In today's interconnected world, organizations rely heavily on third-party vendors, suppliers, and service providers to deliver their products and services. While these third-party relationships can provide significant benefits, they pose various sustainability risks that can harm your organization's reputation, brand value, and financial performance. This blog summarizes what you should know about this important topic and how to manage it.
Third-party sustainability risks refer to the risks associated with environmental, social, and governance (ESG) practices of suppliers, vendors, contractors, and other partners. These risks can range from environmental harm and labor abuses to corruption and human rights violations. As companies increasingly rely on complex and globalized supply chains, managing third-party sustainability risks has become essential for responsible business practices.
Sustainability risks can arise at any point in a supply chain. Examples of sustainability risks include:
Environmental risks: Suppliers that engage in environmentally harmful practices such as deforestation, pollution, and carbon emissions can create sustainability risks for downstream customers.
Social risks: Suppliers that engage in labor abuses such as forced labor, child labor, or unsafe working conditions can create social risks for downstream customers.
Governance risks: Suppliers that engage in corrupt practices such as bribery or money laundering can create governance risks for downstream customers.
Regulatory requirements related to managing third-party sustainability risks are increasing around the world. On February 2022, the European Commission adopted a proposal for a Directive on corporate sustainability due diligence. The proposal aims to foster sustainable and responsible corporate behavior throughout global value chains. To comply with the corporate due diligence duty, companies need to integrate due diligence into policies, identify actual or potential adverse human rights and environmental impacts, prevent or mitigate potential impacts, bring to an end or minimize actual impacts, establish and maintain a complaints procedure, monitor the effectiveness of the due diligence policy and measures and publicly communicate on due diligence.
Similarly, the UK Modern Slavery Act requires organizations with a turnover above a certain threshold to report on the steps they have taken to address modern slavery risks in their operations and supply chain.
Likewise, the French Duty of Vigilance Law requires French companies with more than 5,000 employees in France or more than 10,000 employees worldwide to establish a vigilance plan to identify and prevent human rights abuses, environmental damage, and corruption in their operations and supply chains.
There are several compelling reasons why companies should manage sustainability risks in their supply chains. First, managing sustainability risks can help to protect a company's reputation and brand. When companies are associated with sustainability issues such as environmental harm, human rights abuses, or corruption, it can damage their reputation and lead to losing customers, investors, and other stakeholders. By managing sustainability risks in their business relationships, companies can demonstrate their commitment to responsible business practices and build trust with stakeholders.
Secondly, managing sustainability risks can help to reduce costs and increase efficiency. For example, companies can reduce waste, improve resource efficiency, and save on costs by identifying and addressing environmental risks in supply chains. By identifying and addressing social risks such as labor abuses or community conflict, companies can reduce the risk of disruptions to their operations and avoid potential legal and reputational costs.
Thirdly, managing sustainability risks can create new business opportunities. Many customers and investors increasingly demand sustainable products and services, and companies demonstrating their sustainability credentials may have a competitive advantage in the marketplace. Moreover, many companies are increasingly looking for suppliers and business partners that share their commitment to sustainability, creating opportunities for collaboration and partnerships.
Managing third-party sustainability risks requires a proactive and systematic approach. Companies should begin by conducting a sustainability risk assessment of their supply chains to identify potential risks. This due diligence assessment should include evaluating suppliers' ESG practices and analyzing their geographic location and the specific commodities they produce.
Once potential risks have been identified, companies should work with their suppliers to develop a sustainability action plan addressing them. This action plan should include specific goals, timelines, and performance indicators, as well as a system for monitoring and reporting on progress. Companies should also consider conducting regular audits and due diligence assessments to ensure their suppliers adhere to sustainability standards.
Assessing all your third parties concerning ESG can be a challenging and time-consuming task, especially for those with large and complex supply chains. This is where real-time monitoring using technology comes into play. With real-time monitoring, you can identify potential sustainability risks in third-party relationships as soon as they emerge, allowing you to address them promptly. Real-time monitoring can also help companies prioritize their assessments of third parties, focusing on those with the greatest sustainability risks. By using technology to supplement their ESG assessments, companies can improve their sustainability risk management processes' efficiency and effectiveness and ensure that they stay up-to-date with the ever-evolving sustainability landscape.
Smart technology can help organizations to streamline their third-party risk management processes by automating manual tasks, reducing the risk of human error, and enabling faster decision-making. For example, automated due diligence tools can help you to quickly and efficiently screen potential suppliers and vendors for sustainability risks. Similarly, real-time monitoring technology can help you track the sustainability performance of your suppliers and vendors, enabling them to identify and address any emerging risks quickly.
In addition, technology can provide organizations with valuable insights into their supply chain, enabling them to identify trends, risks, and opportunities for improvement. For example, data analytics tools can help organizations to analyse and visualize large volumes of data to identify patterns and trends that may indicate potential sustainability risks. These insights can help organizations to develop more effective sustainability strategies and improve their overall sustainability performance.
In conclusion, managing sustainability risks in your supply chain is crucial for responsible business practices. By managing these risks, you can protect your brand, reduce costs, create new business opportunities, and comply with regulatory requirements. To effectively manage sustainability risks, you should start by conducting a sustainability risk assessment of your supply chain and work with your suppliers to develop a sustainability action plan. Additionally, leveraging smart technology solutions such as 3rdrisk will help you to streamline your sustainability risk management processes, increase efficiency and enhance your sustainability performance. By taking a proactive and systematic approach to managing sustainability risks, you can demonstrate your commitment to responsible business practices and create long-term value for your stakeholders.