Six features of sustainable and ethical sourcing

It’s clear that companies need to act now to improve ethical sourcing. Many multinationals have faced scandals resulting from suppliers violating their sustainability standards, such as sourcing electronics components from companies with hazardous working conditions. Globally, 99% of the goods people buy and consume are discarded after six months. Only 1% of the materials used to produce consumer goods are used after six months.

At the same time, 45 million people are living in modern slavery – more than at any other time in history. Almost 27 million people are located in just five countries: India, China, Pakistan, Bangladesh and Uzbekistan. Given the high propensity of international supply chains to touch at least one of those countries, we can assume modern slavery continues to be present in almost every global supply chain in the world.

But, according to the Human Rights Law Centre’s evaluation of the corporate response to two years of Australia’s Modern Slavery Act, Australian companies are not doing nearly enough to stop it. The recent report, Paper Promises, makes dismal reading. In its accompanying media release, co-author and Senior Lawyer, Freya Dinshaw, noted:

“…our research indicates most companies have barely left the starting blocks. Many have published modern slavery statements, but when you drill down into the details, many aren't even at the point of identifying the most obvious risk areas in their supply chains, let alone taking meaningful action to address them.”?

If we look at ethical sourcing more broadly – human rights, social impact, carbon, biodiversity – most Australian organisations are still at what EY teams calls the “reactive” stage of sustainable supply chain maturity.

They acknowledge the importance of ethical sourcing to make their supply chains sustainable. They make public commitments to do the right thing. They require their suppliers to jump through multiple self-assessment hoops and sign up to contractual terms and conditions and a Supplier Code of Conduct. They publish reports.

However, most of this is cosmetic. Their supply chain sustainability strategy is essentially a bolt on. They may respond to a particular issue that a director has a passion for – or one that keeps coming up in a line of questioning from investors or customers. But, largely, they kick the ethical sourcing can down the road to their, often much smaller and less capable, suppliers.

As Freya and her colleagues concluded, this ‘tick the box’, compliance-based response is light years away from the meaningful supply chain action required to move the dial on sustainability issues.

So, what does it look like when ethical sourcing is embedded in an organisation’s supply chain culture and strategies?

?I know a company is using the power of its supply chain for good when I see:

1. ?Partnerships for impact – Rather than having a transactional relationship with suppliers, organisations with a truly sustainable supply chain consider suppliers as an extension of their business. They strategically select suppliers based on sustainability criteria – even when the cost is higher – and they work with (and invest in) suppliers to help them build capacity and embed a culture of sustainability. We can see this at work in a global retailer, which is striving to become a regenerative company by making philanthropic investments direct to small- holder farmers in its supply chain. This same company also operates a ‘Sustainability Hub’, providing its suppliers with resources and collaboration opportunities to support their sustainability strategies. ?
2. Radical transparency – Consumers and investors expect full and frequent disclosure of a brand’s sustainability impacts, right back to the original material source. A grocery company has published an interactive supply chain map on the company’s website showing where source materials come from. It even allows customers to look at the details of a specific supplier’s location, factories, accreditations and employees.
3. Innovation – Leading companies are investing in supply chain innovation to solve sustainability issues. For example, a global beverage company has established a supply chain innovation hub to commercialise sustainability initiatives to achieve its carbon and water targets. The company is spending up to ￡100K per proof of concept, incubating ideas centrally before deploying solutions across its supply chain.
4. Collaborative circularity – We all know the circularity concept, where waste materials and used goods are reused or resold to reduce costs and create less waste throughout a supply chain. But now organisations are considering circularity at an industry level. A beer company has not only developed a paper-based beer bottle, it has also shared this innovation across multiple industries, including with its own competitors, to advance sustainable packaging globally.
5. Full traceability – Blockchain, satellite monitoring and geolocation tracking mean it’s possible to track and trace at an incredible level of detail – and use this data to drive sustainability goals like regeneration. For example, a global consumer products company is using these technologies to achieve a deforestation-free palm oil supply chain by 2023.
6. Risk-based – Rather than taking an audit-based approach, leading ethical sourcing organisations use their deep understanding of risks to drive targeted supplier due diligence. In this way, a global snack food company used supply chain rationalisation as a mechanism to manage risk in palm oil.

Global supply chains are a primary lever for organisations to drive the change they want to see in the world. But we cannot pull this lever until we have embedded ethical sourcing into upstream design and every procurement decision. It’s time for Australian companies to put ethical sourcing at the heart of their supply chain and procurement strategies and truly become a force for good.

Disclaimer: The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.