Estimated reading time: 5 minutes

With environmental, sustainability, and governance (ESG) considerations becoming increasingly integral to companies’ success, it is crucial for firms to be aware of their impact on the environment and ensure their values are upheld at every step of the supply chain.

Alexis Garatti, Climate Expert at Allianz Trade, said, “Supply chain transparency is fundamental to ESG accountability. More importantly, it serves as the cornerstone of sustainable trade, paving the way for greater resilience and enhanced efficiency across global value chains.” Businesses must take steps to increase transparency in their supply chains to maintain accountability around their ESG goals and increase resilience to shocks and regulatory changes.

The many faces of supply chains

Supply chain transparency encapsulates a company’s awareness of all aspects of its supply chain down to the primary sources of its products – from environmental emissions to labour standards, trade routes, and the origins of raw materials. Awareness about the importance of following supply chains down to primary sources is increasing in every aspect of ESG. For example, most environmental reporting guidelines now divide emissions in three categories: scope 1 and 2 emissions measure the impact of energy usage directly controlled by companies, while scope 3 emissions now include all energy usage throughout the supply chain. 

According to some estimates, scope 3 emissions account for as much as 90% of companies’ total emissions – making it all the more crucial for firms to monitor and reduce them, even before they are mandated to do so by regulators. Scope 3 emissions include both downstream emissions, generated after the product is released to the consumer, and upstream emissions, generated before the product arrives at the manufacturer. For companies to stay true to their commitments to reduce their environmental impact, they must monitor their emissions throughout the supply chain, working with their suppliers to become more sustainable at every step of the production process. 

Many reporting guidelines do not yet include scope 3 emissions, citing difficulties in measurement and in applying standards equally across supply chains that can span multiple jurisdictions. Similarly, few place a strict cap on these emissions at this point in time.

However, this could change soon as technology makes supply chain transparency easier and governments face increased pressure to curb global emissions. The UK government recently published the results of a call for evidence on scope 3 emissions reporting, which found that despite some challenges, future regulation should include scope 3 emissions in companies’ emissions totals. The EU non-financial reporting guidelines recommend that companies include scope 3 emissions in their total emissions reporting, focusing on disclosure rather than direct operational emissions. 

Transparency for accountability

Even though not all ESG rating initiatives value, or even consider, upstream aspects of supply chains, it is important for companies to take the lead in monitoring this themselves to prove their commitment to sustainability and avoid accusations of greenwashing.  

Richard Wulff Executive Director of the International Credit Insurance & Surety Association (ICISA) noted that closing our eyes to what happens upstream and downstream is increasingly unacceptable.

“Parties involved in manufacturing, trading and financing are under increasing scrutiny when it comes to the societal impact of their activities. Not only aspects related to sustainability play a role. In the current geopolitical environment, compliance with export controls and sanctions is of paramount importance. A transparent supply chain is necessary to live up to this,” he said.

As reporting standards evolve and become more stringent, emissions throughout the supply chains will likely be considered more and more in calculating total emissions. Companies wishing not to be caught unaware should start monitoring scope 3 emissions now, both to prove their commitment to sustainability and to ensure resilience in the face of regulatory changes. 

Beyond environmental considerations, having transparency in all steps of a supply chain is important to ensure that company principles of equality and governance are respected at every step of the production process. As customers become more aware of social issues like child labour, modern slavery, and unsafe working conditions, there are growing calls for transparency on labour standards for suppliers as much as in companies themselves. Recent calls for a boycott on Apple and other microchip producers for exploitation of workers in mineral mines in the Democratic Republic of the Congo should serve as a warning to all industries of the importance of being aware of ESG aspects throughout supply chains. 

Increased awareness of labour exploitation in the mining of “conflict minerals”—minerals like tin, tungsten, and gold, used in everything from jewellery to microchip production and sourced from politically unstable areas—has led to export restrictions and public outcry against companies unwilling to monitor the source of their raw materials. 

Increased public awareness of ESG considerations throughout supply chains and the prospect of regulatory change to include upstream emissions in reporting should encourage companies to increase transparency over their supply chains and enact changes that reflect their values at every level of the manufacturing process. 

The technology panopticon

However, this is easier said than done. Companies often find it difficult to monitor every step of their supply chain, especially when their production processes involve different producers spread out across the world, who themselves have multiple producers or suppliers that they might not have complete oversight of. 

Many companies will find that digitisation is the key to streamlining data collection and enabling greater transparency. As noted in a 2022 Tinubu whitepaper, digitisation can give businesses the tools to standardise ESG data and monitor the application of policies, contributing to greater transparency at all levels of production. Periodic audits of supply chains can be a useful investment, increasing transparency while also strengthening resilience by highlighting weak points or possible bottlenecks in the event of a global disruption. 

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There is a ways to go before complete supply chain transparency is truly possible across all industries. However, this is a crucial goal that any company committed to its ESG principles should strive for in the near future if it wants to remain relevant to customers and resilient to regulatory changes. 

To learn more about why supply chain transparency is so crucial to ESG principles and how technology can help support it, attend the “Supply chain transparency and ESG considerations” panel at the online Tinubu conference on 5 February. Get your ticket on this link.