ESG goals are a risk management necessity — An interview with Peter Smith
12/05/2024

The coronavirus pandemic and recent weather catastrophes have made the case for most types of risk management and what one can do to mitigate the risk more obvious. If you do not have accurate information and alternatives of supply in place, the fallout from a sudden flood will drown you. In ESG-related issues, and in the case of forced labor in particular, the discussion around the risks these pose is more nebulous. Yet it is a risk that procurement professionals must be prepared for and manage.
The saliency of forced labor, human rights and other ESG concerns in supply chains continues to increase and poses a major risk to procurement practitioners and the business. Bertrand Maltaverne, Spend Matters Lead Analyst for Upstream Procurement, explained in the second part of our series on forced labor that these regulations, which have for so long been a patchwork of various laws from different countries, will only grow more headache-inducing as even more laws pass and preexisting ones become farther reaching and stricter.
If the CPO declines to become aware of labor issues in their supply chain, they run the risk of financial damage from an ever-growing number of regulatory bodies and damage to their organization’s reputation in the face of a socially conscious consumer base and workforce. “The risks organizations run by ignoring these issues is especially potent in the EU,” Bertrand notes. “If you do not respect the EU’s regulations — and the EU is very serious about clamping down on violations — you either run the risk of a fine or will have your products blocked. You suffer a financial loss either from the top line or the bottom. And that is before you even consider the reputational damage you could incur.” So, the CPO must be proactive.
Mere wishing will not suffice, but then there is the question of what a practitioner can do. Peter Smith, ex-President of CIPS, ex-MD of Spend Matters Europe and author of Bad Buying, among other books, has constructed his career around implementing what he calls ‘Procurement with Purpose’ (which is also the name of his blog). In his decades-long career he has been procurement manager and director and now business author, lecturer and consultant. He presents the argument that procurement needs to treat ESG concerns as a motivating purpose to its processes, as opposed to a hindrance. The risk of regulatory handslaps only heightens his point.
The ways in which companies have dealt with these risks have evolved in recent years. Decades ago, when Peter first began working in procurement, there was little conversation or time spent considering the human rights implications of an organization’s supply chain, and when companies began to address these violations, they immediately stopped working with them. “As people got more thoughtful, though,” Peter explains, “they realized that simply cutting off business ties might not be the best outcome for the people in the factory. While they may be suffering from all the bad things that can happen in employment practices, their situation would not be improved if they came in to work next week, learned that their factory lost their biggest contract and were fired as a result.” So, the focus evolved from simply knowing about issues in the supply chain and avoiding them to working with suppliers to improve working conditions. This insight formed the basis of Peter Smith’s book and attendant blog ‘Procurement with Purpose.’
Tech gives you the tools to conduct an ESG strategy
Procurement tech plays a clear role in helping buyers discover suppliers violating human rights. “You can be compliant without any piece of tech, of course,” Bertrand says. “But the codified workflows and collaboration that comes with technology eases the pain in ensuring your compliance. It’s just easier to make the case that you are complying with regulations if you have concrete data to prove it.”
There is, though, only so much you can do with even the best of procurement technology. “At the bottom end,” Peter notes, “you can probably get by with an Excel spreadsheet. But if you go beyond just collecting basic data to actually doing stuff, then the technology is, at best, an enabler. It doesn’t do anything itself. If you discover that you have a supplier in a part of the world where you have fears about forced labor, a bit of technology isn’t going to solve that problem. Instead, the CPO has to get on the phone with their sales director and raise the issue.”
According to Peter, when trying to root out forced labor from the supply chain, the CPO will resort to the oldest procurement tactics. “The easiest carrot is a stick,” Peter admits. “Even the nicest procurement person must confront a supplier now and again with the prospect of taking business elsewhere. Otherwise they’re probably not doing their job.” He continues to explain that the application of the stick can differ, however. Rather than threatening to pull all of your business away — which would relieve you of the regulatory risk but not solve the problem of forced labor or carbon emissions — you can incentivize your supplier by offering them a greater percentage of your business if they meet certain goals, which can be tracked with tech.
Even getting this far, though, requires some buy-in from the broader company. “You need a business case for doing all of this,” Peter emphasizes. “That’s where a lot of sustainability initiatives have failed and are flailing, and the issue is that it’s quite hard to make the business case to do more than the regulatory bare minimum. Many may agree that sustainability and ethical labor practices are important, but in practice, these arguments fail to sustain an ongoing initiative. A bit of PR makes the rounds, and when the publicity dies down, effort and funding dwindle.”
What the ambitious CPO needs, therefore, is a business case based on business concerns. The most obvious concern is regulation. For example, the more onerous layers of the Lieferkettengesetz, the German Supply Chain Due Diligence Act, came into effect this year. Businesses with over 1,000 workers have to implement a human rights risk management system. So now there is a clear, proactive argument for seeking out and engaging human rights violations. “If I were a CPO making the business case,” Peter suggests, “I would try to sneakily choose software that would allow me to do more than the bare minimum, but my internal business case would over emphasize regulatory impact, the fines and the repercussions from the German government if I fail to comply.” Other bases for the case can be the need for resilience in the case of supplier diversity, winning over customers by pitching your ethical sourcing or using your sustainability initiatives as a recruitment tool.
For Bertrand, the business case rests on the resources investing in the tech can save: “Take, for example, human rights or deforestation. Remaining compliant here can be a nightmare to achieve because you have to check with your suppliers and their suppliers and the suppliers of their suppliers and so on. That’s a huge task! Implementing tech makes this process so much faster.” He adds that if you want to implement the more coercive methods Peter mentioned, you need visibility into your supply chain to know where the problems are and what alternatives are readily available. “You have to understand the structure of your supply chain. That defines where you buy, where your suppliers buy, where their suppliers buy and on and on. And that understanding also drives any initiatives concerned with improving human rights, reducing carbon emissions or avoiding tariffs. The CPO will need to implement the strategy themselves, but they cannot do so as effectively without understanding tech offers.”
To find the tech that would best help you implement these strategies, use Spend Matters TechMatch — or read about how it can help.
To round out your understanding of the risks your organization faces, explore Spend Matters coverage of risk.
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Risk SRM08/02/2018
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Risk SRM08/02/2018
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