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Steps to Navigate ESG Risk in Supply Chains

Steps to Navigate ESG Risk in Supply Chains

April 11, 2024
The first step, says Boston Consulting Group, is to create transparency.

As companies become even more focused on discovering risks within their own supply chains, Boston Consulting group, in an article, offers six steps to  bring ESC accountability to global supply chains.  

The following is an excerpt from that article. 

Create Transparency. The starting point must be for the organization to develop an in-depth understanding of all its supply chains, which can extend across the globe and have many layers, as well as the various steps in the sourcing and manufacturing processes. After tracing each supply chain from end to end, the company should assess trade flows as well as the countries and suppliers involved. It will then be able to identify the potential ESG risks that form the basis on which it can calculate risk scores.

Calculate Risk Scores. Once companies understand their supply chains and material flows, they will be able to assess the ESG risks they face in their own facilities—such as factories, distribution centers, and warehouses—as well as the often larger risks present in the many levels of their supply chains. Each score they assign will be specific to the category and country in which it could occur, the nature of the risk, and the supply chain tier. These scores are essential to help companies better manage the likelihood of violations.

Develop Risk-Specific Measures. It’s important to interact closely with suppliers on risk identification and incident managementDeveloping a standardized, company-specific toolbox will help companies identify risks and mitigation measures along the procurement process.

Define New Cornerstones. Before transitioning to an operating model that places ESG risk management at its core, an organization must analyze its current approach. This starts by focusing on existing policies, the functions involved, and the current roles and responsibilities.

Create a Center of Excellence. Once a company has refined its operating model to account for ESG issues and defined the roles to operate it, the responsibilities for execution should be transferred to the organization’s businesses and functions. Some leaders establish a center of excellence as an organizational node.

This center enables a clear view of risk management and mitigation across the company. It ensures consistency in the development of ESG guidelines, sharing of best practices, and performance tracking. A center also catalyzes internal collaboration by setting guidelines and requirements for each unit and providing toolboxes for supplier risk assessment, supplier engagement, and risk mitigation. For example, a European supplier of aerospace components recently set up a center of excellence that tackles supply-chain-related ESG issues on two fronts. One, it tracks ESG risks, trains employees, and manages mitigation in supply chains. Two, it also defines supplier standards and tracks business units’ performance on improving them.

Monitor, Audit, and Campaign. To manage risks over time, most ESG leaders have drawn up a specific set of parameters and deployed digital systems to monitor them constantly. In addition, they conduct periodic audits and reviews to improve suppliers’ performances, especially those of smaller vendors.

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