The Benefits of Ethical Supply Chains: Putting Ethics Over Profits

The Benefits of Ethical Supply Chains: Putting Ethics Over Profits

22 June, 2021 - The Purpose Index · Organisational Purpose

TLDR:

  • Many supply chains are vulnerable, unsustainable, and unethical
  • Building an ethical supply chain can lead to more profits
  • In today's interconnected and transparent world, organisations must seek ethics over profits to stay relevant and in business

Doing Business in A World of Transparency, Accountability, and Ethics

The business world of today is more interconnected than ever before. Every business action is under scrutiny, with stakeholders from customers to investors expecting transparency and alignment from organisations. Businesses must show their stakeholders that they care about the same things, be it environmental justice, income equality, gender discrimination, and modern slavery.

A business must now win the trust of each consumer by demonstrating—not just saying—that they have good CSR and ESG policies in practice. Industries are now taking slow and steady steps in the direction of a more ethical approach towards sourcing, managing, and growing their supply chains.

Major Concerns with Supply Chains

Modern slavery is perhaps one of the key things that springs to mind when thinking about supply chains. Around the world, organisations utilise individuals to grow, create, and assemble their products; from electrics to fashion, from factory jobs to fieldwork, many ‘employees’ are just children, and many work on a pitiful wage, keeping them trapped in poverty.

The British Government has previously stated that businesses have a “vital” role to play in modern slavery:

Modern slavery is a brutal way of maximising profits, by producing goods and services at ever lower costs with scant regard for the terrible impact this has on individuals.

How should businesses respond? They must “not be knowingly or unknowingly complicit in this horrendous and sickening crime.”

Another huge issue is that of environmental damage through business production. From air pollution from transport and factories to water pollution from product development (such as textiles, technologies, and food), each product holds a carbon footprint. Consumers care, and they want to know what businesses are doing to offset this damage.

In an age of transparency, this places direct responsibility on businesses to know their supply chains better than anyone else. Just as a board member may be removed for sexual misconduct, consumers increasingly look elsewhere when businesses are proven to be connected to unsustainable supply chains.

Vulnerabilities in the Supply Chain

Covid-19 has made it quite clear that many supply chains are at risk of crumbling. A workforce that is shut indoors for months and mounting pressures on governments to bolster stagnant economies, added to dangerous working conditions and growing poverty gap threaten supply chains worldwide. Consumer markets changed spending tactics, rushing to buy toilet roll, bread, and milk in some cases and heading to electrical shops to set up home-offices in others. Supply chains across industries struggled to meet demand and protect their workers as consumer needs ebbed and flowed.

Astute organisations are already taking the steps to protect themselves from these threats to their business. The journey to do so requires active review and implementation of ESG policies.

What Is an Ethical Supply Chain?

An ethical supply chain is one where basic standards of ethics and sustainability are met. Workers in the supply chain must all be paid a fair wage in a safe and respectful workplace. This means that their human rights are being protected and upheld through regulated working hours and they have access to clean and safe working environments.

Beyond kindness and ethical practices for workers, organisations should also take positive steps to protect the environment. Fashion retailers might implement safe water practices to stop chemicals destroying local water supplies and ecosystems. Designers can choose to travel to areas where supply partners aren’t the cheapest available, but instead have infrastructures that support sustainable growth. Any product requiring transport will have a carbon footprint that can be evaluated; what greener technologies and transportation methods could be used that have less environmental and financial cost?

Ethical supply chains will vary from industry to industry and business to business, but across the board, an ethical supply chain can only exist where an organisation cares in practice, not just in theory.

Is There Evidence of Profits Through Ethics?

Yes. There is a clear link between corporate citizenry and profitability. Deloitte highlighted two studies that demonstrate this in their 2018 Global Human Capital Trends article: Citizenship and social impact: Society holds the mirror. One study looking at purpose-focused companies found that those companies outperformed their S&P 500 peers by a noticeable difference (a factor of eight). The second study covering 22,000 investment professionals uncovered that “78% have increased their investments in firms focused on corporate and social responsibility (CSR).”

With an ethical mindset, savings can emerge in all kinds of situations. In 2010, PepsiCo discovered energy-saving opportunities that amounted to $60m. How? The organisation, along with their suppliers, undertook a programme that entailed energy assessments and carbon management solutions. Big changes led to greener practices at a better financial cost.

Ultimately, digitisation is leading to transparency, and companies are now being forced to care more about what their customer thinks of them. Even if ethics wasn’t demonstrating profitability, consumer spending and investor interest in sustainable business are dictating new ethical standards that businesses must adhere to.

The Challenges of Auditing and Changing Supply Chains

Auditing supply chains is itself a mammoth task. Organisations therefore often ask their supply chain partners to self-audit, resulting in a sea of ambiguity over standards and processes used for auditing, and concerns of fraudulent behaviour to ensure a ‘pass’ and keep the existing relationship alive.

In the face of consumers demanding change, organisations might consider to evaluate and change their supply chain. But this isn’t easy, especially if supply chains weren’t established with ethical, sustainable, and anti-slavery requirements in mind. Supply chain overhauls can take months to plan, implement, and manage. Often thousands of people are at risk of losing their jobs, and there are plenty of implications for the business too; a change in materials can result in a different product no longer loved by the consumer and delivery delays can be financially devastating. Understandably, organisations are reluctant to make such drastic, seemingly risky changes.

If It Ain’t Broke, Don’t Fix It

Many organisations therefore adopt an attitude of “our supply chain is working and it’s all we can afford”. The risks of change seem too great. They shy away from full, independent auditing of their supply partners, focusing instead on branding, marketing, and sales. Lofty carbon-neutral targets and seemingly kind and caring gestures become the primal focus of messaging, and whilst that all might temporarily appease investors, consumers, and directors, the chance of being caught out is high and the damage could be serious.

A marketing campaign blunder may be forgiven, but consumers are no longer solely interested in pointing out bad campaigns. Transparency, international communities, better communication, and a simple desire for change now drive the growing millennial and Gen-Z market force. They, like a growing number of seasoned investors, favour organisations who place ethics and sustainability at their core. As the internet continues to work to expose bad businesses and the network they operate in, organisations should seriously consider a practical route to building and maintaining an ethical supply chain for good.