Chapter 4 Environmental and social soundness: looking beyond the immediate

Environmental and social soundness: looking beyond the immediate

In brief:

The lack of transparency is most pronounced when it comes to monitoring environmental soundness. Across all the ten elements tested that contribute to environmental soundness and transparency, for both direct and indirect suppliers, less than half report performing at optimal levels.

So typically, it goes well up until tier 3, and then after that, we can make assumptions – we can even go down up to tier 6. But, when you look at the value chain and look at where the delays are happening, or where more value is being created, 80% of the value can be driven by focusing our time on this 20% from tier 1 to tier 3 suppliers and partners.

Technology, Finance Director
USA

Figure 11: Environmental and social practices – companies aware of significant scope for improvement

The research suggests that while companies recognise the importance of ensuring that environmental standards are met throughout their supplier ecosystem, they find it difficult to monitor suppliers on an ongoing basis. Companies also report that they are better at investigating suppliers’ past performance than monitoring current performance.

Figure 12: The past is easier than the present

Respondents find it challenging to ensure that standards are continuously upheld. This is especially true for labour practices. While they believe that external ESG ratings agencies can help by conducting on-site assessments, only 38% say their companies are currently using them.

The reality is that independent third-party assessments happen at a point in time. So if you have an annual audit, everybody gets ready for that. Hopefully it’s an unannounced audit and then it can be a bit more spontaneous. But ultimately beyond audits you need ongoing monitoring and evaluation. So we’re developing a variety of tools for transparency and traceability – from advanced satellite monitoring to embedding different data layers…. we’re also the first in the world to use Google Earth Engine commercially for monitoring supply chains.

Martin Huxtable
Director, Sustainable Sourcing, Unilever

A company’s ESG rating is significantly affected by its response to external events such as the COVID-19 pandemic. Sustainalytics, a global ESG and corporate governance research and ratings agency, monitors corporate incidents – which they define as ‘company activities that generate undesirable social, environmental or governance effects.’ The agency reports that during the first half of 2020, it captured 1,270 corporate incidents related to COVID-19 alone, including occupational health and safety, quality and safety, business ethics and labour relations. These may result in downgrades to companies’ ratings, and reputational damage.²

² 'The COVID-19 incidents curve: corporate events & impacts’, Sustainalytics ESG Spotlight, 20 July 2020, accessed 23 March 2021.

Finally, according to our research, there is room for improvement in fields such as understanding supplier risks arising from climate change. Additionally, there are ways to support direct suppliers as they look to incorporate 3R (reduce, reuse and recycle) waste management strategies.

Companies should consider the environmental and social impact of their supply chain across a number of key areas. These include emissions, ecosystems and biodiversity, impacts to communities and livelihoods, worker welfare, waste prevention, recycling, pollution prevention and control, and overall climate risk mitigation These are very real risks that have the ability to disrupt global supply chains. We recommend using tools to better analyse and mitigate climate risk, for example.

Daniel Hanna
Global Head of Sustainable Finance, Standard Chartered

Top tip:

Your bank can help you with recommendations and introductions to ESG ratings agencies. At Standard Chartered, we connect our clients to credible third-party ratings providers, such as Sustainalytics, who we also refer to in order to verify our sustainable product framework.