Supply Chain
Social Materiality:
The Importance of a Life Cycle-Based Approach

Social responsibility is an integral element of sustainable development. Since the endorsement of the Protect, Respect and Remedy framework by the UN in 2011, an increasing number of initiatives is starting to require organizations to consider their supply chain impacts when completing Sustainability Rating questionnaires (e.g., the Dow Jones Sustainability Index) or reporting to their stakeholders. The Global Reporting Initiative’s (GRI) fourth-generation guidelines (G4) added reporting on supply chain-significant and potential negative Labour Rights and Human rights Impacts into GRI's scope.

GRI G4 also put a strong emphasis on the concept of materiality as a key for choosing where an organization should put its efforts within its sustainability-related activities. G4 defines Material Aspects as issues “that reflect the organization’s significant economic, environmental and social impacts” and encourages the reporting organization to focus its reporting effort on these aspects. There is, however, an important challenge in identifying the Material Aspects. What are the issue areas in which an organization has its most significant social impacts? How can they be identified and prioritized?

Until now, nearly all social due diligence assessments have taken a single-tier, *country of origin-*based approach, which considers only the risks associated with the country in which the final production stage occurs. This truncated approach can be contrasted with a full supply chain approach, or "life cycle approach,” which considers risks across the full set of countries in which the full set of supply chain activities are distributed. The life cycle approach can also take into account the labor intensity of each supply chain process, supporting prioritization by helping companies identify where in their supply chains are the greatest concentrations of labor hours at social risk.

The European Union's Joint Research Centre has recently published a report underscoring the importance of taking a life cycle-based approach to understanding and managing social risks in support of policies and decision-making for socially sustainable development. The report conducted a macro-scale analysis of the social risk profile of EU-27 imports by combining trade statistics regarding imports from in-EU-27 and out-of-EU-27 trading partners in 2010, with country and sector-specific social risk indicator data addressing five thematic areas: Labour Rights and Decent Work; Health and Safety; Human Rights; Governance; and Community Infrastructure. It estimated the apparent social risk profiles of EU-27 imports based on consideration of country/sector-of-origin social risk data only (the truncated, country-of-origin approach), and compared these results with results from a life cycle-based social risk assessment that takes into account the distribution of social risks along product supply chains.

The study was conducted using the Social Hotspots Database, a repository of social indicator data covering 57 economic sectors in each of 225 countries, addressing five overarching thematic areas: Labour Rights and Decent Work; Health and Safety; Human Rights; Governance; and Community Infrastructure. These indicators were developed based on the recommendations of the UNEP/SETAC Guidelines for Social Life Cycle Assessment (UNEP/SETAC 2009), the ISO 26000 Guidelines for Social Responsibility (ISO 2010), the Global Reporting Initiative (GRI) G3 Guidelines, (GRI 2006) and the Global Social Compliance Programme (GSCP) Reference tools (GSCP 2012). The indicators in turn are transparently based on over 200 sources of data. The Social Hotspots risk tables themselves are able to support country-of-origin assessments, but they are not limited to this. By being linked with a Global Input-Output model derived from the Global Trade Analysis Project general economic equilibrium model, the full Social Hotspot System also enables life cycle-based, full supply chain assessments social risks.

The EU report demonstrates that it is now possible for organizations to harness and benefit from a life cycle approach in performing social risk due diligence, and it illustrates how doing so provides crucial insights regarding the materiality of social sustainability issues.

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