Sustainability and Ethics in Supply Chains: Current State and Progress

Presented by: Michael Bland, QIMA Director

Setting the stage of the first session of the QIMA Sustainability Conference, Michael Bland presented an overview of the current state of sustainability and ethics in global supply chains, highlighting issues specific to individual countries and industries.Highlights:

• The transforming attitudes of businesses towards sustainability

• Ethical compliance in 2016 vs. 2017: progress and challenges

• Performance by geography and industry

• Most pressing ethical issues in global supply chains

Many analysts single out 2017 as the year when CSR became truly mainstream, transforming from an optional, feel-good component to one of the top items on the agenda of businesses of all sizes. Businesses are facing increasing pressure from their consumers, governments and NGOs, who are taking them to task to ensure sustainable sourcing in their supply chains, eliminate exploitation and modern slavery, protect the environment, and basically affect positive social change on every level.Consumers are one of the strongest driving forces for ethical and sustainable business. In the US, between 70% and 90% consumers believe that companies have an obligation to address important social issues and operate in a way that benefits society and the environmentMeanwhile, governments are also taking a stance on CSR issues. Laws related to modern slavery are already in force in UK, US, France, and underway in Australia and the Netherlands. In sourcing regions, such as India and, notably, China, governments are cracking down on polluting facilities with high fines and closures. What’s the progress on the ground?Based on the data collected from 15,000 on-site audits every year, QIMA found that overall ethical scores in 2017 were 4% lower compared to 2016, with the most pressing issues being related to working hours and wages, waste management, and Health & Safety. In the compliance rankings, only a third of factories could be classed as “Green”, or fully compliant, while the remaining 67% were in need of remediation, including almost 32% where critical compliance violations were found. Performance by geography:During 2017, compliance scores notably deteriorated in China, largely due to issues related to Working hours and Wages, which are often connected to labor shortages and insufficient transparency of labor records in factories.By contrast, Southeast Asia did much better in 2017, with over 60% factories earning a “Green” ranking. A lot of this improvement can be attributed to the opening of newer facilities, where sustainability considerations have been included during planning and setup.Meanwhile, Bangladesh is showing some much-needed improvement, likely as the result of Accord and Alliance efforts. However, the share of factories requiring remediation in the medium and long term still stands fairly high at 62.5%.Turkey remains a compliance hotspot, in the light of the continuing Syrian refugee exploitation scandal. Performance by industry:Among the industries served by AI, the best performance was observed in the Electrical and Electronics industry, which tends to have better compliance compared to other consumer goods, as higher levels of technological sophistication and higher cost of outputs usually results in better-equipped and safer factories.The Textiles industry, despite having mature CSR programs, showed some deterioration of scores, but some of it can be attributed to the continuous raising of the compliance bar, with brands putting stricter requirements on their suppliers and moving compliance efforts past tier 1 facilities and further upstream.Meanwhile, the Construction and mechanical sector remains among the lowest performers – in part due to being a predominantly B2B industry and therefore seeing less pressure from consumers and NGOs. Performance by issue:The most pressing issues of 2017 were Working hours, wages and benefits (score of 6.8 out of 10), followed by Waste management (7/10), and Health, Safety and Hygiene (7.4/10).An ongoing problem in waste management and Health & Safety is the fact that many suppliers are still very reactive and tend to be unfamiliar with relevant laws and regulations. Training on risk or impact assessment can be a useful tool in encouraging suppliers to be more proactive and establish appropriate policies, controls, and education for personnel. The Takeaways:

• As companies change their sourcing patterns to optimize their supply chains, new ethical challenges emerge, especially when sourcing is moved to younger markets, which tend to be lower in cost, but also with poorer compliance record

• The apparent slow rate of progress shouldn’t be viewed as discouraging, because compliance standards are becoming more unified and more stringent, and a certain “moving of goal posts” is inevitable in a field as complex as sustainability.

• Accumulating first-hand data is imperative to objectively assess the state of sustainability and compliance. It’s especially important to follow up on previously audited suppliers and assess their pace of improvement.

• Continued cooperation and education of suppliers is paramount for continuous improvement. The best results are achieved when the buyer fosters a partnership with their supplier, and helps them understand how all parties benefits from compliance.