizens should have ESG goals and objectives. Monitoring progress is essential for real achievement, and reporting is the output of this achievement. ESG plans and reports are key tools to drive ESG success..

• Third-party risk management: Many ESG risks and issues reside in the interconnected ecosystem of third parties. In the perfume industry example, it wasn't the manufacturer employing the child, but further down the chain, where parents sold flowers to merchants, who then sold to an oil processor, eventually reaching the perfume manufacturer. Third-party risk management helps organisations understand who is working in their ecosystem and assess alignment with their values and practices. Conducting due diligence on third parties enables proactive risk identification and mitigation before they become issues or embarrassing headlines. Third-party risk management also protects against cybersecurity risks and creates opportunities for innovation, collaboration, and competitive advantage.

• End-to-end auditing: This is essential to ensure third parties adhere to standards and contractual agreements. Identifying issues or weaknesses during audits allows for corrective actions before they are discovered by external parties such as regulators or journalists.

Conclusion

While such stories might be suppressed to prevent reputational damage, wouldn’t it be better to pay working parents a fair wage? This would reduce the need for child labour, and the increased salary costs would likely outweigh the expenses associated with reputation damage and PR efforts.

So if an organisation is truly serious about eliminating modern slavery and child labour, it must practice good governance and enforce ethical, responsible behaviour.

How can organisations do better and meet their ESG goals? Set realistic goals and pursue them diligently. This situation exemplifies the need for comprehensive Governance Risk Compliance (GRC). Identify risks, particularly those ESG risks. Monitor them, audit, and implement corrective actions.

Tina Chugani is the Managing Director of Proxis, advising clients on GRC and ESG solutions. She is also a Non-Executive Director of the Global Girl Project charity. Get in touch here: [email protected]