Quantifying Sustainability - Supply Chain Sustainability and Minimising Risk
This is part I in a two-part series on quantifying sustainability. Part I outlines how quantifying supply chain sustainability is a powerful way to manage business risks. Part II will give an overview of the tools available.
The structure of supply chains can be complex, but understanding them and quantifying supply chain sustainability initiatives is a worthwhile challenge. There are countless well-known examples of how supply chain sustainability initiatives can create value within an organisation, allowing them to cut costs, respond to customer demand, and respond to regulations. This article discusses examples of another leading reason companies engage in supply chain sustainability initiatives: risk management. Several major social and environmental business risks arise from within the supply chain, including potential brand reputation damage and loss of access to natural resources.
Social Issues and Brand Reputation
Insufficient product safety, environmental concerns, and social issues with suppliers can lead to direct costs, such as product recalls, and indirect costs, including product boycotts and decrease in market share.
The April 2013 collapse of the Rana Plaza factory in Bangladesh, for example, highlighted the social impacts of negligent management in the supply chains of clothing brands. Over 1,100 garment workers were killed and 2,500 injured when the building collapsed. NGOs and customers immediately pointed out that the retailers exploited cheap labour, knowing that the low price came at the expense of safe working conditions. The media was quick to point out labels that were found within the wreckage, for brands such as Mango and Primark. Exposure of these types of social issues within the supply chain can clearly have an impact on product demand. Ignorance is not an excuse, as consumers will hold companies responsible for activities occurring far upstream from the brand itself.
Access to Natural Resources – Water Footprinting
As resource constraints become a more pressing concern, risk avoidance will likely continue to be a large driver for supply chain sustainability programmes. Growing scarcity in natural resources and impacts from climate change could lead to increasing costs to the business, and companies want to understand the potential size of these costs.
Just by watching the news, we can see that water use has become a major focus of attention in recent years. Water-related risks include water shortages, water contamination, flooding, and price increases. In fact, a World Economic Forum Global Risks report lists water crises as one of the top global risks for 2014. Lack of access to water due to drought or contamination could lead to significant costs for businesses that need water to operate, and to damaged reputations if local communities are also affected. A thorough understanding of where these risk factors and hotspots are located within the supply chain allows businesses to be prepared when and if issues arise.
Monetisation As Risk Management Tool
To make well-substantiated decisions, companies need to know the relative value of different scenarios. This is important for decision-making around sustainability programmes, progress tracking, and other business processes, but it is especially important in risk assessment. Monetisation is the process of making risks and impacts associated with social and natural capital more tangible by expressing them in monetary value. For example, companies may assign a monetary value to water use or carbon emissions in order to help them determine what actions best address the triple bottom line of people, planet and profit.
The Natural Capital Coalition is one example of an organisation working to develop methods for valuing social and natural capital. Part II of this article series will explore the tools and methods that are available.