Uncovering Risk in Modern Supply Chains

Supplier.io product expert Laura Noonan and Senior ESG Risk Analyst Alexandra Di Fabrizio shared insights from our recent ESG Risk Report that analyzed over 200 companies across 11 industries, revealing where these risks are most prevalent and common mitigation strategies for procurement teams.

The report identified the majority of negative impacts on a company’s reputation and financial performance originate in the supply chain. With 70 to 90% of potential risks tied to suppliers, the ability to identify and manage ESG risks is crucial. Companies can no longer afford to take a passive stance.  They must proactively integrate ESG metrics into their procurement strategies to ensure long-term risk manage, value, and resilience.

This isn’t just a supply chain issue. It also represents potential financial risk for organizations.  Alexandra, a Senior ESG Risk Analyst at Impact Analytics shared.

“More organizations are concerned with double materiality.  This means evaluating not only the financial risks that environmental and social factors pose to a company but also the broader impacts a company has on its external environment.”

 For example, a company’s energy consumption can be viewed through both lenses. From a financial perspective, high energy usage can lead to increased operational costs and potential liabilities, particularly if the company is reliant on fossil fuels subject to volatile pricing or carbon taxes. However, double materiality also requires the company to assess how its energy consumption affects the broader environment and communities. This includes the greenhouse gas emissions generated from burning fossil fuels, which contribute to climate change, air pollution, and the depletion of natural resources, all of which can have adverse effects on local ecosystems and public health. This comprehensive view of materiality is becoming a standard practice, especially in light of upcoming regulations like the Corporate Sustainability Reporting Directive (CSRD) in the European Union which require double materiality reporting.

Environmental risks in supply chains

The data shows climate change remains the most pressing environmental risk for companies today. With 73% of the companies analyzed facing material risk due to greenhouse gas emissions, making it clear that reducing carbon footprints is at the forefront of corporate sustainability efforts.

However, while climate change is undoubtedly the leading concern, other environmental risks also pose substantial threats that cannot be overlooked. These risks are often overlooked but can have severe financial and operational repercussions.

For instance, Alexandra pointed out that water risk is anticipated to have financial repercussions three times higher than carbon risk, according to a 2021 study by Barclays.

“This is particularly relevant for industries like agriculture, mining, and utilities, where water is a vital resource.” Alexandra explained.  “Water withdrawal is one of the key underappreciated risks, especially in areas where water scarcity is becoming more prevalent. Companies failing to address these risks could face severe operational disruptions.”

One of the most shocking risks came from often overlooked biodiversity. 

“55% of global GDP depends on high-functioning biodiversity and ecosystems. Alexandra explained.  Companies with suppliers who neglect these risks are not only exposing themselves to potential financial losses but also to significant reputational damage. For example, some industries rely on natural resources, where the depletion of these resources could lead to skyrocketing operational costs and increased scrutiny from both regulators and consumers.

Social risks: Diversity and labor conditions

On the social side, diversity also emerged as a major area of concern, with 71% of companies exposed to this risk. While diversity is often associated with internal company operations, its impact on supply chains is significant. Suppliers lacking diverse workforces can stifle innovation and hinder market understanding, leading to less informed and effective decision-making. This risk is particularly pronounced in industries where a deep understanding of diverse consumer bases is essential for success. The absence of supplier diversity also increases the risk of non-compliance with supplier diversity mandates. This is especially critical in the public sector, where failing to meet these requirements can result in lost contracts and significant business opportunities.

Poor labor conditions are also a significant social risk, affecting 45% of companies. These risks can manifest in several ways, including labor unrest, strikes, and production delays, all of which can lead to severe operational disruptions. The reputational damage that arises from reports of forced labor or child labor within supply chains can be particularly devastating. Alexandra highlighted. “These issues often lead to consumer backlash and investor divestment, making it essential for companies to ensure that their suppliers adhere to strict labor standards and codes of conduct.”

Alexandra shared examples from her work in the solar industry, where companies with opaque and complex supply chains have been exposed to forced labor controversies, leading to significant divestment from international lenders. These examples illustrate the far-reaching consequences of neglecting labor conditions in supply chains and underscore the importance of proactive risk management in this area.

Governance risks: The often overlooked ‘G’ in ESG

While much of the focus in ESG discussions tends to be on environmental and social issues, governance risks are also important and are foundational to the overall ESG framework. Supply chain management emerges as the most significant governance concern, with 45% of companies facing material exposure. This includes vulnerabilities such as geopolitical risks and the reliance on single-source suppliers, which can threaten operational continuity and cost efficiency. For example, if a company relies heavily on a single supplier in a politically unstable region, a sudden change in that region’s government or trade policies could disrupt the supply chain, halting operations and driving up costs. Additionally, 43% of companies face risks related to unethical business conduct, such as bribery and corruption, which can lead to severe regulatory and reputational consequences.

Proactive risk management for a resilient supply chain

 One of the key takeaways from the webinar was the importance of transparency and trust in managing governance risks. Companies need to establish strong relationships with their suppliers, ensuring that they have visibility into the entire supply chain, including tier-two suppliers. This transparency is essential for ensuring that all suppliers adhere to the same high standards of ethical conduct.

The insights shared during the webinar underscore the importance of proactive ESG risk management in modern, complex supply chains. As regulatory pressures increase and stakeholder expectations evolve along with increased supply chain disruptions, companies must prioritize transparency, collaboration, and continuous improvement in their ESG practices. By conducting comprehensive risk assessments, engaging with suppliers to improve their maturity, and implementing robust governance frameworks, companies can not only mitigate risks but also unlock new opportunities for growth and innovation.

In the words of Laura Noonan, “If you don’t know you have the risk, you can’t manage it.” This sentiment captures the essence of the discussion: the need for companies to be vigilant, informed, and proactive in addressing ESG risks to ensure the long-term sustainability and success of their supply chains.

For additional insights on suppler ESG related risk and mitigation strategies for procurement teams, watch the webinar.