Written for ESG Clarity – editorial panel contribution

Businesses are making headway in sustainable business practices throughout supply chains but more needs to be done.

Employment rates in the UK are currently at a 10-year low. Job losses around the world as a result of lockdown orders have exponentially increased, with only marginal improvements post lockdown. Increases in reports of adverse working conditions have been cited worldwide across various industries from the fashion industry to the meat industry. Some businesses have stopped trading as a result of cancelled orders from large multinationals. The global supply chains that have ground to a stop have highlighted the fragility of systems that outsource production to more vulnerable communities whilst drawing down on resources that are either finite or pollutive in nature. Investing in the solutions to these problems comes through the lens of Goal 8 (Decent Work & Economic Growth) and Goal 12 (Responsible Consumption & Production). These Goals are intrinsically linked, they are known as “enabling” Goals, as they inform and/or underpin the delivery of many of the other United Nations Sustainable Development Goals (SDGs).

Every business has a supply chain and a value chain where human and natural capital reside. As impact investors we look for those businesses with clear and evidential engagement on the issues that can potentially arise in both chains. These issues are often linked to either complexity (for example, those industries with complex, multinational supply chains), or mismanagement (for example businesses with a less stringent approach to managing the human capital within its value chain).

This year, for example, we’ve witnessed a number of well-known fashion brands caught up in issues around contracting and outsourcing key product development to emerging economies and the responsibility that then comes when demand dries up, but supply has been ordered during a global lockdown. Contracts haven’t been honoured, payments have not been made, and as a result, more fragile emerging economy communities already at risk of poor health and safety practices, have been left additionally carrying the financial burden of structurally flawed business models.

Conversely, we have seen other businesses making huge headway ingraining sustainable business practices throughout their supply and value chains. Some technology businesses have made huge progress in recent years overseeing their supply chains, often having high performing value chains where human capital is nurtured and supported. Some of these businesses have benefitted not just from the shift to online and remote, but also from an increasing number of impact driven investors recognising their improved sustainability practices and their potential to create systemic change. The same has been seen amongst some food distributors and retailers. Improvements in supply chain management and resource use have pivoted some of these businesses into the path of impact driven investors looking for those businesses at the forefront of reimagining the global food supply chain as a resilient and regenerative ecosystem. The frontline role of food distributors during the Covid-19 crisis has also increased the awareness of their positive role in the local communities they serve.

Investing in this way of course does not come without its challenges. Many companies can have complex supply chains with multiple human and non-human inputs. Tracing the relationship of companies to all these inputs requires effort and engagement. Data alone can be opaque. For example, when looking at the number of people in employment and/or jobs being created, the numbers can look good on the surface but have factors such as job dignity been taken into account? Are working conditions healthy, is pay fair and timely, are employment opportunities non-discriminatory?

Does this mean, therefore, investment into companies with complex supply and value chains should be avoided? No, but it does highlight the importance of being aware of all the pressure points and being clear in what is hoping to be achieved by investing in that business. When taking a position in a company – to work with it to improve its current approach to supply and value chain engagement – it’s important to be explicit: set clear goals and transition pathways and if these are not met, ask why. Timetables also need to be set. How long should one stay invested trying to affect change as opposed to investing in a better company and/or solution? This is the investment world beyond ESG. It’s the world of impact investing, where investors are driven by clear intent to improve society and our relationship with nature, knowing that this is good investing.

More than ever, the last six months have shown us that in order to thrive as a global community and build a future that is resilient, fair, equitable and agile we must invest through the lens of the change articulated in the UN Sustainable Development Goals (SDGs) and the Paris Climate Agreement. As an actively managed risk strategy, ESG helps us to understand the robustness and responsibility of a business’s approach to managing its inputs from its supply chains, but it’s not complete.

We must go beyond ESG to really drive the change required. In doing so we can better identify and understand those businesses who are improving their supply and value chains. These businesses will get more sustainable product to market faster and will benefit from shifting consumer and investor sentiment. Seismic shifts are beginning to happen and they revolve around how we value everything; including ourselves, our relationships with each other and ultimately our relationship with nature.