Supply chain due diligence is crucial to understanding risks and opportunities associated with ethical, legal and sustainable practices, as well as managing your climate change (both physical and transition) related vulnerabilities. However, traditional business due diligence windows will rarely accommodate a robust assessment of a company’s supply chain owing to its multi-tiered nature and complexity, and likely absence of reliable and consistent dataset unless the target business has a high ESG maturity.
Understanding how this can be navigated is important for risk management and value creation. To prepare for the next transaction it is advisable that supply chain due diligence commences during the investment period and is incorporated into the strategic and operational efficiency of the business using the following ten step guide:
1. Define Objectives and Scope:
Start internally, clearly define the objectives of supply chain due diligence to address ever present transparency and visibility challenges. What are the specific goals and risks the business is trying to mitigate? Define the scope of the assessment, including the geographical regions, tiers of suppliers, and specific areas of focus (e.g., environmental impact, labour practices, regulatory compliance).
2. Supplier Mapping:
Poor visibility of suppliers beyond Tier 1 (direct) requires development of a comprehensive list of all suppliers, including those below Tier 2 (indirect) - identifying all the organisations that play a role in your supply chain.
3. Risk Assessment:
Identify and assess various types of risks associated with the suppliers, which can include financial, operational, reputational, and compliance risks which is complicated further by multiple jurisdictions. Categorise risks based on their potential impact and likelihood of occurrence and address suppliers that are incompatible with your ESG strategy.
4. Supplier engagement:
Collaborate with suppliers to address identified issues and risks, working together on corrective actions and continuous improvement initiatives, jointly addressing challenges. Meaningful engagement will help suppliers to start their own ESG journey, moving beyond the ‘just in time’ and quality metrics, in turn strengthening your business resilience whilst addressing ESG factors outside of your direct control.
5. Data Collection/ Verification and Compliance with Regulations:
ESG data complexities can hinder progress on ESG roadmap. Collecting and analysing relevant data that is material to identified objectives minimises effort and supplier fatigue that can lead to litigation. This may include environmental reports, water/energy uses, labour practices, compliance records and product safety/stewardship standards. Utilising digital solutions in data collection improves transparency, simplifies verification of the accuracy and authenticity of the provided dataset, simplifies reporting and improves traceability.
6. Ethical and Social Responsibility:
Assess suppliers' commitment to ethical practices, such as fair labour conditions, human rights, and community engagement. Evaluate their social responsibility efforts and policies.
7. Environmental Impact:
Evaluate the environmental impact of your supply chain, including carbon emissions, use of non-renewable resources and waste generation. Encourage sustainable practices, circular economy principles and reduction of environmental harm.
8. Responsible Communication:
Using an experienced team leverage ESG marketing value whilst maintaining clear and transparent communication with stakeholders and regulatory bodies about your supply chain practices and performance. Make sure there is a credible plan to back up any sustainability claims made. Avoid vague language to minimise risk of controversy, reputational or possible litigation risk.
9. Continuous Monitoring, Remediation and Accountability:
Implement a system for ongoing monitoring of your supply chain and associated potential risks and opportunities. Stay ahead of regulatory development and industry best practices by sharing your progress with industry peers and adjust your due diligence process accordingly. Define consequences for suppliers that consistently fail to meet your standards and implement a mechanism for remediation and improvement plans.
10. Review and Adapt:
Regularly review and adapt your supply chain due diligence approach to stay aligned with changing business conditions, regulations, and stakeholder expectations. Supply chain due diligence is an ongoing process that requires commitment, resources, and collaboration between organisations and their suppliers to ensure a responsible and sustainable supply chain.
Proactive supply chain management is critical for modern businesses seeking to reduce costs, minimise risks, enhance customer satisfaction and advance business resilience in a rapidly evolving marketplace. Hopes that the business size will keep you below the regulatory radar could be quickly dashed by requirements from your clients. By anticipating challenges and leveraging data-driven insights, organisations can build more efficient, resilient and adaptable supply chains.
Authored by Tomas Sys
UK M&A ESG Advisory Lead at Ramboll, and member of the BVCA Excellence in ESG 2023 Awards judging advisory panel