It’s often said, “ If you own it, you OWN it.” In sustainability circles the expression has come to mean that if you own a product, you “own” everything that has gone into making it. That means that you bear responsibility for the impacts associated with the product.
Many companies, and especially those in the services sector, already know that their largest sustainability impacts come from their supply chain – from the products and services they purchase. In fact, for most companies, 50 – 70% of overall sustainability impacts come from the supply chain. Clearly, the risks posed to companies from those impacts need to be identified, understood, and managed.
But what are those risks? For most purchasers of products and services, they are hidden. Companies may know the suppliers in the first tier of their supply chain, but are largely unaware of suppliers in the second and third tiers (and beyond). This means purchasers likely do not know where their materials and ingredients are sourced. And risks stemming from violations of environmental regulations, and human rights or labor standards are usually impossible to see in the finished product.
This is a problem, because significant risks may lurk unseen deep within the finished product. Let’s look at just three sources of hidden risk:
1. What’s in that microchip? Maybe conflict minerals.
You will often find human rights abuses (including the recruitment and use of child soldiers) in countries with oppressive regimes, especially in conflict areas. Experts frequently point to the Democratic Republic of Congo (DRC) as the leading example of local militias and warlords using forced (including child) labor to mine the minerals that pay for their weapons. These minerals end up being purchased by middlemen and component sellers. They often turn a blind eye to the abusive human rights practices by militias that control the mining process.
These “conflict minerals” – tin, tantalum, tungsten and gold – end up in many electronic products (as well as in jewelry, automobiles, and many other products). These products (and we, as their purchasers) support conflict and human rights abuses in the DRC and surrounding countries.
In 2012, the SEC adopted a “Conflicts Minerals Rule.” It requires publicly traded US companies to report whether any of the minerals in their products are conflict minerals. Although the rule faces some court challenges, it is being gradually phased in. Companies have been working for the past few years to try to determine whether their supply chains contain conflict minerals. And that is a real struggle. A 2014 study by Tulane University found that nearly 90% of companies reviewed were unable to determine whether their products contained any conflict minerals. Not only is the supply chain back to extraction long and multinational, it is fraught with issues that defy monitoring and reliable information.
2. What’s behind that t-shirt with the company logo? Maybe slavery.
A recent report prepared for the U.S. State Department estimates that “more than 20 million” people are victims of human trafficking and forced labor (another term for what we would all recognize as modern slavery). Other estimates are far higher: the Global Slavery Index believes that there are 35.8 million people in modern slavery globally. Many of these are children.
According to an International Labor Organization (ILO) estimate, in 2014 forced labor in the private economy reaps some $150 billion in profits each year. On whose backs are those profits made? You can read about some of the people in a U.S. State Department report that survey conditions in human trafficking and tells the stories of some of these victims. If anyone needs a reason to dig into supply chain issues, these stories are quite sobering and compelling.
But it’s challenging. Long and complex supply chains that cross multiple borders and rely on many middlemen and subcontractors create a veil of invisibility. That makes it difficult to ensure that the goods and services bought and sold in our every day activities weren’t produced by modern-day slaves.
What drives forced labor also makes it more horrific. Some pretty nasty circumstances give rise to force labor and human trafficking.
- Jobs that require low skilled labor are often characterized by the “3Ds”: dirty, dangerous, and difficult. You would have to pay an empowered person a lot to do these jobs.
- Forced migrations because of civil conflict and other economic, political, or environmental conditions create vulnerable refugee populations, ripe for additional abuses. These refugees often pay high fees to be smuggled across borders for a promised job only to end up in forced labor mining and agricultural camps, or on unregulated fishing vessels. The “affordable” textiles, produce, and shrimp we purchase often come embedded with the blood, sweat, and tears of these 21st century slaves.
- Fierce competition exerting continual downward pressure on prices, leads many employers to cut costs and wages and permit abusive or dangerous working conditions to maintain profits.
- Wage withholding (wages are paid only at the end, and after deductions for subpar food and housing)
- Threats of physical violence
- Passport confiscation
- Labor brokers/recruiters with high fee (which leads to debt bondage and creates layers of separation between the workers and their employers, who often have no idea that their workers receive only a tiny portion of their paychecks)
- Insufficient wages
Sectors with significant risks:
- Electronics and Electrical Productions
- Temporary workers, particularly warehousing
- Fishing and Aquaculture
2. What’s behind those office supplies? Maybe a LOT of GHG emissions
For many companies, GHG emissions from their supply chain can account for the largest source of overall emissions (EPA estimates that 42% of all GHG emissions are derived from the production, use, and disposal of purchased materials, products and food). But because many organizations do not have the knowledge or resources to conduct a GHG analysis on their supply chain, they don’t even know the scale of their impact. As a result, emissions derived from goods and services they buy are not included in their reporting – or in their emission reductions efforts.
A recent study, Supply Chain Greenhouse Gas Inventory Meta-Analysis, dramatically illustrates this point. The study reviewed the publicly available GHG inventory reports filed by 15 local government agencies and 16 institutions of higher education. The review showed that the indirect Scope 3 emissions associated with supply chain are the largest single source of emissions – larger than the Scope 3 travel and commuting categories that many organizations focus on when doing a GHG inventory.
From the report, here are statistics on the percentage of total emissions by organizational type and emissions category:
Products with significant risk for these largely hidden GHG emissions include paper, food and produce, textiles and apparel.
4. These aren’t the only hidden risks. There are a host of others, deeply embedded in the goods, products, and foods companies purchase. Here are some of the things to look for in the supply chain.
- Greenhouse gas emissions
- Water consumption
- Resource scarcity
- Unsustainable use of timber and natural resources
- Pollution (toxic chemicals and pesticides – agriculture, cotton)
- Bribery and corruption
- Unethical standards
- Poor working conditions
- Forced labor
- Child labor
5. Challenges abound. We’ve covered a number of challenges to ferreting out supply chain risks. It’s not easy, but with more and more companies looking at these issues, new, refined, and better methodologies and tools are emerging.
Here’s a summary of the challenges:
- Supply chains are complex, highly fragmented, and usually unmanaged
- Brands outsource their manufacturing and production, in many cases to multinational providers
- Difficulty in even seeing upstream because chains are undocumented. Example from the food industry: buying beef. Where did the cow come from? It might have had many owners. It’s practically impossible to determine.
Even sustainability leaders find these challenges difficult to overcome. A recent article in Even Patagonia, global leader in many sustainability initiatives, recently reported that it found instances of forced labor buried in its supply chain. When it conducted a thorough audit of the lower tiers of its supply chain, Patagonia found that Taiwan-based mills supplying the textiles to its manufacturing facilities were using abusive “worker recruitment” practices to trap and enslave its workers.
For many, the key to working through these challenges is to partner with others in the industry to create the infrastructure that will enable companies to examine their supply chains. Industry associations are great places to begin this work. Coopetition is often the best way to crack otherwise persistent large-scale resistance to transparency and change. Many organizations have been working hard on developing these processes to make supply chain risk more transparent and manageable. In a follow-up post, we’ll take a look at the some of the more promising approaches and report on some success stories.