*This article is a Japanese translation of a manuscript (in English) written by aiESG's ESG research team and edited into three parts for publication. The English-language manuscript isthis way (direction close to the speaker or towards the speaker)Available from.
Please see the original article in English. HERE..
Table of contents:
Introduction.
Factors that drive companies to pursue supply chain sustainability.
Benefits and opportunities of implementing ESG-oriented supply chains.
Risk of inaction.
Conclusion.
Introduction.
This three-part series, 'Sustainable ESG-oriented supply chains: a strategic imperative for modern business', covers the relationship between supply chains and society and the environment, the impact of promoting sustainable supply chains on companies and how to develop action plans to promote them.
The first part of the report introduced the importance of the impact of supply chains on the environment and society, with examples from companies and the results of UN research.
[Part 1] Environmental and social impacts of supply chains.
〜˜Sustainable ESG-oriented supply chains: a strategic imperative for modern business ˜.
In the second part, we will examine the various factors behind the trend of companies implementing sustainability and ESG in their supply chains from three perspectives: academic, business and civic. It will also take a closer look at the benefits, opportunities and risks of inaction that motivate companies to promote sustainability in their supply chains.
Factors driving corporate supply chain sustainability (three perspectives).
A. Academic perspectives
.
Review of academic literature related to sustainable supply chains.More than 40 factors (also known as pressures, triggers, enablers and drivers) have been identified that drive sustainability in the supply chain by organisations. The most frequently cited external pressures are government legislation, international regulations and customer pressure. On the other hand, internal pressures related to corporate strategy (e.g. top management commitment, organisational mission statements) and organisational resources (e.g. availability of resources for sustainability efforts, pressure for more efficient use of natural resources) were also identified as important factors (see Saeed & Kersten, 2019). Although each factor is not discussed in detail here, the full list of factors is presented in the table below.
Factors driving the implementation of sustainable supply chains.
| driver group | driving force |
| External factors (pressure from outside the organisation) | |
| regulatory pressure | Government legislation (labour, employment and environmental regulations; fines for non-compliance) Regional (e.g. EU) or international regulation (supranational regulation promotes sustainable practices of enterprises) / professional/trade associations (trade association requirements; penalties for non-compliance). Financial benefits (tax incentives encourage adoption of sustainability). Certification (standards such as ISO help companies meet environmental and social requirements). |
| social pressure | NGO pressure (NGOs promoting sustainability initiatives). Media/press (media coverage damages reputations and prompts government action) Value-based networks (scientific communities drive sustainable innovation). ∙ Public pressure (public awareness drives demand for sustainable practices) Consumer organisations (organised consumer groups demanding sustainability) ∙ Social welfare/community focus (expect communities to support local welfare) |
| market pressure | ∙ Competitive advantage (improved sustainability for competitive advantage) ... Competitor pressure (competitor sustainability practices set the industry standard) / shareholder/investor pressure (shareholders and investors demand sustainability; low performance leads to divestment) ... Institutional pressures (banks and financial institutions demanding sustainable practices) ... supplier pressure (suppliers help and pressure suppliers to adopt sustainability) Customer pressure (consumer demand drives adoption of sustainable practices). Reputation/image (sustainability improves brand image and stakeholder satisfaction) Globalisation (global market access increases pressure on supply chain sustainability). |
| Internal factors (pressure from within the organisation) | |
| corporate strategy (business) | ∙ Top management commitment (leadership actively supports sustainability) ∙ Organisational strategy (sustainability integrated into mission and strategy) Cost-related pressures (energy savings, reduced material consumption, increased efficiency, cost reduction for profit) / operational/economic performance (sustainable strategies for long-term economic benefit). |
| organisational culture | ... Socio-cultural responsibility (moral obligation to fulfil social expectations). ∙ Innovativeness (willingness to improve and generate new sustainability ideas) ∙ Code of Business Conduct (standardised decision-making and procedures for stakeholders). ... Dissemination of information (sharing of sustainability information to facilitate co-operation) Health and safety (reporting of work-related accidents and pressure to reduce them). |
| organisational resources | Organisational resources (sufficient resources drive sustainability initiatives) ... depletion of resources (pressure to use natural resources more efficiently). Human capital (skills and competencies) (sustainability practices enhance expertise and competencies) Employee pressure/involvement (employees promote sustainability practices internally). ... physical capital (technology and equipment) (new technologies enable sustainability practices) Training and development (improving sustainability performance through training and reducing waste) |
| Organisational features. | ... size (larger companies face more internal and external pressures) ... industry sector (different sectors require different sustainability initiatives). Position in the supply chain (downstream organisations are under more pressure to be sustainable) ... geographical location (compliance with local environmental and social regulations). ∙ Degree of internationalisation (MNCs are under greater pressure to adopt sustainable practices). ∙ Current level of sustainability action (high sustainability performance reduces stakeholder pressure) |
Sources: Saeed, M.A.; Kersten, W. Drivers of Sustainable Supply Chain Management: Identification and Classification. Sustainability 2019, 11, 1137. https://doi.org/10.3390/su11041137)
.
As well as identifying existing factors, recent academic research has made progress in establishing positive causal links between the implementation of sustainable supply chain management and benefits to companies (e.g. reduced reputational risk and improved performance) (seeAgoraki et al. 2023). Similarly, there is growing evidence that climate change poses health hazards for employees in the supply chain, leading to commodity price instability and consequently affecting downstream companies (seeKovacs and Falagara Sigala, 2021(ibid.).
B. From a business perspective.
.
From a business perspective, introducing sustainability into the supply chain has gone from 'nice to have' to 'essential' and makes perfect sense for running a modern competitive business.
According to a recent survey.CEOs and supply chain managers strongly agree that it is important to embed sustainability in their operations (53%) and in their suppliers (45%).This opinion has been echoed by leaders and experts in the Asia-Pacific regionand supply chain resilience as a top success factor for business competitiveness. In addition,The World Economic Forum interviewed large companies operating global supply chain networks.Many interviewees linked supply chain sustainability to long-term financial success, giving real examples of operational benefits such as reduced material waste, increased energy efficiency and streamlined processes, and noted a shift in investor interest.
.
According to experts.However, companies are now increasingly aware that investors are assessing companies based on their ESG performance. Furthermore, the cost of capital can be very high for companies that are exposed to high ESG risks in their supply chains. Two-thirds of all capital is already allocated through some kind of ESG lens, making the cost higher for companies with low ESG performance.
.
Another global corporate concern is the shortage of qualified personnel.According to an international survey.In the UK, 75% of employers globally are struggling to find the talent they need, with Japan facing the most severe shortage at 85%.Forbes is., stating that "the talent shortage is real and many companies are struggling" and that "employers in multiple countries and industries and of all sizes are struggling to attract and retain talent". In this context, companies are competing fiercely to attract the best talent. On the other hand, talented workers are attracted by the purpose and meaning of a company, rather than simply receiving a paycheck. Therefore, companies that cannot demonstrate that their business operations (including supply chain operations) are ethical and sustainable will struggle to attract and retain the best talent.
<Other concerns.
Finally, companies are very concerned about ever-increasing regulation, consumer awareness and growing public scrutiny and demands for supply chain transparency. These issues are discussed in more detail in this section.
C. Citizens.From the perspective of
.
With supply chains becoming ever more complex, it is not surprising that public scrutiny is increasing, vulnerabilities are being exposed and regulatory and stakeholder demands are increasing rapidly. As consumer awareness grows, there is increasing pressure on businesses to comply with sustainability principles and on governments to develop the necessary regulations and guidelines to ensure compliance. In addition, the growth of social justice movements in recent years and the shift in the debate around climate change towards 'climate justice' and 'just transition' has increased attention to ensuring human rights and equity. This is particularly important for vulnerable groups of people, such as those working directly in supply chains and those in communities affected by supply chain operations. In this context, companies need to be constantly aware of business practices within their supply chains.
.
International frameworks promoted by international organisations and non-profit organisations have been largely voluntary and focused on reporting, but in recent years governments (and supranational bodies, e.g. the EU) have proposed, debated and enacted legislation to ensure that companies comply with sustainable practices in their supply chains. They include.
The US Securities and Exchange Commission (SEC) has proposed legislation that would legally require public companies to report GHG emissions, particularly indirect Scope 3 emissions.this billis currently in the public comment stage, but if passed, companies like Walmart will have to report emissions across their entire supply chain, not just in their own shops.
In the UK, fines for large companies using agricultural products (e.g. cocoa, rubber, soya, palm oil) grown on illegally deforested land, requiring them to keep their supply chains healthy.Laws are being discussed.。
However, it is the European region that is moving most quickly to strengthen ESG legislation, with a particular focus on supply chains. In Germany, on 1 January 2023, the'The Act on Due Diligence Obligations in the Supply Chain of Enterprises'.came into force, making it a legal requirement for large companies to carry out due diligence to minimise environmental and human rights-related risks. The European Commission has launched the European Green Deal*Two complementary pieces of legislation, the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD), were introduced as part of the These legislations will come into force in 2023 and 2024 respectively and are aimed at EU or non-EU companies operating in the EU market. Both regulations apply to companies' own operations and supply/value chain operations: the CSRD focuses on the disclosure of information relating to a company's social and environmental impacts, while the CSDDD focuses on companies' engagement with their supply/value chain counterparts on human rights and environmental issues It requires companies to establish due diligence procedures in relation to human rights and environmental issues when engaging with supply/value chain partners. Companies that breach these laws and regulations are at risk of exclusion from public procurement contracts, financial fines and administrative action.
*The European Green Deal is a policy package aimed at leading the EU towards a green transition, with the ultimate goal of achieving climate neutrality by 2050.
The country-specific enactment of these laws, with a focus on large companies, inevitably affects businesses worldwide, including small and medium-sized enterprises (SMEs) with few employees. Large companies under the jurisdiction of such laws will need to require their global and small partners to comply with the relevant requirements in order to operate, and may even oblige them to do so by specifying relevant clauses in supply contracts.
Benefits and opportunities of implementing an ESG-oriented supply chain.
.
Let's now take a closer look at why companies are motivated to pursue sustainability and ESG orientation throughout their supply chains. We have researched academic sources, online news articles and blog posts and compiled a table of the factors that motivate companies (and investors) to pursue sustainability throughout the supply chain (i.e. benefits and opportunities).
Companies' motivation to implement ESG-oriented supply chains: potential benefits and opportunities.
Improved regulation and quality standards | Rapid response to regulations ... smooth compliance. Reduction in regulatory compliance costs Sustainability certification/labelling Raising quality standards above average |
New contracts and market access. | Access to government contracts. Entering new markets. |
Improved stakeholder trust and brand image | Achieve an image of a responsible and trustworthy company Increased priority from investors Creating enduring stakeholder value. Improved reputation Improved brand value Gaining trust through transparency and traceability |
Improved risk management | Mitigating supply chain risk. - Improved ability to anticipate risks - Improved ability to cope with disruption and recover - Supply chain resilience. - Prevention of harmful activities ∙ Reduced costs and increased financial stability through better risk management. |
Long-term success | ∙ Improved business continuity and long-term success. Promoting innovation Improved competitiveness Realisation of the circular economy Improved shareholder relations. |
Improved corporate performance | ... value creation and improved operational performance. ∙ Developing new procurement routes and improving supplier management. ∙ Improved efficiency in the use of new technologies (optimisation and clean operation) Flexible and environmentally friendly product design ... Optimising logistics. |
Reduced costs and increased financial stability | Reduction of product costs through energy and resource savings Access to capital on favourable terms. Reduction in capital costs Reduction in borrowing costs ... improved financial performance. ∙ Obtaining pricing rights for eco-friendly products (consumers are willing to pay more). |
Improved human resources | Improved employee relations. ∙ Attract employees with a focus on sustainability, including highly qualified personnel Retention of employees (social responsibility reduces retirement rates by at least 3%) Increased productivity through better employee engagement Improved job quality and working conditions for employees of companies and supply partners |
Improved customer relations | Improved relations with consumers. ∙ Attracting customers with a focus on sustainability. ... increased customer loyalty. Ability to offer a premium. |
Improved partner relationships | Improved cooperation with suppliers. Developing long-term partnerships with suppliers. |
Improved corporate social responsibility (CSR) performance | ∙ Engaging supply chain partners to meet emission reduction commitments (e.g. reductions in Scope 3 emissions). ... improved social performance. |
Profit from an investor's perspective | Alignment with responsible investment policy and best practice ∙ Increased company revenues from the above opportunities. |
.
Thanks to the many opportunities and potential benefits (a number of which are increasing as the academic and business communities become more knowledgeable), companies are not only driven by pressure, but also have an intrinsic motivation to realise these opportunities and benefits. This trend represents a significant opportunity for leading companies that have made early improvements in their supply chain ESG performance. For other companies, it is increasingly difficult to avoid serious risks.
Risk of inaction.
<There are many benefits to taking action, but there are also significant risks in not taking action.
Companies are increasingly required to understand and manage their exposure to supply chain risk. As mentioned above, companies that fully understand their supply chains have significant opportunities for business stability and long-term success. Companies that ignore current trends and lag behind in managing their supply chains in line with ESG principles face a range of risks.
.
These risks include direct consequences from supply chain disruptions. Examples include disruption to material flows, impact on delivery times, loss of social licence and increased material costs due to sudden changes in suppliers. Other risks include loss of reputation, regulatory non-compliance, business disruption, financial risks, difficulties in attracting and retaining employees and lost business opportunities.
＜Companies are increasingly being held accountable for ESG violations in their supply chains.
With increasing public scrutiny of the issue, many global companies are increasingly being held accountable for their supply chain operations: by 2020, executives from major companies such as Amazon, Ikea and Nike will be challenged on claims that their suppliers are responsible for forced labourUK Parliament asked to attend.Another company, UK fashion retailer Boohoo, after revelations of poor working conditions at the clothing manufacturer,We lost more than $1.5 billion in market value in one day.Companies such as Hershey's and Nike have also recently suffered financial and reputation damage in ESG-related supply chain scandals.
.
Stricter ESG and human rights regulations have made companies directly liable for violations, such as child labour, in their upstream supply chain activities. These violations can be committed by suppliers and their suppliers that the company did not even know existed. However, experts say that 30-40% of a company's overall value can be lost instantly if the risk of these violations materialises and becomes a scandalWarning.。
Conclusion.
In the second installment, how different pressures and motivations, such as the need to avoid serious risks of inaction, in addition to the benefits and opportunities of promoting a sustainable supply chain, drive companies to initiate initiatives to properly understand and improve their supply chain ESG performance We have looked in detail at.
In the third part, we will discuss the necessary steps companies need to take to promote an ESG-oriented supply chain and the challenges they face along the way.
__
aiESG supports ESG analysis at the product and service level, tracing back through the supply chain. We also provide support on everything from basic ESG-related frameworks to the actual disclosure of non-financial information.
Enquiry:https://aiesg.co.jp/contact/
*Related articles*.
Session 1: Sustainable ESG-oriented supply chains: a strategic imperative for modern business - Environmental and social impacts of supply chains.
Part 3: Sustainable ESG-oriented supply chains: a strategic imperative for modern business - steps, responses and trends.
Commentary] CSRD: The EU version of the Sustainability Reporting Standard just before it comes into force - the impact on Japanese companies.
[Commentary] Overview and amendments to the European Corporate Sustainability Due Diligence Directive (CSDDD).
[Commentary] Understanding the European Corporate Sustainability Due Diligence Directive (CSDDD): mandatory assessment of adverse human rights and environmental impacts.
[Commentary] Summary on the expanding environmental certification system - integration of social aspects.
[Paper commentary] Clarifying that corporate climate change action reduces the cost of capital.
~Data analysis of 2100 Japanese companies reveals relationships~.
[Commentary] The importance of social and human capital in financial reports.
[Commentary] Non-financial capital: trends in human and natural capital - domestic and international disclosure regulations and guidelines.
[Commentary] Sustainable Finance - Sustainable Response in the Financial Industry.
[Commentary] Alphabet soup - The disorder and convergence of sustainability standards.
[Paper commentary] The relationship between environmental assessment and stock returns - Investors consider companies that do not engage in environmental management to be a significant risk.