Why is supply chain management important?
It is only once we establish standards throughout the supply chain can we be confident that those who contribute to delivering your services/products to your customers are being treated fairly and that our ambitions and goals for our carbon footprint can be accurately measured.
The standards that you want for your business and your teams in the way you represent your company should be similar, if not identical, to the standards you set your suppliers.
However many organisations do not view suppliers as an extension of their business, with many decisions taken on supplier choice being driven by price, personal relationships and quality of the brand.
If standards within your supply chain do not match the standards you set for your business, the damage you're potentially creating to your brand is high. More importantly, by being unaware of what’s happening within your supply chain you could be ignoring impacts your business has on the environment and society.
In our digital age, where information is constantly available, standards are no longer set just by the government and founders, employees and customers are setting their own standards that are impacting the grander scope of small and medium-sized businesses.
In this article we explore the different standards that these groups have. We also look to the future to see what might be changing for you.
Regulation Surrounding Supply Chains
While regulatory standards aren’t directly impacting SMEs in the UK right now, the long term implications are clear when it comes to the recommendations of experts and policymakers, that larger businesses should begin to cooperate and work with businesses that are trustworthy, transparent and accredited for implementing sustainability in their practises.
As of right now, supply chain sustainability has largely gone under the radar of regulators despite being the biggest contributor to carbon emissions, as well as breaking labour laws.
This is due to change, however, with the EU parliament recently backing legislation that leads the way for a new directive on Corporate Due Diligence and Corporate Accounting. Lawmakers are urgently calling for this initiative to include companies having to identify, address and remedy ESG risks throughout their supply chain.
Further, whereas some regulations only address direct suppliers, this regulation is expected to address the entire value chain of a company, requiring direct suppliers to contact and collaborate with those further down. This is highly comprehensive and you can expect most SMEs to be included in one place or another, regardless of whether you are even in the EU.
Looking at the draft directive, we can get an idea of the scope of future supply chain regulation. These companies are expected to establish and implement due diligence strategies addressing environmental, social and governance risks within the company.
We’ve also started to see recent developments by individual governments in an attempt to get ahead of this reporting. For example, Germany has announced the ‘Act of Due Diligence in Supply Chains’ which is expected to come into effect for large businesses of 3000+ employees in 2023, and then large businesses of 1000 employees in 2024. Although it is only expected to apply to large companies and high risk SMEs, it will also have a direct influence on all SMEs who work with large companies which this legislation will impact the most.
It's also worth noting the Paris Agreement, a legally binding international treaty to keep global warming below a 2°C increase requires drastic changes by all companies. According to the Intergovernmental Panel on Climate Change (IPCC), the world must halve emissions by 2030 and go net zero by 2050. Scope 3 emissions, which are emissions resulting from a company’s value chain, makeup on average around 75% of a company’s total emissions within the Morgan Stanley global index, designed to track the global economy and so also represents the average company.
Corporate versus Public sector
In the corporate world, we can already see examples of large companies proactively seeking sustainable suppliers. For example, Waitrose and Boots have added virtual ‘B Corp aisles’ to their respective online shops which they plan to expand over time, with them acknowledging that their customer base have been asking for more ethical shopping options for years now. The Guardian reported that the UK ethical spending market is now estimated to be £41 billion, up 4x in the past 20 years.
One of the main initiatives that’s significantly grown in the past few years is the SBTi (Science Based Targets Initiative) where businesses set net zero carbon targets in line with the Paris Agreement. The most notable feature of this initiative is the mandatory requirement for a lot of companies to set Scope 3 goals, which account for at least 40% of your total emissions which come from suppliers, primarily SMEs.
One of the largest examples is Apple who signed up to the SBTi in April 2021. Until now, they've been largely focused on their Scope 1 & 2 emissions, however in line with Science based targets they have recognised the importance of Scope 3 (supplier emissions) and plans to go carbon neutral across its entire value chain by 2030.
According to the Apple website, these measures will inevitably impact and influence hundreds of suppliers and facilities across 50 countries, and the livelihoods of millions of their workers and families.
As for the public sector, we have the likes of the Social Value Act, where the central government announced that they would go further in assessing the social impact of their contractors. The act states that larger suppliers are not able to win on scale alone; all bidders must set out what they will deliver and how they will deliver it and it is this information that will be scored in bid evaluations. The minimum weighting that should be applied to social value is 10%.
As an example, the NHS is aiming to be the first net carbon zero national health system in the world, including across its supply chain. To achieve this ambitious goal, they will be screening suppliers across human rights and labour, compliance, plastics and packaging, greenhouse gas emissions and waste and circular economy.
In the 5 years of 2014-2019, private firms were awarded £15 billion in contracts from the NHS, highlighting the future capital inflows into sustainable business, with the NHS being only a small fraction of public contract spending.
SME Supply Chains
With society growing more educated on topics of sustainability, SMEs and business leaders are also beginning to step up and set their own standards ahead of time, acknowledging that the only way to succeed long-term is through sustainable actions. There is no better evidence of this than the B Corp community, who are now beginning to set their own standards while being a fantastic indicator of their beliefs globally.
As seen from the graph, B Corps have been steadily increasing since 2016 and now amount to over 3500 globally in more than 70 countries. Not only are B Corps consistently on the rise, the B Lab states that the growth of these sustainable businesses is also well above average. The mean average net turnover of UK B Corps was 24% in comparison to 3% for all companies. They also outperform all companies on average across innovation, financing, employee retention and engagement and their financial outlook for the future of their business.
The main reason we’re highlighting B Corp businesses however, is that they end up being highlighted suppliers along a chain and end up becoming championed for what they contribute to the businesses they work alongside. Here are some examples of this;
- Percol Coffee - A great example of a small, sustainable business. They sell single-origin coffee and achieved the first fairtrade certified coffee, first plastic free packaging coffee in the UK and are carbon neutral! As a result of this positive brand image, they were developed by LVK, a B Corp certified purpose driven brand that helps purposeful companies grow including Pret A Manger and Tesco Finest Coffee. This has resulted in demand for Percol which is now being stocked in Sainsburys, Tesco, Waitrose, Amazon, Coop, ASDA, Morrisons (basically every supermarket).
- The Cheeky Panda - An SME providing sustainable bamboo-based tissues and wipes, they are carbon neutral, use renewable bamboo instead of from trees and are plastic free. Due to their innovative product derived from sustainable thinking and being B Corp certified, they are now valued at over £75 million, are sold in Waitrose, Boots, Amazon and lots more, despite only being established in 2016!
- Toast Ale - The first B Corp brewery, they have a unique process of brewing beer from surplus fresh bread, lowering food waste while creating a delicious product. With food production being the largest contributor to climate change, they also dedicate all profits to charities dedicated to fixing the food system. Their products can be found in most Coop and Waitrose stores across the country, as well as thousands of independent bars and restaurants. Comparing their latest impact reports, even with the issues presented by COVID-19 in the past year, their sales have vastly increased from 656,000 pints sold to an impressive 1.7 million!
Customer and Society Expectations
The general perception and understanding of the environmental and social impacts of business has been increasing drastically in the past decade, whether due to the warnings of scientists and advocate groups, or due to celebrities and influencers adding their voices to the conversation.
With the UN increasing their efforts towards educating the public and businesses about the SDGs, it has provided a system for people to understand and break down the individual problems that can be resolved. While the problems themselves are more difficult to tackle individually, and come with many logistical challenges, it has meant that there is no longer an excuse for businesses to wave away certain problems as if they’re beyond the scope of what they do.
This has meant that standards of customers, employees and society at large have now come with their own heightened expectations, and will often only align themselves with brands that suit their values. In some ways it's harder to keep customers happy now that they want so much but in other ways they just want to put their money into an organisation which is doing the right thing.
As stated previously with the success of B Corp businesses in recent years, it goes hand in hand with the changing buying habits of the younger generations with them seeking out sustainable businesses to support, or operating in more local reuse markets and avoiding purchasing from retailers or outlets as much as possible.
Younger generations are placing an increasingly higher value on other factors outside the quality and price of products and services. Their views of the company and how sustainable they are now have a much greater influence which has only been accentuated by COVID-19. McKinsey reports that 63% of consumers agree that they have gone out of their way to buy environmentally friendly packaged products.
Customers want to support businesses that are sustainable but clearly if your supply chain is exposed as being unsustainable then customer confidence will drop off. As we move forward it will become harder to hide issues of poor practice to customers.
In a recent study from eBay they found that Gen-Z is the generation that puts more emphasis on reusing, reselling and recycling products as opposed to buying new, with 81% of those surveyed saying that buying pre-owned increased in the past year. On the selling side, 73% are interested in selling second-hand goods, more than double the other generational groups, suggesting that they’re already looking at alternative options and losing loyalty towards brands who aren’t keeping up with their values.
Investor Expectations
As we’ve talked about in previous blogs, the investor standards when it comes to sustainability is continuing to grow with the increasing demands for sustainability across the board.
In the UK alone, investors are heavily looking towards businesses that can evidence and prove their sustainability, with integrated ESG considerations growing to 76% between 2015 and 2017 with the number predicted to be higher in 2021. This seems to be supported by the UK’s Investment Association reporting a record inflow of £7.1 billion in responsible or sustainable funds in 2020, nearly four times the £1.9 billion sum that flowed into the first three quarters of 2019.
The argument for sustainable investment also ended up solidifying after the COVID-19 crisis, with investment experts predicting that the focus on sustainability will persist.
“I think it will last and in simple terms it’s largely down to investment performance. The relative success of sustainable funds this year is very important because it was their first big test. This shows that sustainability isn’t a ‘luxury’ that investors can only afford to think about in the good times; it’s crucial in tough economic times too.”
Nicholette MacDonald-Brown
Head of European Blend Equities
As a clear example of these factors being important in recent news, Boohoo, the clothing brand was recently in the spotlight for the pay of labour with one of their suppliers, Jaswal Fashions. Despite it being in their supply chain and not the ‘direct’ responsibility of Boohoo, their share price dropped 14% as a result of the news, highlighting investors' neo-values based on sustainability even in a company’s supply chain.
As for where to begin with best practices for sustainability reporting, the New York Stock Exchange has put out a wonderful guide on where to get started with the process broken down into 8 steps. Step four, for example, is about how to establish governance of ESG issues and reporting, and how to put in place the processes required to measure, monitor and verify your performance. Including tips and ideas on where you can capitalise and find sustainability ROI inside your company.
We do understand however that each step is a huge task on its own, especially for SMEs who are just getting started. If you need guidance and assistance, contact Profit Impact today and we can help you bring conscious business performance to the heart of what you do.
The five main points to take away from this blog;
1) Even though there aren’t major regulatory standards on supply chains for SMEs yet, the acts that are coming into place in the next few years will have an impact on all businesses in the supply chains of larger organisations.
2) There is huge funding in the public sector towards sustainable business, and private businesses are already seeking out more sustainable businesses for their supply chains.
3) B Corps and other small businesses with sustainability at the core of their creation are reaping benefits due to being at the forefront of sustainable development and practises.
4) Customer habits are changing due to the growing awareness of sustainable practises across the board, including more knowledge on supply chains due to access to the internet and more information.
5) Investors have been placing more emphasis on ESG ratings, with Boohoo having a plummeting share price after it was revealed that their supplier was conducting unethical practises.
In our next blog we will be talking about what a good supply chain standard looks like to maximise your chances of competitive advantage.
We’ll also be exploring specific areas of your sustainable supply chain and what tools and processes you have available to you to ensure a robust and transparent supply chain.
If you'd like to understand more about supply chain standards, please do book a call with Sarah today.
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