Corporate ESG Stakeholders – Supply Chain Management – What’s in Your Supply Chain Mix?

By Pam StylesG&A Institute Fellow

The current COVID-19 pandemic has exposed countless concerns, including (global) supply chain management issues near the top of the list.

Public and private-sector professionals and officials are soon to be attempting to get economies back up and running. Following Herculean and likely imperfect restart efforts, it will be important to debrief supply chain systemic failures and risks that have been exposed during the pandemic crisis.

ESG/Sustainability practitioners may be able to offer unique vantage to assist the debrief in collaboration with company supply chain experts and management teams.

Well-established ESG tracking practices and voluntary reporting frameworks, such as GRI (est. 1997) and CDP (est. 2000), could possibly be used to expand internal information sharing and analysis to augment internal supply chain risk assessments, monitoring and oversight capabilities.

ESG reporting frameworks are not necessarily a perfect fit or infallible, however they could potentially provide existing information platforms from which to add and/or improve accessible reporting, analysis and assessment, and executive leadership observation in a multitude of strategic (multi) sourcing risk assessments and repositioning exercises to come.

As we all try to learn and make important changes going forward, important questions to ask:

What do you know about your company’s suppliers’ supply chain, their suppliers, and so on?

The Business Continuity Institute, Zurich Insurance Company and others have been raising the red flag for years that too many companies do not have full visibility of their supply chain, nor the ability to fully track components through the full vertical supply chain.

Just a few recent examples of how reality has suddenly struck some pharmaceutical, consumer products and electronics companies (the list of other sector impacts can go on):

  • U.S. Pharmaceutical supply chain dependencies on China were well known at high levels prior to COVID-19, but effectively nothing was done about it and consumers were unaware of the looming risk.
  • Consumer Products giant Procter & Gamble indicated 17,600 products could be affected by Coronavirus in China.
  • Apple is dealing with pandemic-driven supply chain and sourcing woes.

Back in 2008 PwC published a fascinating paper about German companies supply chain sourcing practices in China, in which it suggested companies take a closer look at their KPI’s.

Who should raise warning flags and influence corrective supply chain action?

Supply chains can be very complicated with many layers or tiers, all the way down to original raw materials source. Aggregate supply chain geographic risk management is surely challenging.

As a specialist at well-known Gartner Supply Chain observed, “COVID-19 should be a wake-up call to boards of directors, CEOs and supply chain leaders that being well prepared for disruptions, regardless of their cause, is not an optional extra. It is a business necessity.

Companies are learning painful lessons in the shortcomings of legal boilerplate risk disclaimer language in situations like today’s. These lessons should compel executive leadership and Boards to step-up their efforts and investment in overseeing supply chain strategy and active risk management mitigation.

Does your company regularly review and remediate identifiable aggregate risks across the company’s supply chain and associated third-party relationships?

As recently pointed out in a COVID-19 related article by another G&A Institute Fellow, Daniel Goelzer, “Internal auditors are missing key risks.” He went on to observe,

“The Institute of Internal Auditors (IIA) has released its annual survey of Chief Audit Executives. The 2020 North American Pulse of Internal Audit “reveals serious gaps in internal audit’s coverage, with audit plans deficient in key risk areas.”

“For example, the IAA found that almost one-third of respondents did not include cybersecurity/information technology in their audit plans. In addition, more than half did not include governance/culture or third-party relationships, and 90 percent did not include sustainability.”

Postulating that the professional supply chain management tools kit is loaded with granularity to boggle the mind, it is fair to suggest the possibility that the many different tools may inadvertently complicate aggregate risk assessments.

Thus, we should think about whether there might be an opportunity for ESG/Sustainability professionals to constructively share their inherently top-down vantage and tools kit to assist companies with additional angles for risk assessment and oversight.

Brainstorming how the growing mainstream ESG/Sustainability field can help:

One gets a strong sense that professional supply chain experts across the board are now committed to re-engineer their collective body of knowledge and management resources to truly understand–down to the last pharmaceutical raw ingredient source, medical gear and equipment–the geographic and geo-political risks of their companies’ product vertical manufacturing and supplies.

First, let’s acknowledge that professional supply chain experts have a lot of knowledge, skills and complex management tools at their disposal that those outside their discipline know little about.

Second, kudos to the U.S. Army Corps of Engineers for their brilliance and ingenuity. Their recent reminder to all of us that, when a problem is large and complex and a fast solution is needed, it’s worth remembering the “keep it simple” concept.

Their challenge: emergency need to rapidly expand hospital bed and critical care capacity in multiple locations across the country.

Their solution: work with the infrastructure already there – large convention centers, empty hotels, and the like – and quickly retrofit them to meet the hopefully short-term surge capacity needs.

So now let’s apply the “keep it simple” concept, to think about what infrastructure we already have that can be efficiently and effectively adapted to immediate re-purpose, constructive to supply chain risk management.

Pre-dating the world’s awareness of the coronavirus COVID-19 crisis, the Global Reporting Initiative (GRI) stated in an article published November 15, 2019, that it “recognizes that joining the dots between corporate reporting and the practical changes needed to promote transparent supply chains can be challenging.”

In that same article, GRI announced its new two-year business leadership forum to help businesses work through challenges to bridge the gap between supply chain management and reporting. Your company may already use or be familiar with the GRI reporting framework.

Specific to supply chain, you might take another look at three GRI KPI sub-series: 204 – Procurement Practices, 308 – Supplier Environmental Assessment, and 414 – Supplier Social Assessment.

GRI is the oldest and most widely recognized voluntary ESG/Sustainability reporting framework and provides a wide range of supply chain related leadership interaction. It has alliances and synergies with the ISO certification standards and CDP, among other organizations.

Hence, GRI could be a robust resource to turn to for facilitating internal supply chain risk discussion, brainstorming and improvement.

CDP, originally known as the Carbon Disclosure Project, has grown beyond carbon to include a host of other key sustainability topics including supply chain. Several germane excerpts from the CDP Supply Chain Report 2018-2019:

  • Companies’ supply chains create, on average, 5.5 times as many greenhouse gas emissions as their own operations. (This hints at the veritable iceberg of suppliers beyond the companies’ direct control.)
  • Having a single, common disclosure platform is also proving to be beneficial. Amongst program members, 63% are currently using, or considering using, data from CDP disclosures to influence whether to contract with suppliers or not.
  • Managing supply chain risks, impacts, and capturing opportunities for sustainable value creation is complex. However, the fundamental steps are common across all organizations: understanding, planning and implementing. Learning from outcomes is essential in order to deepen and broaden the value of a Supply Chain strategy.
  • This year a record number of companies submitted disclosures on climate change. CDP supply chain members made requests to 11,692 suppliers, with 5,545 responses received from businesses headquartered across 90 different countries. This is a 14% increase on the 4,858 responses received in 2017.

Taking inspiration from the U.S. Army Corp of Engineers, a serious question to ask is whether either or both the existing GRI and CDP reporting and data analysis infrastructures could be used (1) ingeniously for a foundation from which to build or expand distance and country concentration inputs to provide additional foundation for sourcing risk analysis and oversight capabilities for companies, as well as (2) to facilitate improved global commerce and public stakeholders supply chain risk awareness?

Concluding Encouragement

To ESG/Sustainability practitioners:

Your reporting frameworks, databases and analytical tools may be well-positioned for collaborative solutions to help companies identify and address deep-tier supply-chain risks — both immediate (public health/safety) and longer-term (climate change) — that can and should now rise to a higher level of scrutiny.

When it comes to Sustainability – climate change is important, but supply chain is urgent.

Pamela Styles – Fellow G&A Institute – is principal of Next Level Investor Relations LLC, a strategic consultancy with dual Investor Relations and ESG / Sustainability specialties.

News From the Sustainability Front as The Trump White House Makes Controversial Moves on ESG Issues — Actions and Reactions

by Hank Boerner – Chair/Chief Strategist – G&A Institute

February 23, 2017
Forward Momentum! – Sustainability 2017

Are you like many of us having sleepless nights and anxiety spells as you watch the antics of the Trump White House and the creeping (and similarly moving-backwards) effects into the offices of important Federal agencies that the Administration is taking over?

Consider then “other news” — and not fake news, mind you, or alt-news — but encouraging real news that is coming from OTHER THAN the Federal government.

We are on track to continue to move ahead in building a more sustainable nation and world — despite the roadblocks being discussed or erected that are designed to slow the corporate sustainability movement or the steady uptake of sustainable investing in the capital markets.

Consider the Power and Influence of the Shareowner and Asset Managers:

The CEO of the largest asset manager in the world — BlackRock’s Larry Fink — in his annual letters to the CEOs of the S&P 500 (R) companies in January said this: “Environmental, social and governance (ESG) factors relevant to a company’s business can provide essential insights into management effectiveness and thus a company’s long-term prospects. We look to see that a company is attuned to the key factors that contribute to long-term growth:
(1) sustainability of the business model and its operations; (2) attention to external and environmental factors that could impact the company; (3) recognition of the company’s role as a member of the communities in which it operates.

A global company, CEO Fink wrote to the CEOs, needs to be “local” in every single one of its markets. And as BlackRock constructively engages with the S&P 500 corporate CEOs, it will be looking to see how the company’s strategic framework reflects the impact of last year’s changes in the global environment…in the ‘new world’ in which the company is operating.

BlackRock manages US$5.1 trillion in Assets Under Management. The S&P 500 companies represent about 85% of the total market cap of corporate equities.  Heavyweights, we would say, in shaping U.S. sustainability.

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As S&R investment pioneer Steve Viederman often wisely notes, “where you sit determines where you stand…” (on the issues of the day).  More and more commercial space users (tenants and owners) want to “sit” in green spaces — which demonstrates where they “stand” on sustainability issues.

Consider:  In the corporate sector, Retail and other tenants are demanding that landlords provide “green buildings,” according to Chris Noon (Builtech Services LLC CEO). The majority of his company’s construction projects today can easily achieve LEED status, he says (depending on whether the tenant wanted to pursue the certification, which has some cost involved). The company is Chicago-based.

This is thanks to advances in materials, local building codes, a range of technology, and rising customer-demand.

End users want to “sit” in “green buildings” — more than 40% of American tenants recently surveyed across property types expect now to have a “sustainable home.” The most common approaches include energy-saving HVAC systems, windows and plumbing. More stringent (local and state) building codes are also an important factor.

Municipalities — not the Federal government — are re-writing building codes, to reflect environmental and safety advances and concerns. Next week (Feb 28) real estatyer industry reps will gather in Chicago for the Bisnow’s 7th Annual Retail Event at the University Club of Chicago to learn more about these trends.

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Institutional investors managing US$17 trillion in assets have created a new Corporate Governance framework — this is the Investor Stewardship Group.

The organizers include such investment powerhouses as BlackRock, Fidelity and RBC Global Asset Management (a dozen in all are involved at the start). There are six (6) Principles advanced to companies by the group that including addressing (1) investment stewardship for institutional investors and (2) for public corporation C-suite and board room. These Principles would be effective on January 1 (2018), giving companies and investors time to adjust.

One of the Principles is for majority voting for director elections (no majority, the candidate does not go on board). Another is the right for investors to nominate directors with information posted on the candidate in the proxy materials.

Both of these moves when adopted by public companies would greatly enhance the activism of sustainable & responsible investors, such as those in key coalitions active in the proxy season, and year-round in engagements with companies (such as ICCR, INCR).

No waiting for SEC action here, if the Commission moves away from investor-friendly policies and practices as signaled so far. And perhaps – this activism will send strong messages to the SEC Commissioners on both sides of the aisle.

Remember:  $17 trillion in AUM at the start of the initiative — stay tuned to the new Investor Stewardship Group.  These are more “Universal Owners” with clout.

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Not really unexpected but disappointing nevertheless:  The Trump Administration made its moves on the Dakota Access Pipeline (DAPL), part of the Bakken Field project work, carrying out a campaign promise that caters to the project’s primary owners (Energy Transfer Partners**) and other industry interests, S&R investors are acting rapidly in response.

The company needed a key easement to complete construction across a comparatively small distance. Except that…

  • The Standing Rock Sioux Tribe says the route would cross their drinking water source, impact their sacred sites, and threaten environmentally-sensitive areas;
  • would violate treaty territory without meeting international standards for their consent; (this is the 1868 Fort Laramie Treaty, which according to the U.S. Constitution, should be the supreme law of the land);
  • and ignore alleged shortcomings in the required environmental review (under the National Environmental Policy Act – NEPA).

These are “abuses”, and banks and financial services firms involved may be complicit in these violations by the nature of their financing, S&R investors note. Their involvement in the project financing could impact their brands and reputations and relationships with society. And so S&R shareholders are taking action.

Boston Common Asset Management, Storebrand Asset Management (in Norway) and First Peoples Worldwide developed an Investor Statement to Banks Financing the DAPL. The statement — being signed on to by other investors — is intended to encourage banks and lenders to support the Rock Sioux Tribe’s request for re-routing the pipeline to not violate — “invade” — their treaty-protected territory. The violations pose a clear risk, SRI shareholders are saying.

The banks involved include American, Dutch, German, Chinese, Japanese, and Canadian institutions.  They in turn are owned by shareholders, public sector agencies, and various fiduciaries — “Universal Owners,” we would say.

The banks include: Bayerische Landesbank (Germany); BBVA (Argentina); Credit Agricole (France); TD Securities (Canada); Wells Fargo; ABN AMRO (The Netherlands); Bank of Tokyo-Mitsubishi UFJ; and Industrial and Commercial Bank of China, and others.

The shareholders utilizing the Investor Statement say they recognize that banks have a contractual obligation with the respect to their transactions — but — they could use their influence to support the Tribe’s request for a re-route…and reach a “peaceful solution” acceptable to all parties.

As The Washington Post reported on January 24th, soon after the Trump Administration settled in, President Trump signed Executive Orders to revive the DAPL and the Keystone XL pipelines. “Another step in his effort to dismantle former President Barack Obama’s environmental legacy,” as the Post put it.

One Executive Order directed the U.S. Army Corps of Engineers to “review and approve in an expedited manner” the DAPL. Days later the Corps made their controversial decision, on February 7th reversing course granting Energy Transfer Partners their easement. This week the remaining protestors were removed from the site (some being arrested).

The sustainable & responsible & impact investment community is not sitting by to watch these egregious events, as we see in the Investor Statements to the banks involved. The banks are on notice — there are risks here for you.

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May be what is happening in the asset management and project lending activities related to the project is the IBG / YBG worldview of some in the financial services world:  I’ll Be Gone / You’ll Be Gone when all of this hits the fan one day.  (Like the massive Ogalala Aquifer being contaminated by a pipeline break. The route of the extension is on the ground above and on the reservation’s lake bed.  Not to mention the threats to the above ground Missouri River, providing water downstream to U.S. states and cities.)

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Energy Transfer Partners, L.P:  (NYSE:ETP)  This is a Master Limited Partnership based in Texas.  Founded in 1995, the company has 71,000 miles of pipelines carrying various products. The company plans to build other major pipelines — the Rover Project — to carry product from the shale regions (Marcellus and Utica) across the Northern U.S. state east of the Mississippi.  ETP LP acquired Sunoco (remember them?).

Mutual Funds – Bond Holders – other key fiduciaries with brands of their own to protect — are funding the operations of ETP LP.

Brand names of equity holders include Oppenheimer; Goldman Sachs Asset Management; CalPERS; JPMorgan Chase.  Bond holders include Lord Abbett, PIMCO, Vanguard.  There are 567 institutional owners — fiduciaries — with some 45% of ownership, according to Morningstar. Partners include Marathon Petroleum Company (NYSE:MPC) and Enbridge (NYSE:ENB). (Bloomberg News – August 2, 2016 – both firms put $2 billion in the project and related work.)

The Partnership used to have an “Ownership” explanation on its web site — now it’s disappeared. But you can review some of it in Google’s archived web site pages here: http://webcache.googleusercontent.com/search?q=cache:http://www.energytransfer.com/ownership_overview.aspx&num=1&strip=1&vwsrc=0

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We are seeing in developments every day (like these above with non-governmental strategies and actions) that hold out promise for corporate and societal sustainability advocates and sustainable investment professionals that with — or without — public sector support, the Forward Momentum continue to build.

We’ll share news and opinion with you — let us know your thoughts, and the actions that you / your organization is taking, to continue the momentum toward building a better future…a more sustainable nation and world.

Out the Seventh Generation, as the Native American tribes are doing out in the American West in protecting their Treaty lands.  In that regard we could say, a promise is a promise — the Federal and state governments should uphold promises made in treaties.  Which are covered as a “guarantee” by the U.S. Constitution that some folk in politics like to wave around for effect.

FYI — this is Article VI:  “This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land, and the Judges in every State shall be bound thereby…”