Surging social risk in global supply chains

ESG+ Weekly

Surging social risk in global supply chains

Eileen Gavin - 15 October 2021

ESG+ Weekly
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Marking the release this week of our Human Rights Outlook 2021, we have newly examined the global labour rights situation post pandemic – and it’s not a great picture for Western supply chains.

The past 18 months have seen health emergencies, natural disasters, conflict and widespread human rights violations flare up in the world’s major sourcing countries, making the challenges of maintaining responsible supply chains more difficult than ever. However, according to our data these recent events are more than an aberration. Rather, they form part of a sustained trend, whereby the rights of workers are under increasing threat from multiple directions.

Across the board, our risk indices show that issues such as child labour, discrimination, forced labour, health and safety, and the exploitation of migrants in the workplace have worsened globally for the past five years.

And nowhere is this happening more than within the world’s manufacturing hubs – from Myanmar, Bangladesh, Vietnam and Cambodia to Ethiopia and Mexico.

But it’s not just labour rights that are stoking concerns for responsible sourcing departments. Investor backlash and consumer boycotts are likely if manufacturers are seen to be associating with abusive regimes such as those of Myanmar or Ethiopia. The threat of Western economic sanctions against such regimes further compounds the situation. This declining picture, set against the background of the pandemic, presents a set of dilemmas for ethical procurement for which there are no easy answers.

Indeed, the pandemic has not only upended traditional human rights due diligence, it has forced companies to rethink the fundamentals of sourcing low-cost labour from countries that have been devastated by the ensuing socioeconomic fallout. Adding to the mix the declining state of political and other social rights in key manufacturing locations, and a perfect storm arises for responsible sourcing.

With global volatility fast becoming the norm rather than the exception, companies are going to have to innovate in due diligence to make their supply chains fit for purpose in the post-pandemic era.

And in the face of mounting regulatory demands in the EU and US - as well as investor and board/activist shareholder expectations - implementing best-practice responsible sourcing standards and social protections is no longer a ‘nice-to-have’ - but an essential for companies looking to improve their ESG performance, safeguard their reputations, and ultimately, protect their bottom line.

As our CEO Matt Moshiri notes, human rights do not exist in a vacuum. They are subject to the vicissitudes of governments, to poorly enforced and ineffectual laws, and the ebb and flow of market forces. At no point in recent times have these factors coalesced more than over the last 18 months. Add in the indirect impacts of a global pandemic – which has upended working practices, thrown supply chains into turmoil and amplified inequalities – and a troubling shift for the worse was inevitable.

For 20 years, our aim has been to develop innovative solutions that make a tangible difference to the lives of people and workers around the world by helping companies and investors operate more responsibly.

Our focus on data means we are unique in having the ability to assess the trajectory of the global human rights landscape. Using our risk indices, subnational issue mapping and ESG commodities data, we’ve taken stock of the trends, the current state of play, the cross-cutting issues driving risk, and how and where human rights are intersecting with the world of business and finance.

It is difficult to say things are improving, but it is not all bad news. Investors have more opportunity to influence how governments and companies act than at any other time. The concept of ESG has gone mainstream and organisations are embracing the idea that managing these issues well will also drive better business performance. If matched by proactive efforts by lawmakers and regulators in key jurisdictions, this has the potential to achieve the more important aim of improving the lives of millions.

For now, understanding risk - from sovereign right down to site level- is the first and most important step companies and investors can take. The rest will hopefully follow.

Eileen Gavin

Principal Analyst, Global Markets & Americas
 

Chart of the week

 

Quote of the week

See what's going in Europe — there is hysteria and mess in the markets. Why? Because nobody takes it seriously. Some speculate on the climate change issues, some underestimate certain things and some others start cutting investments in the mining industries. There must be a smooth transition. We see what certain unbalanced decisions, unbalanced development and sharp twists can lead to. We can see it well today in the European energy markets.”

President Vladimir Putin

President Vladimir Putin tells a 6 October cabinet meeting that Russia intends upon a painless energy transition
 

What we’re reading

  • A new White Paper from our VP Extractives, Gus MacFarlane - Is conventional ESG data failing mining companies and investors? - looks at the ESG reporting situation in the mining sector, which will be critical given the importance of metals such as copper, nickel and lithium to the global energy transition
  • Capital as a Force for Good, Capitalism for a Sustainable Future, 2021
  • Does Europe have enough gas to meet demand? The Inside Track, Wood MacKenzie
 

The week ahead

  • In the second release from our Human Rights Outlook 2021, we argue that the small ‘s’ in ESG is about to get much bigger. And investors wanting to deliver social impact need to expand their horizons. Our advice is clear: SDG, impact need, and country ESG performance all have to be critical inputs if asset managers want to have systemic impacts on social risk
  • Please join us for our upcoming webinar - Analysing human rights risk - From cities to supply chains - Live on 2 Nov & on-demand after
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