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Quality Digest

Management

Supply-Chain ESG Risk Surges in Western Markets

Human rights violations on the rise in US, Europe

Published: Wednesday, July 19, 2023 - 11:00

(ELEVATE: Hong Kong) -- ELEVATE’s biannual risk report, compiling data from 20,000 global supplier audits, finds that nearly half of all sourcing countries are now considered a “high risk” of supply-chain ESG violations.

The U.K., Germany, Portugal, and Italy are now ranked as high risk from the most critical forms of supply chain ESG violations, showing high risk for critical supply-chain labor indices.

The states of Texas, Florida, and New York now have a higher degree of exposure to forced labor risk than Pakistan, India, Thailand, and Indonesia.

The “Supply Chain Environmental, Social, and Governance (ESG) Risk Ratings” report has found that Western sourcing markets have shifted away from their lower-risk classification, with forced labor identified as a key contributor to an increasing risk. The U.K. and U.S. are seeing higher risk for critical violations—in part due to a rise in the exploitation of foreign migrant workers.

The report, published by sustainability specialists ELEVATE, an LRQA company, is grounded in 20,000 global supplier audits conducted annually, with more than 45 million data points derived from on-the-ground site visits collated in ELEVATE’s data analytics solution, EiQ.

The data demonstrate that nearly half of sourcing countries are now considered “high risk,” meaning that the country is more likely to experience risk events that stand in violation of supply-chain ESG governance frameworks, including local and international law. These could range from finding evidence of environmental degradation to the use of child labor.

The U.S exhibited a decrease in every key labor index, maintaining a high-risk classification in the forced-labor index in particular.

For supply chain ESG violations associated with several of the most critical forms of ESG violations—forced labor, child labor, freedom of association, and wage-related violations—the U.K., Germany, Portugal, and Italy are now ranked as “high risk” as well. The U.K. saw its forced-labor index decrease by 58% during the last year, which coincided with the country welcoming refugees, particularly from Ukraine, who can be more susceptible to forced labor.

Kevin Franklin, managing director advisory at ELEVATE, says, “The current geopolitical, economic, and legislative climate has made it increasingly difficult for businesses across the globe to be confident about ESG risk in their supply chains. Even historically lower-risk Western markets have started to slip. It’s now clear that simply homeshoring or nearshoring manufacturing in countries previously thought to be safe from egregious ESG risks isn’t enough.

“Systematic and proactive supply chain risk assessment, monitoring, and management should be applied in all sourcing locations to avoid negative business impacts and trade disruption,” he says.

Adding to the increased risk of sourcing is a decline in audit transparency. Countries such as Vietnam, Thailand, Indonesia, India, China, and even Italy have all become less transparent since the pandemic, with auditors being unable to access accurate information and make conclusions from site visits. The decline in transparency relative to prepandemic levels has complicated the ability of companies to govern higher risk levels, with suppliers in 50 sourcing geographies less transparent than in the previous year.

J. P. Stevenson, director of customer success, ESG analytics at LRQA, says, “Transparency is key for supply chain audits. Deception and sharing of falsified data not only render risk assessments ineffective but also mean that serious violations can go unidentified.

“To build resilient supply chains, being able to see, manage, and mitigate risk exposure is essential,” he says. “Through responsible sourcing programs and insightful data, businesses can partner with suppliers that can meet the sourcing requirements that include critical ESG performance.”

You can download a copy of the 2023 Supply Chain ESG Risk Ratings report here. For more about ELEVATE, visit its website; you can learn more about LRQA here.

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