The race to save the planet has given an urgency to corporate efforts to make and deliver net-zero carbon commitments. But for their companies to be truly sustainable, CEOs must focus not only on the E in ESG but also on the S and the G. Human rights, workplace safety, fair pay for a fair day’s work, ethical business practices—these are just a few of the social and governance issues that CEOs must address in their company and in the companies they do business with—their suppliers.
This is not just about complying with regulations. It is about fulfilling the terms of an unwritten social license to operate. But doing the right thing is hard. To help CEOs, we have identified a series of actions that they should instruct their CPO and the procurement team to take in order to address social and governance issues.
To start with, companies should set out their social and governance expectations in their supplier code of conduct, alongside their environmental expectations. They should then incorporate these expectations in their supplier contracts, establish a clear reporting process, require their own local managers to monitor the suppliers, and commission formal—and ideally third-party—audits on a regular basis.
If evidence of human-rights abuses, poor working conditions, or bribery and corruption is found, the CPO should send personalized letters to the CEOs of the suppliers, demanding immediate improvement and offering business support and training. Dell Technologies takes great care to risk assess the factories where Dell products are manufactured and assembled. It helps the suppliers take corrective action if necessary, and supports them in developing new capabilities.
In 2020, for example, Dell commissioned third-party audits for 346 high-risk suppliers in its supply chain. The auditors spent several days on-site, reviewing documents, observing daily work practices, and conducting interviews with thousands of supplier employees. To improve the suppliers’ compliance with the code of conduct established by the Responsible Business Alliance—a nonprofit organization whose members have combined annual revenues of more than $7.7 trillion, directly employ more than 21.5 million people, and manufacture products in more than 120 countries—Dell required several factories to complete bespoke programs of “corrective actions” and to put 1,439 supplier employees through “capability building” programs.
Sometimes suppliers fail to improve even after receiving substantial support. In these cases, CPOs should put the relationship on hold and review the situation. Sometimes suppliers refuse to engage in any way. In these cases, CPOs should not hesitate to terminate the relationship. Apple has done this on several occasions. The tech giant is striving to improve working conditions for mining communities around the world where it sources vital metals and minerals. As a result, miners, smelters, and refiners are expected to assess and identify risks under the terms of Apple’s supplier code of conduct and its standard for the responsible sourcing of raw materials.
In conflict zones, such as the Democratic Republic of Congo and adjoining countries, where Apple sources tin, tantalum, tungsten, and gold, suppliers have to provide re-assurance that they have not directly or indirectly financed or benefited armed groups. As part of this reassurance process, they are required to participate in traceability and third-party audit programs designed to address and mitigate identified risks. In 2020, Apple ejected seven smelters and refiners from its supply chain because they either did not meet its requirements for the responsible sourcing of minerals or were unwilling to participate in, or complete, a third-party audit.
Traceability is critical, and it can also be hard to do. Apple is committing to “one day” using only “recycled and renewable minerals and materials in its products and packaging.” Until then, it is working with ITSCI (the international tin association) and RCS Global Group, a specialist responsible-sourcing auditor. The company acknowledges that “the challenges of tracking specific mineral quantities through the supply chain continue to impede the traceability of any specific mineral shipment through the entire product manufacturing process.”
Similarly, in the jewelry industry, which also has to deal with suppliers in conflict zones, some companies are working to improve the reliability of their track-and-trace processes. The issue of conflict or blood diamonds—those that have been mined in a war zone and sold to finance a warlord’s activities—has become acute. To address this, Tiffany, the US-based jeweler, gives each diamond a unique serial number that is etched by laser onto the diamond’s surface and provides a record of its provenance. In a competitive industry, though, these actions may not be sufficiently radical. In 2021, Pandora, the world’s biggest jeweler, not only unveiled its first laboratory-grown, or man-made, diamond collection but also announced that it would no longer use mined diamonds. To do this, it is starting to redesign its supply chain.
Sustainability is no longer just about doing the right thing. Increasingly, it is about doing business, full stop. If companies ignore the principle to ‘Become truly sustainable by allying with your suppliers to meet environmental, social, and governance standards’ and fail to take appropriate actions, they had better hope that their customers—and the citizens of the countries where they do business—aren’t looking. It could spell the end, or the beginning of the end, of their business. After all, a company that is not sustainable is by definition unsustainable. This is why companies and their suppliers have a vested interest in helping each other meet all the environmental, social, and governance standards.
Reprinted by permission of Harvard Business Review Press. Adapted from Profit from the Source by Christian Schuh, Wolfgang Schnellbächer, Alenka Triplat, and Daniel Weise. Copyright 2022 by The Boston Consulting Group Inc. All rights reserved.