Towards a more sustainable supply chain

Why adopt a firm approach?

The movement started with top-tier suppliers (direct suppliers), as Apple experienced when labor violation scandals by their direct suppliers (such as Foxconn and Pegatron) occurred in China[1]. Tier 2 (suppliers’ suppliers or companies that subcontract to direct suppliers) and tier 3 suppliers (suppliers or subcontractors of tier 2 suppliers) practices are henceforth under close control. Indeed, the weakest link in the supply chain is often the more distant one, so lower-tier suppliers appear as the riskiest in a global supply network.

Consequently, outsourcing companies can find themselves involved in high-profile ethical scandals, where they may even be unaware of the existence of their distant partners. In 2013 for instance, the Rana Plaza collapse in Bangladesh strongly affected fast fashion brands’ reputation regarding their upstream lower-tier suppliers’ factory malpractices. The same year, global pharmaceutical firm Sanofi discovered at its costs that horses used to develop medicines were fraudulently resold for human consumption downstream of its supply chain.

Yet, even though intangible, brand reputation is often the most important asset on the corporate balance sheet. Strategies based on outsourcing procurement are supposed to enable lower wages and input costs. But they can ultimately create reputational costs that offset these offshore advantages. After having engaged in a “race to the bottom” to secure their market share, multinationals increasingly engage in a “race to the top” to preserve their competitive advantage regarding social and environmental responsibility.

In addition, lower-tier suppliers globally exhibit passivity[2] in addressing labor and environmental standards, for several reasons: unawareness of sustainability requirements, tier-one suppliers’ lack of proactivity, invisibility for public scrutiny, and thus very low risk perceived of being penalized for non-compliance.

How can we regulate to reinforce standards throughout the upstream supply chain?      

Even if most corporations adopted codes of conduct and commitments for their entire supply chain, they remain under-implemented. The World Benchmarking Alliance’s Social Benchmark Report 2024[3] reveals that 90% of the world’s 2,000 most influential companies assessed not even being halfway to meeting fundamental societal expectations on human rights, decent work and ethical conduct over their entire supply chain. Notably, only 3% of companies ensure the payment of a living wage in their supply chain, and the same proportion meet the International Labor Organization’s minimum standards on working hours.

To enhance effective enforcement, a growing cross-sectoral regulatory framework aims at reframing existing corporate commitments and international soft laws (UN’s Guiding Principles on Business and Human Rights, OECD’s Guidelines for Multinational Enterprises) as mandatory obligations. France paved the way in 2017 with its law on the duty of vigilance, followed by the German Supply Chain Due Diligence Act (LkSG) in 2023.

At the European level, the Corporate Sustainability Due Diligence Directive (CSDDD) adopted in April 2024 will introduce comprehensive mandatory human rights and environmental due diligence obligations, with significant financial penalties and civil liability. It will also create a new obligation to adopt and put into effect a climate transition plan, as well as a requirement for companies to report on their due diligence processes.

The CSDDD is based on the assumption that “When companies take voluntary action, they focus on the first link in the supply chains while human rights and environmental harm occurs more often further down in the value chain.”[4]  Its extensive sub-tier supply chain approach will require that companies visualize, monitor, and actively investigate their entire multi-tier supply chain network, with the risk of facing sanctions. The CSDDD, based on a phased-in approach depending on companies’ turnover, will apply not only to EU but also to non-EU companies with activities in the EU.

As laudable and promising as these new regulations may be, they remain controversial, especially for non-UE firms such as in the United States[5]. 

How being proactive beyond regulatory requirements?

In addition to the legal multinational arsenal, corporations should proactively extend their code of conduct beyond first-tier suppliers, ideally in partnership with industry organizations to harmonize standards at the sectoral level. It could notably include verification requirements for lower-tier suppliers, mapping of the supply network, and training obligations. To be contractually binding and thus ensure effective compliance, this extended supply chain due diligence should provide for penalties and be embedded into their tier-1 contracts.  

Beyond the binding framework, incentive and flanking measures could be implemented towards first-tier suppliers: resources sharing, training and peer-learning programs, survey of practices, rewards for cascading requirements in the upstream supply chain…

Two key points appear critical to unlock internal and external stakeholders’ commitment:

• Focus on the procurement function: train and reward procurement officers on sustainability issues including suppliers’ procurement personnel and include social and environmental criteria for preapproved lower-tier suppliers.
• Empower suppliers, to develop their capabilities to independently comply with corporate guidelines and ensure their own suppliers’ compliance.

Finally, the strengthened lower-tiered suppliers' compliance with CSR standards is neither the unique responsibility of corporations, top-tier or lower-tiered suppliers… nor that of sectorial organizations or national and federal governments. A more sustainable supply chain is the complementary responsibility of all of them all together! 

Author : Alice C., People4Impact Expert

As a freelance writer and advisor, Alice Carré-Seemuller helps organizations committed to a more sober and resilient world to gain visibility and credibility. Her main areas of interest are circular & regenerative practices, soil health & sustainable food, climate change awareness & advocacy. After a 15-year experience as a senior civil servant in French local governments, she received a certification in Circular economics awarded by Harvard University.    
 

[1] Cole, Nicki Lisa. iPhone or iExploit? Rampant Labor Violations in Apple’s Supply Chain. Truthout. August 25, 2016. https://truthout.org/articles/iphone-or-iexploit-rampant-labor-violations-in-apple-s-supply-chain/

[2] Verónica H. Villena, Dennis A. Gioia, On the riskiness of lower-tier suppliers: Managing sustainability in supply networks, Journal of Operations Management, Volume 64,2018. (PDF) On the riskiness of lower-tier suppliers: Managing sustainability in supply networks (researchgate.net)

[3] Social Benchmark 2024. World Benchmarking Alliance. July, 2024. https://assets.worldbenchmarkingalliance.org/app/uploads/2024/06/SB-2024-Insights-Report_28June2024.pdf

[4] Towards a mandatory EU system of due diligence for supply chains. European Parliament. 2020. https://www.europarl.europa.eu/RegData/etudes/BRIE/2020/659299/EPRS_BRI(2020)659299_EN.pdf

[5] The EU’CSDDD usurps the role of US fiduciaries. Responsible Investor. February 5, 2024. Comment: The EU's CSDDD usurps the role of US fiduciaries (responsible-investor.com)