View on ’22: Managing ESG risk in the supply chain

The past two years have made us all think about risk in a more personal, societal and global way, says Katie Lennon, head of ESG, UK & Lloyd’s, at Axa XL.

The COVID-19 pandemic has brought untold human tragedy and huge economic disruption across the world. As well as the direct impact, it’s has made us all look at the way we live, work and interact in a different light.

As a result, Environmental, Societal and Governance (ESG), already a board-level issue, has become an even more important factor in the way stakeholders view and interact with companies across all sectors. As we look ahead to 2022, addressing risks in a way that not only satisfies ESG goals but expediates them will be a key differentiator for companies. And the dangers of neglecting these risks will likely have much wider reputational consequences.

Against this backdrop, supply chain risk – which has been near the top of most companies’ risk registers for many years – has crept further up the agenda. The impact of the pandemic, coupled with rising geopolitical concerns, have once again highlighted the interconnectedness of, and potential pinch points in, many organisations’ supply chains.

The first lockdowns had an immediate effect on supply chains. Labour shortages caused by restrictions on the movement of people lead to reduced availability of certain raw materials and goods, while the urgent deployment of containers, ships and trucks to transport vital supplies meant they were diverted away from transporting non-essential supplies.

All this highlighted both the complexity of supply chains and the potential risks within them. And yet, supply chain risk is by no means a new phenomenon. Risk managers have long worked hard to better understand their organisations’ global and increasingly complex supply chains. This is an ongoing – and ever evolving – piece of work for risk professionals.

But with ESG considerations rising up the corporate and public agenda – it’s no longer enough just to identify and mitigate potential bottlenecks or weak links in supply chains. Knowing who your suppliers are and their ESG credentials – in all tiers of the chain – has become increasingly important from a reputational perspective.

Reputation is a modern company’s most valuable intangible asset. And in today’s climate, stakeholders at all levels within – and outside of – organisations are thinking ever more closely about the ethical standards of the companies they work for, buy goods from, transact with and have shareholdings in.

Companies need to be able to demonstrate that not only are their supply chains robust and well understood, but that the players within those supply chains adhere to the ESG standards and commitments that the company promotes and that its stakeholders expect.

Those who fail to do so stand accused of Green- or Social-washing – that is, of providing a false impression or misleading information about how their products are more environmentally or socially sound than they really are – which has already been witnessed in several high-profile cases in the media.

Risk managers have a vital role to play in working to understand the various moving parts within their companies’ supply chains, ensuring that those suppliers do not give them exposure to otherwise precluded ESG risks and preparing crisis management plans in the event something goes wrong.

When done right, supply chain management can actually enhance a company’s ESG objectives. And the insurance industry can play an important role in that too, by not only helping risk managers to understand supply chain risks but by recognising good ESG behaviours.

As we stand on the threshold of a new year, the world remains full of uncertainties. But by working to understand supply chains and to integrate ESG into every level of their organisation’s business, risk managers have an important role to play in helping companies, and society as a whole, to face the challenges that may lie ahead.

Reputation is a modern company’s most valuable intangible asset. And in today’s climate, stakeholders at all levels within – and outside of – organisations are thinking ever more closely about the ethical standards of the companies they work for, buy goods from, transact with and have shareholdings in.

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