Environmental, Social and Governance in the Supply Chain: Top Priorities and Best Practices

A company’s ongoing commitment to creating a positive impact on the environment, as well as social issues, has created a new lens in which companies are measured and perceived. Environmental, Social and Governance (ESG) has become a key indicator for investors to evaluate a company’s health and overall attractiveness. Harvard Business Review¹ recently interviewed 70 senior executives at 43 global institutional investing firms, including the world’s three largest asset managers (BlackRock, Vanguard, and State Street). This research found that almost universally, ESG was top of mind for each of these executives.

boohoo: Lessons Learned

The UK-based company boohoo, an ultra-fast fashion company, had seen continued and record growth before and through the pandemic – until a Sunday Times article⁸ published their finding of an investigation into one of boohoo’s vendor’s labor practices. The report revealed workers were being paid well below minimum or the established living wage and they did not have access to needed personal protection equipment. The report went on to find that the vendor was using mostly South Asian immigrants as their labor force, seemingly taking advantage of their status and need to work.

After the report, boohoo stated⁹ that the supplier was not a direct supplier, but a secondary one and that they would immediately discontinue their relationship with them and launch an investigation into all its suppliers.

However, the damage was done and within two days boohoo’s market value plunged 1.89 billion dollars, losing over a third of its value. Large retailers like Amazon, Next and Zalando also pulled all of boohoo’s clothing from its sites. Much of boohoo’s image and reputation had been carefully built online through influencers and social media. After the report, many of these influencers turned their back on boohoo and spoke out against the company.

Funding and Investing in ESG

Investing and funding in ESG programs have become a hot topic for many boards and executives. But there are barriers that have kept many organizations from adopting and funding an ESG plan. A survey of supply chain professionals¹⁰ found the following:

• 48% lacked data of any sort on suppliers’ ESG credentials
• 40% reported they had limited financial resources for ESG efforts
• 36% were reliant on technology not designed to comply with ESG standards

In the same survey, the top three categories of investing for an ESG program were found to be:

• Buying or building new technology
• Improving legal and compliance capabilities
• Acquiring new measurement tools for analysis

With any new regulation or governance, there will be companies that resist reporting or complying with the new ESG standards as they believe it will place too large a financial burden on them. However, an inactive or poor ESG performance record can lead to far worse repercussions. According to Bank of America¹¹, US companies in 2019 lost more than $500 billion in market value over the prior five years due to controversies related to corruption, data privacy, sexual harassment and more.

Read more in the next article of our ESG series.