Supply Chains: ESG- the new normal
Updated: Dec 14, 2020
The coronavirus’s impact on the global economy has forced businesses to act quickly to mitigate any vulnerabilities in their pre-Covid practices. Businesses with sound ESG principles demonstrated resilience during Covid-19, whilst the weaknesses of the current economic model were exposed by those who did not. Scepticism towards the commitment to ESG principles has quickly decreased as Covid-19 has provided the real-world metric from which to measure its performance. The disregarding of ESG and the impact that this has on supply chains has been further highlighted as fast fashion brands have come under public and investor scrutiny.
A major turning point
The halting of the global economy has served as an opportunity to regroup and re-evaluate our environmental efforts, whilst lockdown measures coupled with widespread furloughing and redundancies has meant that the treatment of employees has become a key talking point. This has resulted in demands for a ‘green recovery’ in the shape of green stimulus packages, and an increased awareness of social responsibility towards employees from investors and the general public. In fact, JP Morgan have recently reported about how covid-19 could prove to be a major turning point for ESG investing.
“Over the long run, COVID-19 could prove to be a major turning point for ESG investing, or strategies that consider a company’s environmental, social and governance performance alongside traditional financial metrics,” Jean-Xavier Hecker and Hugo Dubourg, J.P. Morgan
The appetite for companies which offer more than solely financial profit has arguably never been greater. According to Patrick Thomas of Canaccord Genuity Wealth Management (CGWM), this is supported by the flowing of capital from traditional funds to ESG funds since the covid-19 crisis struck. The drive towards ESG from the financial sector has been further punctuated by news stories highlighting a change in demand towards more responsible corporate behaviour.
Businesses being held to account
Boohoo have come under intense scrutiny due to substandard working conditions and accusations of workers being paid as little as £3.50 per hour in their supply chains. The waves of this particular story have reverberated far beyond Boohoo’s Manchester headquarters, with fresh questions being aimed at fast fashion in general. There is a heightened demand for businesses and their supply chain to meet certain standards and if they don’t, they may be held to account. In the case of Boohoo, investors and stakeholders have shown they are willing to take action.
Following the revelations about Boohoo’s supply chain issues, one of its largest shareholders, Standard Life Aberdeen sold almost all of its stock and criticised the retailers response to the allegations. This is illustrative of how a company’s failure to understand and engage with ESG principles can hide manageable risk, eventually impacting the business’s performance and value further down the line. Next, Amazon and Zalando were also quick to delist products made by Boohoo, distancing themselves from the story as quickly as possible. The rapid response by these companies shows their awareness of how damaging it is to be associated with such headlines. This story should act as a warning to businesses that embedding ESG principles into their businesses and their supply chains is now a must to ensure long term business sustainability.
Yet whilst the allegations surrounding the Leicester factories have struck especially hard because of their UK location, supply chains abroad with poor ESG performance can also damage a business. It is now estimated that 80% of global trade is embedded in supply chains and the globalised nature of the modern economy means that they span multiple jurisdictions. For example, raw materials are mined in Congo to make batteries in China for vehicles produced in the US which are then sold in Europe. In short, supply chains have become infinitely complex and this brings a heightened risk of exposure to poor supply chain practices. Earlier this year, Nike received negative headlines due to their supply chains being linked to Uighur Muslim forced labour in China. Nike quickly came out to confirm that they intend to review their supply chains in China but this case also highlights the increasingly high standards which businesses are expected to meet, not only at home but abroad too.
A look to the future
The trend towards companies being held to account for their behaviour and operations, as well as those in their supply chains is unlikely to go away. Larry Fink’s landmark letter to BlackRock CEOs regarding a fundamental reshaping of finance has been followed with a fresh drive to make sustainability and ESG mainstream in the financial sector. With this comes new innovations, tools and products designed to help shift capital to the right parts of the economy, meaning substandard business practices are likely to become even more difficult to hide. For instance, the credit rating agency Scope, has developed a methodology for scoring companies’ ESG impacts which heavily focuses on macro-level data and incorporates analysis of supply chain impacts. Developments like this are making it easier for companies to understand their ESG performance and that of their supply chains, therefore making it easier to hold companies to account. This is without considering that calls for mandatory ESG related disclosures are getting louder by the year, since the emergence of the Taskforce for Climate-related Financial Disclosure (TCFD).
It’s unlikely that many people will look back on 2020 in a positive way, yet the renewed focus on tackling social and environmental issues may turn out to be an unexpected silver lining. ESG principles have taken centre stage as the roles which companies play in the real economy have become increasingly important to investors and the public alike. The acceleration in ESG will act as a springboard for those companies who are already one step ahead with their non-financial strategies, whilst many others will face problems as Boohoo have. Businesses have the chance to decide whether they want to take the fast-fashion approach and face the risk of frowned upon operational practices or strive to be the timeless, sustainably sourced business of the future.
Co-authored by Governex and Harry Vigus
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