Ethical Supply Chains: Building a Sustainable Future

Abstract

Garry Warhurst delves into how companies can embed sustainability and ethical practices into their supply chains, building on his earlier examination of challenges within the UK meat industry and its supply chain in the FST December 2023 issue. This article provides a comprehensive exploration of the global supply chain landscape, offering actionable insights for integrating sustainability and ethics into corporate supply chain frameworks.

On January 12, 2021, the UK government implemented business measures addressing human rights violations in China's Xinjiang region. This is a recent and poignant example of human rights concerns within global supply chains. From these measures, UK businesses needed to ensure that they were not profiting from these human right abuses and all UK businesses needed to take the appropriate action. For many businesses, this was the removal of suppliers in that region. However, what else could have been done to highlight this issue prior to UK government issuing their control measures? We will investigate this as we go. However, before this, let's look at the bigger picture regarding where the UK is getting its food from and why this is important.

According to the UK Food Security Index 2024, which was issued in May this year, the UK produces 60% of all the food we consume, which means that 40% is imported. Within figure 1, it breaks down the UK production supply ratio by food type for 2022. This shows that the UK produces most of the meat, cereal, dairy and eggs that we need. However, we only produce 55% of the fresh vegetables and 17% of the fresh fruit we consume, as the rest is imported⁽¹⁾.

Of course, there are some foods which currently cannot be grown in the UK due to our climate, (e.g., cocoa, coffee, tea and rice) and we rely solely on imports for these commodities.

As the climate changes and the planet warms up, we will see climate migration occur from the traditional growing areas, such as around the Mediterranean Sea for olives (in January 2024, we saw prices increase in olive oil in the UK due to drought in the primary growing regions), to new locations where land necessary for growing the crops we need to survive will be competing with land where we can live. However, alongside the movement of crops, comes the movement of people away from their homelands as they become too hot to live in and the work for them dries up.

Staying in the Mediterranean region, figure 2 shows the projected annual temperature changes around the Mediterranean Sea dependent on either a global rise in temperature of <2°C (Representative Concentration Pathways (RCP) 2.6) or of 4°C (RCP8.5) and this shows that if climate change is not restricted to <2°C, then the Mediterranean basin annual temperature could rise by 7°C by the end of this century, with an increase by 60% in the number of tropical nights⁽²⁾. This could force both people and agriculture to migrate from this historically significant region to new areas.

The Internal Displacement Monitoring Centre (IDMC) reported in 2023, that 31.8 million people worldwide were displaced (migrated) due to weather related incidents (floods, droughts, extreme temperatures, wildfires, etc.) with 6 out of 10 displacements being triggered by floods (19.2 million people)⁽³⁾. Alongside the floods, and as the ingredients which make up our food are predominantly grown outside, we have to consider extreme heat and the working conditions on the people working within the supply chains. The International Labour Organisation (ILO) released a report entitled ‘Ensuring safety and health at work in a changing climate’ in April 2024 and this highlighted that at least 2.41 billion workers are exposed annually to excessive heat which leads to 18,970 deaths and 1.2 billion are exposed to air pollution leading to 860,000 deaths each year (the overall risk of occupational injuries increases by 1% for every 1°C increase in temperature above 20.9°C)⁽⁴⁾.

As people move to where the work will be, we also need to consider the risk of human trafficking and modern slavery as the people who are displaced are among some of the most vulnerable in society and they become exposed to criminal gangs as criminal activity increases after natural disasters.

We now understand what some of the key issues are regarding sustainability and ethical practices, so let's see what frameworks are already in place in the UK and Europe to take action to protect workers and build in sustainable practices in the supply chain.

This needs to be present on the company website and a link to it to be in a prominent place on the homepage. This is designed to use the need to publicly report as a driver to improve the business performance, as interested stakeholders will want to know more about this key area.

Where companies are supplying UK retailers, there is a requirement to be on an online platform called SEDEX (Supplier Ethical Data Exchange) and this requires the company to complete a self-assessment questionnaire (SAQ) which details key areas of their business around ethical and environmental areas, e.g. wages, nationalities of workers, hours worked, accommodation provided, health and safety, disciplinary and grievance systems, environmental performance, etc. This is then shared with the retailers and through the platform the information is risk assessed against a set criteria, which includes an assessment on their location, and any high risk suppliers can then be highlighted. Some retailers and companies will also ask for a SEDEX Members Ethical Trade Audit (SMETA) to be completed and this covers the areas detailed within the SAQ. These audits can then be shared with the retailers and other customers to show their ethical performance. There are 2 types of audits, a 2-Pillar and a 4-Pillar audit. The difference between them is that the 4-Pillar includes Environmental and Business Ethics in more detail where the 2-Pillar only covers the very basics.

There is health & safety legislation around the world which covers safe working practices. An example of this is working in extreme heat and what temperatures can and cannot be worked in and what breaks are required to be had. For example, in Cyprus, outside work needs to stop when the temperature rises above 32.2°C for low intensity work, 31.1°C for moderate intensity work or 30.0°C for high intensity work⁽⁴⁾.

This information will cover the supply chain and allow for investors, shareholders and other interested parties to review the company's progress towards mitigation of the risks and implementing the opportunities highlighted to reduce the impact of the business on the climate. This also includes its carbon emissions report.

A new Taskforce for Nature-related Financial Disclosures (TNFD) report has been developed and this works as per the TCFD, but with the focus on nature and nature recovery. This is currently a voluntary disclosure for businesses.

Within the European Union, on 29^th June 2023, the EU Regulation 2023/1115 on the commodities and products associated with deforestation and forest degradation came into force. This now makes it illegal to sell soy, beef, palm oil, wood, cocoa, coffee and rubber in the EU if they have been sourced from an area affected by deforestation or forest degradation. With the transition dates of 30^th December 2024 and 30^th June 2025 (for micro and small businesses) to comply with the new legislation, this will ensure that the land on which these food commodities are farmed is protected.

Through the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018, companies listed on the stock exchange and large companies (over 250 employees, turnover of £36 million or more, or £18 million or more on the balance sheet) in the UK must report their location-based emissions (operational emissions). These are known as Scopes 1 (Direct emissions from owned or controlled sources) & 2 emissions (Indirect emissions from the generation of purchased energy (i.e. electricity)). However, the largest contribution to a company's emissions is normally their Scope 3 (All indirect emissions (not included in Scope 2) that occur in the value chain) emissions and this covers the supply chain. These emissions are not legally required to be reported and calculating the purchased goods and services (Scope 3 - category 1) is very difficult to get accurate. This is due to the need to obtain accurate data from the suppliers who may not be measuring their own impact.

So, we now understand some of the main legal and customer frameworks which companies need to comply with, but what systems or standards are in place to assist with this process?

There are many standards which are in place to help control and manage the supply chain and the challenges which this brings. Examples of ones which are currently in use are (note that some of the standards detailed below will cover areas of both social and sustainable requirements):

As with all standards and guidance documents, there are positives and negatives about using them and asking for the supply chain to comply with them. These all take time, resources and money to implement, moreover, for small suppliers, it can be a burden to them regarding the need for paperwork. However, these can also provide a structure to measure and control the ethical and sustainable impact throughout the supply chain. Not all the standards / guidance above can be certified. In fact, only ISO 14001, ISO 50001, BRCGS Ethical Trade and Responsible Sourcing, Global GAP and SA8000 are standards which can be certified by certification bodies from the list above.

So how can companies integrate all this information into their supply chain management systems? Let's take a look.

Firstly, the company needs to have the culture in place which is willing to embed the resources, time and money into making sustainability and ethical practices a key supply criterion. Once this is in place, then sustainable and ethical sourcing policies should be implemented, and training given to employees who make purchasing decisions. These should be based around the standards and guidance documents which have been previously mentioned.

The use of horizon scanning for ethical and climate related issues should be encouraged and incorporated into the risk assessments. There are non-government organisations (NGO's) like Amnesty International, United Nations, Médecins Sans Frontières (Doctors without Borders), Greenpeace, World Wildlife Fund (WWF) and the World Economic Forum who generate reports and information regarding human rights issues and climate risks which the world is currently facing. These reports should be considered when reviewing embedded country risks.

Alongside this risk assessment, the company should look at its own practices as to what it asks suppliers to do or need to do to ensure that they can supply them. For example, are suppliers required to pay to supply the business or forced to reduce rates when their costs are increasing? If they are, then this may lead to poor practices and ethical breaches. Therefore, the contract which is in place with the suppliers needs to be robust and suitable for both parties. Are the prices which are being offered by the supplier too low and too good to be true? If they are, then it is likely that they can only achieve these prices by cutting corners, breaching some form of legislation or ethical standard. So if it is too good to be true, then it probably is!

The use of online systems should be encouraged to share information, be that using SEDEX or other data sharing platforms like Manufacture 2030 (M2030), which allows for climate information to be shared and is a requirement for some UK retailers, or EcoVadis, which reviews the environmental, social and ethical performance within the supply chain.

However, these systems are only as good as the data which is inputted into them. Therefore, training and education around what the data is and why it is so important needs to be completed. This may be completed through supplier conferences for large businesses so that they can communicate their message or through more traditional communications for smaller businesses.

Once the risks have been identified, the systems and standards have been installed and the suppliers communicated with and trained in what they need to complete, we need to ensure that the data is verified and there are ongoing improvements and opportunities highlighted to continue to drive the ethical and sustainable agenda. These can be completed using 3^rd party certification as previously detailed, or through independent audits via consultants, insurance companies or financial institutions to ensure that the data is correct.

It is also important to note that the data will change over time and certain data, e.g. carbon emissions reporting, will need to be updated every year. Therefore, the controls and systems need to be dynamic to be able to reflect these changes. This also includes the need to handle crises which may occur suddenly, e.g. the wars in Ukraine and the Gaza Strip or the loss of crops due to climate-affected weather events.