In today’s global landscape, the emphasis on ESG (Environmental, Social, and Governance) principles throughout supply chains is paramount. It’s not just about the end product; it’s about the journey from inception to delivery. During the 2024 VelocityEHS User Conference, Andrea Korney, Vice President of Sustainability for VelocityEHS partner J.S. Held, presented a session on what it means to be in the midst of Navigating the Nexus of Ethical Supply Chains, and defined the elements that matter for an organization’s part in an ethical supply chain. Read on for highlights from this engaging session – starting with what it means to be part of an ethical supply chain.
What does it mean to be part of an ethical supply chain?
An ethical supply chain involves the integration of sustainable and ethical practices into every step of the supply chain process, from the sourcing of raw materials to product delivery.
Consumers are increasingly aware of these impacts and expect organizations to take responsibility for their entire supply chain, addressing and correcting negative impacts. If a supplier has poor human rights practices or is facing a fine for fudging their reporting, “it’s no longer acceptable for organizations to lay blame on the supplier and call it done,” emphasized Korney in the session.
Organizations are expected to improve their EHS and ESG practices, and if changes aren’t made, companies have a lot to lose in terms of:
- Reputation and Brand Loyalty
- Regulatory Compliance
- Risk Management
- Investor Confidence
- Employee Satisfaction and Retention
- Access to New Markets
- Long-Term Viability and Sustainability
- Partnership Opportunities
- Product Innovation
- Net Zero Alternatives
- Traceability and Assurance
How do ethical supply chains fit into ESG?
Ethical supply chains play a crucial role in an organization’s ESG performance by addressing various aspects of sustainability and responsible business practices.
Environmental
- Sustainable Sourcing: Emphasize sourcing materials and products in a sustainable manner, reducing the environmental impact of extraction or production processes.
- Energy Efficiency: Prioritize energy-efficient practices throughout the supply chain to minimize energy consumption and reduce greenhouse gas emissions.
- Waste Reduction: Focus on reducing waste generation and promoting recycling and reuse initiatives.
- Carbon Footprint: Work towards lowering carbon emissions across the supply chain, including transportation and manufacturing processes.
Social
- Labor Practices: Ensure fair labor practices, including safe working conditions, fair wages, and adherence to labor laws.
- Community Engagement: Engage with local communities where they operate, fostering positive relationships and supporting community development initiatives.
- Diversity and Inclusion: Promote diversity and inclusion within their workforce and among their suppliers.
Governance
- Corporate Governance: Uphold strong corporate governance principles, including transparency, accountability, and ethical decision-making.
- Supplier Management: Manage their suppliers responsibly, ensuring they adhere to ethical and environmental standards.
- Compliance: Comply with relevant laws, regulations, and industry standards, maintaining a commitment to legal and ethical conduct.
- Risk Management: Assess and manage risks associated with their operations, including ESG risks.
Implementation is baked into multiple areas of ESG and plays a vital role in an organization’s ESG performance through:
- Metrics and Reporting: Measure and report on their environmental and social performance using relevant metrics, demonstrating their commitment to ESG goals.
- Stakeholder Engagement: Engage with stakeholders, including investors, customers, employees, and communities, to understand their concerns and incorporate feedback.
- Cost and Quality Management: While maintaining ethical standards, they manage costs and ensure product quality through efficient processes and supplier relationships.
Why is this important now?
New regulations are being added or updated almost every day, and responses to these regulations (including lawsuits against regulatory boards) are all over the map, leaving many within the supply chain feeling a bit unstable. Amid all this are a few regions demonstrating how to deeply integrate ESG practices into an organization’s fabric, like California.
As the state with the highest gross domestic product in the United States, California has a lot to gain from laying a solid path with ESG reporting and regulations. The state plans to include Scope 1 & 2 emissions into organizational reporting in 2026 and is proposing to include Scope 3 emissions in 2027. As regulations expand, organizations with a strong ESG footing and an ethical approach to their supply chain are open to many more opportunities than those that don’t.
Brief Review of Emission Types
It’s important to understand the different types of emissions in order to understand your role and requirements when it comes to ESG program management and reporting. Below are brief definitions of each.
Scope 1: Direct Emissions: GHG emissions that are “owned” or controlled by the company. A result of various operational activities.
Scope 2: Indirect Emissions: GHG emissions from the generation of electricity and/or heat that is purchased from another company that is not your own, but for your company’s energy use.
Scope 3: Other Indirect Emissions / “Value Chain” Emissions: GHG emissions resulting from activities not directly owned or operated by your company but influenced by your operations and outside the Scope 2 boundary. These can occur upstream or downstream from your company’s activities and are broken down into 15 categories.
The 15 categories of Scope 3 GHG emissions as defined by the GHG Protocol are:
Upstream
- Purchased Goods and Services
- Capital Goods
- Fuel and Energy-related Activities
- Upstream Transportation and Distribution
- Waste from Operations
- Business Travel
- Employee Commuting
- Upstream Leased Assets
Downstream
- Downstream Transportation and Distribution
- Processing of Sold Products
- Use of Sold Products
- End-of-life Treatment of Sold Products
- Downstream Leased Assets
- Franchises
- Investments
Scope 4: Avoided Emissions: The reduction in emissions achieved by using a company’s products or services. It highlights the positive impact of products or services; helps to quantify and communicate beneficial impacts on climate change mitigation. This is a more emerging facet of ESG reporting.
Understanding emission types is crucial for accurately assessing an organization’s materiality. Materiality determines which emissions sources or types are most significant to an organization’s stakeholders, helping them prioritize their efforts and reporting to align with their ESG goals.
Balancing Finance and Impact in Supply Chains—Understanding Double Materiality
Materiality is essentially a relevancy filter for the issues that matter most to an organization. Information is considered “material”—or relevant—if it could influence the decision-making of stakeholders regarding the company.
Financial Materiality relates to the issues that internally impact financial performance and the company’s ability to create economic value for investors and shareholders. Regarding supply chains, organizations must consider cost controls, quality controls, contract management, and schedule lead time.
Impact Materiality relates to the external impacts that a company’s activities have, including impacts on communities and the environment: air, emissions, water discharges, greenhouse gases (GHGs), etc. Regarding supply chains, organizations need to consider labor standards, anti-bribery and corruption efforts, supplier diversity, and fair trade.
Double Materiality refers to the relevance and interconnectedness of both impact and financial materiality for an organization. It involves the ways sustainability impacts performance and position, as well as an organization’s impact on wider sustainability issues.
If an organization cares about being part of an ethical supply chain, adopting a double materiality perspective will help them balance profit with equity.
VelocityEHS has easy-to-use software to help companies survey their stakeholders to determine materiality, as well as provide a centralized place to manage that and other EHS & ESG-related data. Combined with JS Held services and regulatory consultancy support, companies can take significant steps toward improving their EHS & ESG programs.
Ethical Supply Chains—Integral to ESG
Taking action to ensure an ethical supply chain involves integrating environmental stewardship, social responsibility, and strong governance practices into all stages of a company’s operations. Ensuring an ethical supply chain contributes to sustainable development and creates long-term value for company stakeholders, creating a sustainable ecosystem where businesses thrive alongside communities and the planet flourishes for generations to come.
Get Help from Velocity + J.S. Held
Through the VelocityEHS and J.S. Held partnership, businesses get access to industry-leading, award-winning EHS and ESG software and expert consultancy services that together help customers better manage their EHS & ESG programs. Korney noted in this session that a mature ESG standing comes from a mature EHS program and explained that “if you have really good EHS – environmental, health and safety – practices, that’s really the foundation for everything ESG.”
VelocityEHS and J.S. Held are here to help you achieve your EHS & ESG goals, so that your organization can lead the way in the ethical global supply chain. If you want to learn more about the ways we can help you and your business—contact us today!