Nearly half of sourcing countries are now considered ‘high risk’, according to a new report, The Supply Chain Environmental, Social and Governance (ESG) Risk Ratings.
The report, published by sustainability specialists ELEVATE, an LRQA company, is comprised of 20,000 global supplier audits conducted annually, with 45+ million data points derived from on-the-ground site visits.
This means the country is more likely to experience risk events that stand in violation of supply chain ESG governance frameworks, including local and international law. These could range from finding evidence of environmental degradation to the use of child labor.
In fact, Western sourcing markets have shifted away from their lower risk classification, with forced labor identified as a key contributor to an increased risk.
The United States exhibited a decrease in every key labor index, maintaining a ‘high risk’ classification in the forced labor index in particular. States such as Texas, Florida and New York now have a higher degree of exposure to forced labor risk than Pakistan, India, Thailand and Indonesia
For supply chain ESG violations associated with several of the most critical forms of ESG violations – forced labor, child labor, freedom of association, and wage related violations – the United Kingdom, Germany, Portugal, and Italy are now ranked as ‘high risk’ as well. The UK saw its Forced Labor Index decrease by 58% over the last year, which coincided with the country welcoming refugees, particularly from Ukraine, who can be more susceptible to forced labor.
“The current geopolitical, economic and legislative climate has made it increasingly difficult for businesses across the globe to be confident about ESG risk in their supply chains,” said Kevin Franklin, managing director, at ELEVATE, in a statement.” Even historically lower risk Western markets have started to slip. It is now clear that simply homeshoring or nearshoring manufacturing in countries previously thought to be ‘safe’ from egregious ESG risks is not enough.
Adding to the increased risk of sourcing is a decline in audit transparency. Countries such as Vietnam, Thailand, Indonesia, India, China and even Italy have all become less transparent since the pandemic, with auditors being unable to access accurate information and make conclusions from site visits. The decline in transparency relative to pre-pandemic levels has complicated the ability of companies to govern higher risk levels, with suppliers in 50 sourcing geographies less transparent than in the previous year.
“Transparency is key for supply chain audits. Deception and sharing of falsified data not only render risk assessments ineffective but also means that serious violations can go unidentified,” said JP Stevenson, director, Customer Success, at LRQA. “To build resilient supply chains, being able to see, manage and mitigate risk exposure is essential. Through responsible sourcing programs and insightful data, businesses can partner with suppliers that can meet the sourcing requirements that include critical ESG performance.”