Companies are under increasing pressure to improve transparency across their supply chains and introduce more stringent procurement policies covering issues including human rights, corruption, and social and environmental impacts. Whilst much of the media focus has been on retailers and other consumer-facing businesses, there is an argument that natural resources firms will be more impacted by this trend, as regulations such as the Dodd Frank Act in the US — which requires companies to report and make public the use of “conflict minerals” from the DRC or adjoining countries in their products — come into force.
Yet, research by Aura Financial has found that over half of FTSE-listed natural resource companies did not provide any significant disclosure on their supply chains in their 2013 reports. Only one-third of companies provided meaningful reporting on their supply chains, showing a commitment to transparency, explaining the potential risks and the importance of supply chain management to the business and outlining the steps they were taking to address potential issues. This is despite recent changes to UK company law, requiring all UK listed companies to consider the relevance of non-financial issues to their business and identify, evaluate and disclose in the strategic report those issues which they deem to be material to the development, performance or future prospects of the business.
Why are the majority of natural resource companies still not reporting on their supply chains? Is it because they do not regard supply chain issues as material? Or is there a lack of awareness of the importance of supply chain management to their businesses or a lack of resources to manage supply chain issues?
In our view, many companies have not yet fully recognised the potential impacts of supply chain issues. Those companies that do mostly focus on financial and operational risks, such as costs and efficiency. However, there are a number of broader issues which can significantly impact company development and performance, including:
- Reputation — Major breaches of ethical behaviour in the supply chain, such as cases of bribery and corruption or child labour, can have a negative impact on a company’s reputation.
- Disruption of supply — if suppliers are not required to enforce ethical and responsible business practices, employee and industrial relations could be affected, potentially leading to interruption of supply.
- Broader economic contribution — building good relationships with local communities and making a positive contribution to regions where they are operating is a key issue for natural resource companies in maintaining their license to operate. Engaging with and developing local suppliers can help to strengthen relationships and contribute to local communities, for example by creating jobs and developing local infrastructure.
- Customer expectations — customers are increasingly demanding that companies demonstrate ethical behaviour throughout their supply chains; for example, HP and other manufacturers now only use smelters that have been certified as conflict-free.
- Legal penalties — with the advent of regulations, including the Dodd Frank Act and proposed EU regulations on conflict minerals, companies may face fines and other sanctions if they do not comply with legal requirements.
We therefore believe supply chain management is a material issue for most, if not all, natural resource companies. Not only are there significant risk issues to consider, there are also opportunities for companies to demonstrate their commitment to the communities where they operate. And in the long run, it is possible that companies could generate competitive advantage from adopting an industry-leading position.
So what should companies be doing to ensure responsible supply chain management?
As a starting point, they need to engage directly with their suppliers and make sure they understand their responsibilities by setting out expectations in key areas, including ethics, environment, safety and human rights. This can be challenging, as many suppliers are small companies with limited resources. Companies should be willing to support suppliers in meeting these standards - for example, through training programmes. Companies also need to put systems in place to monitor and assess suppliers to ensure they are complying with their requirements and upholding responsible business standards, reporting their progress to their shareholders and wider stakeholder audiences. For companies to deliver widespread improvements, their programmes must also be scalable and that’s where collaborative supply chain platforms such as Sedex can help.
This post first appeared on the Sedex blog on January 28, 2015.