Mastering ESG Risks in Supply Chains: Cobalt Mining, Compliance, and Deep-Tier Visibility

The challenges of modern cobalt mining are a high-profile example of the ESG risks faced by supply chains.

The primary source of the metal used in electric vehicle batteries and other electronic products is the Democratic Republic of Congo. So-called “artisanal miners” use their bare hands to dig, wash and bag cobalt for meagre wages. 

Unfortunately, ESG risks like this are not new. High-profile brands have faced reputational damage from their supply chains over the years.

As ESG regulations intensify, identifying and monitoring risks is essential. For example, impending EU Deforestation Regulation (EUDR) rules could hinder the toilet paper industry. Under the EUDR, products such as virgin wood pulp, coffee, soy, and cocoa, would be banned if not procured from sustainable sources. Buyers must ensure they have sources that meet the new standards, which could take time for agricultural and forestry products.

In the EV supply chain, alternative sources are challenging to find. Currently, the hand-mined cobalt winds its way through the supply chain into all sorts of products, the source deliberately hidden in some cases or just lost in the maze of steps to the final use. Many companies likely source products without knowing it was sourced from a complex web of suppliers.

Dig Deeper

Although most companies focus on their Tier 1 suppliers, deep-tier suppliers represent a significant risk for ESG compliance with regulations and internal standards. However, research from risk management software supplier Resilinc shows that 80% of supply chain issues originate with sub-tier suppliers.

Even with the push for digitisation in procurement, few companies take advantage of the information from the hyper-connected supply chain to dig into the tiers of the supply base. A McKinsey report found that only 2% of companies had visibility into the risks of Tier 3 and deeper suppliers. 

In the From Insights to Impact: Driving High-Performance Procurement report from Procurious and SpendHQ,  46% of companies said they don’t have enough data on ESG and diversity, and 39% said their data is disconnected from sourcing and spend decisions.

How much influence do procurement leaders have in influencing ESG goals? A survey from consultancy Efficio found that 38% of procurement pros said that ensuring environmental sustainability was within their duties. In comparison, 40% said that social sustainability was within their purview.

Knowing your deep-tier suppliers could help you avoid public backlash and regulatory scrutiny. At the same time, knowing your suppliers could identify suppliers that may qualify as diverse suppliers or meet other ESG goals.

For many manufacturers and companies that create products, the areas with the largest footprint, such as carbon, waste, and water, are clearly part of the tier-in supply chain. Sourcing managers continuously make compromises during a purchasing event. It’s difficult to find the perfect blend of specifications, quality, and cost while also satisfying ESG and sustainability targets.

While cost is always an issue, it won’t always be the most critical dimension. The trade-offs can vary greatly by category and individual products and services. Procurement can help advise on aligning specifications and volumes to reduce cost and carbon footprint.

Some compliance requirements, such as no forced labour or toxic materials, are mandatory. Once those requirements are met, procurement teams can focus on carbon footprint reduction and other aspects of sustainability that provide value to the brand.

In the case of the EV battery supply chain, manufacturers are innovating with new battery chemistries that use less problematic minerals or sourcing minerals from compliant suppliers.

Focus on Visibility

The ability to assess, monitor and accurately report on supply chain sustainability and ethicality is becoming a critical capability, enabled by deep visibility into suppliers as part of the organisation’s sustainable and ethical business practices.

By pursuing enhanced visibility, organisations can reduce their ESG compliance risk with a comprehensive view of the deep-tier supply network.

Identify Top Suppliers

How do you manage suppliers that could put your brand at risk? Research published in Harvard Business Review revealed the top five factors that identify suppliers who are likely to improve their ESG performance

Compliance with management standards

 Factories that adhere to ISO standards like 9001 for process quality and 14001 for environmental management tend to have systems to improve working conditions than those that do not.

Lean Management

 Lean management includes standardising processes and team-based quality control. After a factory adopts the lean system, managers are reluctant to mistreat workers and may improve working conditions to keep the staff from defecting to a competitor.

Unions

Unionised employers typically have better working conditions and a dialogue to report health and safety hazards.

Time-based compensation

Moving away from piece-rate compensation generally improves working conditions. Piece-rate pays tends to focus on short-term goals for labor and management and discourages compliance that could impede production goals.

Tarnished customer brands

 Suppliers that serve brands that have had negative experiences with other suppliers’ labor practices tighten compliance in their supply chains. Your organisation could take advantage of those improvements to reduce supply chain risks.

Regular audits by independent auditors paid for by the buyer, not the suppliers, improve the odds of compliance. Announced audits can spark improvements, while unannounced visits tend to find more violations.

In some companies, the procurement and social responsibility departments operate in their own silos. Linking the supplier’s compliance with labour standards and the future business relationship will incentivise improvements

As the standards for ESG compliance heighten, procurement professionals have the opportunity to lead their organisations in achieving sustainability targets with suppliers and their own operations but also in the ‘tier-n’ value chain that potentially spans the globe.

For more insights on procurement challenges, read the From Insights to Impact: Driving High-Performance Procurement report from Procurious and SpendHQ.