ESG reporting is longer a ‘nice to have’. Consumer demands have made it a must, while EU rules will soon make it an obligation. How will firms in Central and Eastern Europe with long supply chains react?
Across the globe, companies large and small are under increasing pressure to demonstrate that they are taking steps to address environmental, social, governance (ESG) issues in their supply chains, as consumers become increasingly concerned about the provenance of the products and services they purchase.
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For many consumers, assurance that products and services are sourced in a socially and environmentally responsible manner is no longer a “nice to have”, it is a must. Consumer requests are fast becoming consumer demands.
Investors too want to see evidence that their money is being used ethically, often in order to comply with regulations.
Last month, the European Union gave its final approval to the corporate sustainability reporting directive (CSRD), which means that companies will soon be required to publish detailed information on sustainability matters.
This, says the EU, will increase a company’s accountability, prevent divergent sustainability standards, and ease the transition to a sustainable economy.
According to Jozef Síkela, Czech Minister for Industry and Trade and one of the key figures behind the CSRD, the new rules will make more businesses accountable for their impact on society and will guide them towards an economy that benefits people and the environment.
“Data about [a company’s] environmental and societal footprint will be publicly available to anyone,” he says.
To address ESG issues in their supply chains, firms have begun implementing and monitoring sustainability standards and requirements for their suppliers. This can include setting targets for reducing greenhouse gas emissions, water usage, and waste, as well as ensuring that workers are treated fairly and are provided with safe and healthy working conditions.
But suppliers have – not without reason – often been labelled as the weakest link in a company’s ESG chain. While firms can ensure that their own workers are well treated, or that their own premises use renewable energy, it’s far more difficult to monitor third-party suppliers, especially when these are located outside of the EU.
A game changer
For many firms, Covid-19 was a catalyst for a rethink. “The pandemic significantly exposed global value chain shortcomings and called for stronger, better defined supply chain practices as well as risk mitigation processes” says Laura Grigore, senior counsel at international law firm CMS, who adds that CSRD is a “game changer”.
“It’s a major development regarding mandatory accountability and transparency around big topics such as environmental, social, employee and human rights, anti-corruption and bribery matters, in which supply chain impact and resiliency are also included. With CSRD, we are seeing the significant importance that such reporting has in the market, focusing, amongst much else, on the entire value chain – both within the EU and with third countries – and looking at the short, medium and long term horizon.”
Tyson Barker is head of the technology and global affairs programme at the German Council on Foreign Relations. He says that the twin shocks of Covid and Russia’s war have underscored the importance of resilience in all its dimensions.
“They have pointed to the need for trustworthy, reliable, sustainable supply chains on technology, raw materials, energy, food and pharmaceuticals,” he adds. “All of these aspects have pointed to two trends – either repatriate supply chains domestically or within consolidated democracies with predictability and rule of law.”
CSRD will require all large companies – meaning companies with more than 250 employees and more than 40 million euros turnover and/or more than 20 million euros in total assets – and all listed companies to report on their sustainability.
Pascal Durand, a French MEP from the Renew Europe group, says that CSRD is a major step forward in formally incorporating legally binding and transparent definitions and standards on environmental, social, human rights and governance issues.
“It is the world’s most ambitious regulation for transparency on corporate sustainability strategies and impacts,” he says.
Keep it regular
Key for supply chain ESG management is conducting regular audits and assessments of suppliers to ensure that they are meeting sustainability standards. This can involve on-site visits, interviews with workers, and reviews of production processes and facilities.
Grigore says that it all begins with procurement flow. “This will allow for a thorough mapping of sources, relationships, current ongoing engagements and contractual responsibilities to be tackled,” she says.
Additionally, companies are increasingly collaborating with their suppliers, other companies, and organisations to address ESG issues in their supply chains. For example, they may work together to develop and implement industry-wide sustainability standards, share best practices and technologies, and engage in collective advocacy efforts to drive positive change. What’s important here, suggests Grigore, is clear goals and KPIs.
“Accountability plays a key part in engaging supply chain performance ESG wise,” she adds.
According to Glen Hodgson, CEO of Free Trade Europa, an organisation which lobbies for the expansion of a sustainable single market in Europe and beyond, firms should look at best-in-class examples from other companies in their sector.
“Compliance will be the first step as consumers are demanding this from companies now,” he says.
More engagement into ESG cultural training
To ensure that their managers are well equipped to both meet their obligations and make the most of the opportunities offered by clear, transparent ESG reporting, Grigore says that firms should worry less about mainstream training and focus more about engagement into absorbing and driving ESG cultural training and its meant positive change.
“Maybe for the first time, training is not the right word to put into light what is happening. It may be better suited to approach this from a continuous engagement perspective, to cultivate the need to pro-actively search, calibrate and follow through tailored learning processes suitable to the company, its core activity and its workers. It’s about being inclusive of the overall business character and realistic about the need to engage for growth.”
Hodgson agrees. “This is a fast-moving sector and the paradigm is always shifting. Flexibility and the ability to adapt to trends will be crucial,” he says.
For Central and Eastern Europe, logistics challenges, rising energy and transportation costs, as well as health and political events, along with a reshaping of the labour market, are contributing to higher prices for goods and commodities. There is increasingly a need across many industry sectors to bring supply chains as close to home as possible.
According to Grigore, new industrial orders are continuously on the increase in CEE, even if there are supply constraints. “In this context, there is a need to assess the role of CEE in global value chains,” she says.
Barker meanwhile adds that the days of just-in-time supply chains are over. “The need for risk management and contingency planning has become a core element of corporate strategy,” he suggests.
Indeed, there are opportunities for CEE in the current climate, in which diversification will be crucial.
“Near-shoring to Central and Eastern Europe will provide benefits while moving away from Russia and China will be wise. A failure to do so will affect the business and also the company’s brand,” says Glen Hodgson.
“Providers of goods and services in CEE should take this opportunity to attract more business but also use the current focus on ESG to put these issues front and centre within the organisation. ESG needs to be in a company’s DNA and can no longer be an add-on,” he adds.
One company currently expanding its presence in the region is Mercedes Benz, which this week announced it will invest more than one billion euros to build its first electric-only vans plant in Jawor, Poland.
It cites the need to optimise supply chains as a motive for choosing the Polish town.
“We are not only repositioning our products, but also future proofing the entire value chain: From procurement to production, to logistics and sales,” says Mathias Geisen, head of Mercedes Benz Vans. “The location enables Van division to optimise costs and supply chains as well as the energy-efficient production of new generation vans.”
Finally, an important tool for dealing with the current context will be innovation and digitally driven solutions that can automate supply chain ESG management.
Artificial intelligence (AI) is widely sought with a view to manage corporate sustainability and ESG, including in supply chains.
Laura Grigore says that this demonstrates, amongst much else, how interconnected the main pillars of the circular economy are.
“Intelligent workflows, agile working and efficient and accurately tracked information gathering via automation are more able to deal with current and historical constraints. In this light, the future will not only be green but digitally green,” she concludes.
In the not-too-distant future, ESG-conscious consumers might be able to track the provenance of just about anything they buy with the quick scan of a bar code. Firms around the world will need to be ready.
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