No good deed goes unpunished. When entrepreneur Blake Mycoskie founded Los Angeles shoes and accessories business, Toms, in 2006, it was with the best intentions. Touched by the number of shoeless children he encountered in Argentina, he conceived a “one-for-one” business model: for every pair sold, he would make another pair for a child in the developing world. By 2020, it had donated 100 million pairs of shoes to children across dozens of countries.
Despite this, the firm faced criticism for undermining local businesses and failing to address the underlying causes of poverty. As one critic put it, “Toms isn’t designed to build the economies of developing countries. It’s designed to make western consumers feel good.”
In 2019, it announced it would move away from the one-for-one model. Instead, today it applies a third of its profits to doing “grassroots good”, supporting organisations working to help developing countries.
Whether founded with the noble aims of Toms or not, organisations are being held to closer account for both their own activities and those they deal with.
Increasing the pressure
At least three related drivers have made it vital for businesses to identify and address ethical issues in their supply chains.
The first is the rising profile of environmental, social and governance (ESG) issues – the framework through which ethical considerations are now most likely to be addressed. Public interest for ESG-related initiatives have drastically increased, reflected by a huge range of movements, from ‘Me Too’ and ‘Black Lives Matter’, to anti-fossil fuel protests across various nations. This driver has, additionally, been reinforced by a surge in ESG investment by retail and institutional investors, with global ESG assets on track to reach $53 trillion in 2025 – a third of all assets under management.
Related to this is the increasing influence of social media over the last decade, extending the reach and rapidity with which activists can publicise firms’ transgressions and mobilise supporters. Since 2010, the number of social media users has increased more than four-fold, from 970 million to 4.59 billion. Activist campaigns are not new, but their impact has grown significantly in recent years.
Finally, regulatory change is driving demands to examine ESG issues in the supply chain. The European Parliament, for example, passed the Corporate Sustainability Reporting Directive (CSRD) in November 2022, obliging businesses to report on carbon emissions, including “scope 3” emissions in the supply chain. In the future, this is likely to be supplemented by the Corporate Sustainability Due Diligence Directive (CSDD), requiring action to mitigate impacts in the supply chain, too. In the U.S., the Securities and Exchange Commission (SEC), likewise, requires reporting on greenhouse gases, while the UK’s Modern Slavery Act 2015 is an example of obligations on the social side. The EU is additionally working on other due diligence requirements such as on areas surrounding deforestation and forced labour.
The pressure for businesses to address such issues in their supply chains has never been greater.
Fortunately, while the need to tackle ESG issues in the supply chain has become more urgent, the tools to help businesses do so have also evolved and improved. Two developments, in particular, stand out.
The first is technology, where big data, cloud analytics, the Internet of Things, Artificial Intelligence, the “control tower” concept, and other innovations are enhancing the visibility and control companies have of their supply chains and the risks within them. Coffee company, Moyee, is a good example of expanding possibilities – using blockchain to provide full transparency across its supply chain from farmers to customers.
The second results from consumers’ and investors’ increased interest in ESG. This has spawned a huge range of certifications, ratings, reporting frameworks and standards that can provide third-party validation for suppliers’ ESG credentials and even the countries in which they operate. Combined with the growth of open source and commercial data sources that companies can harvest for information, this provides businesses with far greater insights into their suppliers than they previously enjoyed.
Assessing the reliability of certifications and the lack of consistent methodology between the vast array available, for example, remains challenging. You can have too much of a good thing. Neither they, nor technology, can replace engagement with supply chain partners. Nevertheless, both can help extend the reach of businesses when delving into their supply chains and addressing ethical risks.
In reality, the ESG risks businesses face in their supply chain and the tools they employ to tackle them vary widely by industry, country, and company. Issues of bribery and corruption, for example, are usually a higher priority for those dealing with suppliers in developing countries. Likewise, labour laws in advanced economies often provide some comfort regarding other social risks.
In most cases, though, the process will be similar: mapping the supply chain, identifying the potential issues, and prioritising the risks to eliminate or mitigate. Crucially, however, this last step must recognise the complexity of not just the supply chain, but the ESG risks within them. The best solutions are not always as straightforward as simply switching suppliers. Organisations should look at systems, not just individual risks.
Industries such as palm oil manufacturing and supply are a good example, with their associated risks of deforestation. Rather than changing suppliers, businesses can work with existing partners to increase their yield from existing land. In doing so, they can limit overall deforestation (rather than simply that within their own supply chain), boost their supplier’s productivity and welfare (bringing social benefits), and improve efficiency to potentially cut costs.
Such solutions can offer both ESG benefits and more a profitable business. It is a win-win that requires a holistic approach to ethical issues – and a closer partnership with suppliers. After all, to really understand the problems others face, sometimes you have to walk in their shoes.