Committing to sustainability with responsible sourcing

• In 2021, a group of consumer goods majors allegedly abetted child labor in cocoa plantations in a West African country
• In 2013, several global fashion brands were hit with fines worth millions of dollars after the collapse of a factory building operated by one of their contract manufacturers in Asia killed more than a thousand workers
• In 2010, a major electronics manufacturing contractor that served several cell phone brands was in the spotlight for allegations of poor treatment of workers, including violations of labor laws and child labor practices

Egregious supplier-related incidents such as these put the spotlight on environmental, social, and governance (ESG) concerns across the world and shaped a number of regulatory guidelines and specific regulatory acts such as the UK Modern Slavery Act (2015) and the Netherlands' Child Labour Due Diligence Law of 2020. They also led to increased demands from customers and investors for brands to practice responsible sourcing.

The International Chamber of Commerce defines responsible sourcing as "a voluntary commitment by companies to take into account social and environmental considerations when managing their relationships with suppliers." In other words, responsible sourcing is essentially about ensuring good business practices across the supply chain and minimizing any negative impact on people and the environment.

The need for responsible sourcing

Today's businesses face increased scrutiny and pressure from regulators, investors, and customers to uphold high ethical standards. Companies that don't focus adequately on responsible sourcing could expose themselves to risks, including the following:

• Exposure to fraud and corruption due to supplier's policies and business activities
• Loss of credibility among customers who care about sustainability
• Regulatory actions for violations of sourcing, bribery, or environmental laws even though such violations may have taken place in the wider supply chain
• Significant brand exposure and reputational risk
• Supply crunch when a sole source supplier faces a ban due to environmental health and safety (EHS) and/or labor rights violations
• Inability to develop low-cost, high-quality sustainable alternatives

The risks and challenges in practicing responsible sourcing

Though new regulations and customer expectations have resulted in increased adoption of responsible sourcing across sectors, several challenges limit companies' ability to scale their efforts, including:

• The high cost of sustainable supply alternatives
• Difficulties in monitoring and enforcing responsible sourcing initiatives
• Lack of alignment between internal procurement metrics and responsible sourcing goals
• Poor supply chain visibility, which can make it difficult to track supplier performance
• Supply disruptions and financial constraints due to COVID-19
• Limited resources and internal capability to run a program effectively
• Difficulty in attributing a monetary value add from responsible sourcing programs – it is seen as a cost avoidance (penal action) rather than value generation

Leading practices followed by companies to mitigate risk

In order to make responsible sourcing programs effective, companies need to follow a methodical approach that takes into account an organization's vision, its codified policies, and its engagement level with suppliers. Our analysis of leading practices shows that there are seven core components to having a robust yet dynamic responsible sourcing program:

1. A clear vision and leadership commitment to that vision: It is important that the top of the company champions the vision and objectives of responsible sourcing. This is critical to ensure that there is consistency in action and decision-making from company leaders.
2. Suitable policies and code of conduct: Codes of conduct lay the foundation for shared responsibility for improving sustainability. A supplier code of conduct, specifically around responsible sourcing, will enable companies to translate their vision for responsible sourcing into broad-level expectations from suppliers.
3. Risk assessment: Organizations must conduct a risk assessment to assess focus areas for responsible sourcing initiatives. This could depend on the nature of the products, spend exposure, country of origin of suppliers, or other bases for assessing criticality. When carrying out this exercise, it is also important to focus not just on immediate suppliers, but also on the extended sub-tier suppliers as well.
4. Screening: Screening of suppliers against any sanctions, past violations, or adverse media history along ESG metrics is a key step to ensuring greater visibility of risk in the supply chain. This can be driven at scale with procurement teams who, armed with insights from the screening process, can make quick decisions about their supplier base.
5. Self-assessment questionnaires: Companies are issuing self-assessment questionnaires to suppliers and leveraging reports from specialized rating agencies to monitor supplier performance and create reports. Organizations integrate ratings across the procurement lifecycle and use these rating agencies as a transformative tool for their teams.
6. Supplier audit programs: On-site supplier audits can uncover local practices, behavioral challenges, and opportunities for improvement that questionnaires may miss. Some industries have developed common auditing and assessment frameworks to standardize the process and avoid audit fatigue.
7. A responsible sourcing agenda that's embedded into procurement processes: The task of integrating sustainability consideration into sourcing practices is where the rubber hits the road. This includes developing processes to onboard new suppliers with strong sustainability practices, conducting periodic due diligence, and making sourcing decisions with sustainability in mind.

In addition to the above practices, networking with industry professionals to exchange notes and ideas on best practices, developing shared standards for the industry, and sharing intelligence about potential risks and challenges can have significant merit.

Impact of responsible sourcing – What is good for the planet is good for business

Research shows that companies are more likely to succeed and deliver strong shareholder returns if they strive to create value for all their stakeholders – employees, customers, suppliers, the environment, and the community at large.

Adopting responsible sourcing offers businesses multiple tangible benefits, such as:

1. Improved customer perception: According to a 2017 Unilever survey, 78% of US customers said they feel better about buying products that are sustainably produced. Consumers need to trust the firm and identify with its cause to support it and pay a price premium. As per a 2017 Cone Communication study, 87% of Americans said they would purchase a product because the company that made it supported an issue they cared about.
2. Access to a niche market: Products that are sustainably produced can claim a niche segment of the market, especially when the rest of the industry has not yet adopted sustainability.
3. Reduction of costs in the long run: An available renewable supply source can help businesses meet rising customer demand for certain products. And the cost of implementing responsible sourcing could be reduced if it integrates into upgrading supply chain management.
4. The ability to charge premium prices: Companies might be able to charge a higher price for certain sustainably produced products as customers become willing to pay a higher price for such products. According to a leading cloud-based supply-chain management solution platform, more than 50% of US consumers said that they are willing to pay a higher price for ethically sourced food and beverage products, while 45% said that they were willing to pay a higher price for sustainably sourced clothing and footwear.
5. Better availability of capital: Several banks and financial institutions are raising capital to lend to businesses that are following ESG practices. For example, more than 130 banks have signed the principles for responsible banking that the United Nations Environment Programme Finance Initiative (UNEP FI) developed to align banking practices with the responsible banking agenda.
   Responsible sourcing is an evolving area as organizations aim to balance the twin goals of profitable growth and sustainable operations. The intent of any responsible sourcing program is to walk the tightrope between these two outcomes and deliver long-term value to all stakeholders.