The Global Value Chain and Due Diligence

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The Global Value Chain and Due Diligence

Carrying out human rights and environmental due diligence on the global value chain; an impossible challenge?

Human rights and green due diligence were historically an add-on, but today they represent an essential part of every corporate’s environmental and social governance (ESG) and indeed corporate social responsibility (CSR) disclosure.

That’s great for people, the environment and business, but there’s a catch. Truthfully tracing, reporting and acting for human and planetary good through diligence is tough within even simple supply chains.

When the services, labour, processes and materials that conspire to make a product span global boundaries, the global value chain (GVC) comes into play; massively complicating the equation.

GVC refers to the conveyance of materials and products between locations, often including a change of ownership of those materials and products.

The existence of GVCs where different stages in the production and consumption of materials and products of value take place in different parts of the world implies a global supply chain; engaged in the movement of those materials and products.

Every Sustainability, Procurement or Reporting Officer will immediately spot the challenges; how to meaningfully align differing global standards, governance, law and governments to get a solid ESG/CSR diligence result. Is it asking the impossible?

Due Diligence

Reuters leadership pages make a good fist of outlining the challenges, writing that the pandemic and today’s situation in Ukraine have constrained, altered and challenged even established GVCs.

Further; ‘Supply chains can expose companies to hidden and uncontrollable risk that negatively affects ESG such as depletion of natural resources, human rights abuses, top-level corruption, and more. In fact, for most global brands, their greatest exposure to falling out of ESG compliance can occur in their supply chain.’

Businesses globally are seeking ways to manage this risk and, of course, to make benign and positive profits within a globally pressurised geopolitical scenario. It’s a tough ask.

In-house is Better

This solution won’t be for every corporate, due to matters of scale, but if you can, simply moving processes and production, indeed more or less everything you can in-house is a sure-fire way to manage risk better.

When you do this, there’s less chance of coming up against the issue that part of your GVC simply didn’t bother, wish or choose to inform you of matters impacting negatively on your ownership of the end product.

Stakeholders of every description will welcome the news you’re seeking to bring every aspect of GVC more fully under an internal umbrella, and might even be willing, along with the Board and C Suite, to sign off additional money and resources to help this happen. A recommended path, for those with the scale to leverage it.

Contracting

Another potentially successful approach to managing risk against GVCs is to set up rigid contract terms. These should be regularly updated. For example, if your GVC involves rare metals or minerals sourced from potentially risky countries or administrations, determine strict contracting rules and make it plain that breaking these carries consequences.

This, one hopes, would lessen the potential for human rights mining abuses in an African State rich in ilmenite, for example, to enter into a GVC that lands a Western corporate in trouble at the annual conference, when statistics come to light showing no one bothered to stipulate contracting to avoid such abuses happening.

It mightn’t necessarily stop the rot immediately, but it’s protection for a corporate and arguably can do more in the real world to initiate the right change than engagement with a rogue administration with little intention or desire to hit the mark on diligence.

Partner Up

There are plenty of partnership programmes that can help you navigate the complex world of GVCs. One such programme is run by CDP; a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts.

CDP reckons in 2021, suppliers disclosing through its programmes cut 1.8 billion TCO2E, and saved US$29 billion.

‘Being a CDP supply chain member helps you to engage your suppliers, pinpoint risks and identify opportunities. Our 200+ members worldwide are using the program to set and achieve their science-based targets, zero-deforestation and water security targets,’ says CDP.

As the BBC is fond of saying, programmes apart from CDP are available. But big players like Nike appear happy with CDP’s work, saying, ‘Engagement with our extended supply chain and manufacturing partners has been key to Nike’s climate strategy for over a decade. We are pleased to join CDP as a supply chain member this year to further support our suppliers in reducing emissions and strengthening their climate resiliency.’

Training for staff is available too, and global account managers who have CDP’s ear to the ground across differing territories. It’s a compelling model for managing GVCs.

CDP is also in a position to outline the scale of the challenge; it says in 2021 action is not cascading down the supply chain; only 38 per cent, 47 per cent and 16 per cent of reporting companies are engaging with their suppliers on climate change, deforestation and water security, respectively.

But there is hope. A small group of companies, it says, are trailblazing a path to truly meaningful environmental action in the supply chain. Over 200 major buyers worldwide with US$5.5 trillion in procurement spend requested 23,487 suppliers to disclose in 2021.

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A Force for Good?

The International Monetary Fund (IMF), writing this April, appears to think so. It argues that more diversified GVCs could help lessen the impact of future shocks like Covid.

IMF’s data within the latest World Economic Outlook shows that dismantling GVCs is not the answer. More diversification, not less, improves resilience.

IMF argues governments can help. Reducing trade costs can help diversify inputs; ‘There is room to reduce non-tariff barriers, which would give a significant medium-term economic boost, especially in emerging markets and low-income developing countries. In addition, reducing trade policy uncertainty, and providing an open and stable, rules-based trade policy regime, can support greater diversification.’

GVC for the Future

It appears then that GVCs are something of a double-edged sword. For those corporates that manage them, they carry big risk.

This risk isn’t just about ESG or CSR. It’s about what happens when geopolitical forces rupture global supply, and hence hike pricing and cause serious headaches getting products to market.

These are the negatives. But the wider your GVC, the more choices you have when the tough times come. The IMF appears to be hinting it’s the equivalent of sharing your eggs across as many baskets as possible.

The trick though is keeping an eye on which basket is which, and knowing what the hens who laid the eggs have been eating.

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