Forbes Magazine once stated that a company’s social responsibility is defined as the degree to which it prioritizes societal demands above financial objectives. Understanding the term “sustainability” can help businesses figure out what values they have as a company and how those values will be implemented in their supply chain. This also includes diversity, equity and inclusion factors.
Sustainability is a Growing Concern
Social also refers to a company’s ability to keep strong connections with its workers, areas where it does business, and political climates. This is the central question behind the “S”, or social aspect, of sustainable investing.
Sustainability has been a growing concern for companies in the past decade, and ESG is becoming an increasingly important part of how investors view businesses. Sustainability does not have an end point or time frame on it, but you can expect to hear a lot more about it as we move into the post-pandemic future.
What are the Benefits of Protecting Your Social License?
The benefits of protecting your social license include keeping your investors and clients happy. You may have a better reputation, which leads to increased sales or business opportunities in the future. Your social license is what makes sure that people do not stop wanting to work with you because of negative press coverage surrounding ESG issues. In other words, it refers to how much goodwill and trust your company has within the community and around the globe.
Social Responsibility and Social License: What is the Connection?
What is the connection between social responsibility and a license to operate in a given location or industry? This means that if companies fail to abide by certain rules, they can be shut down temporarily or for good! For example, many oil extraction operations worldwide have been shut down because of social license violations.
Only 1 in 5 ESG Companies
It is important to note that while some companies have put effort into ESG risks, many others are still unaware of the implications. In fact, a survey showed only one in five had an understanding of what was involved with ESG factors and how they might affect their business.
It’s difficult for any organization including suppliers, and retailers to take the time to fully understand their own supply chain, and what effects they have on the world. Or to understand how one torrential rain storm in Thailand can affect the price of electronic components and effect global auto manufacturing. But it can, and it did.
ESG Risks and Supply Chain
There are many challenges companies face every day, both in the external market and inside their own company. Unfortunately if a company is unaware of these external factors it can be difficult to make changes that will benefit all stakeholders involved. It’s important for businesses to understand what ESG issues they may have already identified as risks within their organization so they can be analyzed and quantified. Knowing the full extent of the external challenges a company faces can help them understand their risks and manage those accordingly. ESG is about making sure companies are doing business in a way that will not have a negative impact on the people outside of their walls.
How to Manage Your Supply Chain with ESG
ESG issues can affect corporations and SMB’s both directly and indirectly through consumers’ but one of the key social factors is through their supply chain. When companies invest in sustainable practices, they often benefit the greater good. But the social environment is more complicated than simply assessing consumer opinions about a corporation’s actions. Geo-political events are also part of the social category. For example, a company may have to deal with changes in social law or tax laws in foreign countries that supply components for their goods. They must also consider how those affect their own employees.
Social responsibility is not just an issue for businesses because consumers are now paying greater attention to the consequences of their investments and purchases. Governments also keep corporations accountable through taxes and other regulations that encourage companies to do the right thing. ESG issues are the things that are preventing us from building a sustainable future. Solving these issue will increase equity for all.
How Your Supply Chain IS Your Business
When it comes to ESG investing, many people think about environmental concerns such as greenhouse gas emissions or water use. But sustainable supply chain management may have just as much impact on social factors. Social factors are primarily those factors that will arise in the relations between a company and the people or institutions outside of it. And for every business, your supply chain is outside of the controllable walls in which you work. Whatever your company needs to succeed that you do not grow, produce or manufacture in-house is a part of your supply chain. And that isn’t even completely true.
Supply chains that extend beyond a firm’s core operations expose it to unforeseen and uncontrollable risks, such as natural resource depletion or abuses and corruption. The “S” in ESG stands for social. Consumers will evaluate businesses on their social responsibility, therefore it’s not just a problem for corporations or governments. Governments keep corporations accountable through taxes and other regulations, but ESG factors will make them all accountable to everyone. The common social challenges facing business are changing laws, employee treatment and risks outside of core business operations like supply chains.
Supply Chain Management & ESG Factors
The reputation of businesses or assets owned by investors, as well as investors’ own reputations and investment performance, can be harmed by social problems. They can be anything from wage disparity and human rights to animal rights and geopolitical impacts. Companies have a responsibility for their supply chains and business practices as well as the products they create or sell.
Laws, regulations, and industry guidelines have been established in order to maintain a good reputation with consumers. In turn, investors are looking at social factors when deciding where they want to put their money. They are looking assurity that their investment will pay a healthy dividend, but more importantly, not cast any shade upon them.
The Social Impacts on ESG
To understand how one thing affects another, it is important to understand material impacts from ESG risk in the supply chain. Materiality is a standard for making decisions about how to handle risk. It addresses the size of a potential impact and whether it’s relevant enough to consider action or to be ignored. Material matters also address third party social issues that affect company reputation but are beyond direct control, such as child labor in supply chains.
In order to manage ESG risks it is imperative to understand how they are interdependent. Of course, this only adds to the complexity of supply chains. As a result, products and services connected to ESG risks are linked throughout sectors and at all levels of the supply chain. Therefore, it is important to get the “Social” part of ESG right.
Common Supply Chain Issues
Some common supply chain issues include interruption of flow of materials including raw materials or components, unplanned shutdowns, and lack of worker training. The issue with these supply chain challenges is that they can cause a company to lose revenue and customers while also increasing the cost of goods sold (COGS). For example, if there’s an interruption in flow or components needed for production, then this would lead to a delay in shipping which affects the assembly schedule that prevents the goods from getting market on time.
Social Impact on Delivery and Customer Satisfaction
Then there is the impact on delivery times with knock-on effects to customer satisfaction. If demand is too strong and supply cannot meet it, then customer satisfaction will be hurt because of a lack in availability.
There are many challenges that need to be overcome for companies to maintain social responsibility while at the same time improve operational efficiency and service quality. Being able to balance these often competing factors requires an awareness on value chains across multiple channels.
How Poor Financial Management Affects the Chain
Poor financial management of the supplier can lead to an inability to supply the end customer with the right products at the right time. This can be due to an inability to pay suppliers which causes a delay in deliveries. Or perhaps, not having enough capital for necessary investments that are required for growth and development of new services. Financial challenges can have an impact upon operational efficiency as there is less money available to reinvest into company infrastructure such as IT.
How Loss of Social License Hurts Your Reputation
Your supply is harmed if you lose your social license to operate as a result of major reputational concerns linked to poor working conditions in the chain.Social license to operate is defined as “the acceptance by society of an organization’s activities and its contribution to social good.”
This may entail meeting certain standards, such as environmental and labor regulations or even avoiding negative impacts on human rights, cultural traditions and ecosystems. When a company fails to maintain their social licence they draw negative attention to themselves and the other companies in the chain. This will require greater supply chain management to prevent foreseeable issues from arising.
What About a Material Cost Increase in the Chain?
An increase in the cost of materials will force companies to change their suppliers last minute. This will also affect the cost of goods and services for consumers. Often, companies are required to obtain certification from their suppliers in order to maintain a sustainable supply chain. This is done through auditing systems that will reduce risk and increase transparency between all parties involved, including consumers.
What is Material Waste in the Chain?
This is a result of companies not being able to track materials and monitor their flow through the supply chain due to a lack of transparency. This leads to loss, so companies will have less goods than expected when it comes time to ship out orders. The company might also exceed its capacity to store goods, which is another form of loss that leads to material waste.
Supply Chain Management Solutions
Many companies have been incorporating systems into their supply chains in order to track the movement and availability of materials from point A, where they originate, all the way through production until it reaches its final destination with a consumer. It’s important for companies to manage the elements of the supply chain because it will reduce their costs, ensure delivery volume and maintain the quality of their goods.
Social ESG for Private SMB’s
Smaller private firms are generally less impacted by stakeholder pressure to manage environmental, social, and governance (ESG) risk in their supply chains. But as they grow, some have to take a closer look at how managing risk can impact their business. Incorporating the “S” in ESG into your supply chain can mean sourcing sustainable packaging or consider using recycled material for production. Switch away from single use products so that it is easier to recycle when finished with the product use.
You can also focus on working with suppliers who are transparent about their processes and can demonstrate that they are following best practices. The supplier has a role in the product’s creation, so you should work with them to ensure your business is creating sustainable products. Taking an active role in managing social responsibility while still being profitable is what will make you sustainable for the future. While it may not be easy for smaller companies to find the resources to be socially responsible, it is important for them to do so.
Divestment to avoid reputational or other ESG-related concerns may be costly in private markets, which are somewhat illiquid. Some solutions might be to try to hire a dedicated person or team that can help with ESG related issues. But knowing what your source, where you source it from and how it impacts others will give your employees confidence. You might well discover something in your supply chain that gives you an advantage over the competition.
What are ESG Frameworks?
The ESG Frameworks document is a helpful starting point for any company that wants to incorporate sustainable business practices into their operations. It will help you identify the areas of your business in which you can adopt environmental best practices and provide guidance on how to do so. In addition, it provides information about what qualifies as an “ESG” practice and why they are important for building a sustainable model. We hope this article has been informative and given you some ideas on where to start with your own sustainability efforts!
Caveats and Disclaimers
We have covered many topics in this article and want to be clear that any reference to, or mention of socially responsible, factors, criteria, sustainable, funds, considerations, strategies, financial performance, mutual funds, corporate governance, risks, institutional investors, impact, socially responsible, process, evaluate companies, socially responsible investors, climate change, governance criteria, environmental criteria, waste management, brokerage firms, socially conscious, portfolios, capital markets, research, strategy, executive compensation, energy efficiency, analysis, integration, global economy, non-financial considerations, accounting transparency, ethical, indexes, professionals, environmental concerns, metrics, processes, supply chain, decision making process, own consumer protection, mission related, central factors, screen, framework, social and governance employee relations, company’s carbon footprint, issues, socially responsible, social criteria, governance issues, local communities, millennial investors or scores in the content of this article is purely for informational purposes and not to be misconstrued with investment advice or personal opinion. Thank you for reading.