Enabling socially responsible sourcing throughout the supply chain

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Knowing where products come from, and being sure they were produced fairly, should be a simple matter of tracing goods back to their source—but the nature of today’s complex global supply networks means ethical sourcing can be difficult to guarantee.

The growing drive across industries to become more sustainable is extending beyond carbon emissions and environmental impact to include the social element of sustainability too. Consumers are becoming concerned about issues such as living wages, labor rights, and social responsibility—and are willing to pay more for products that have been sustainably sourced. Around 60 percent of surveyed consumers would be willing to pay more for products when employee safety and no child labor are guaranteed.1Disruption and uncertainty: The state of grocery retail 2021—Europe, McKinsey, March 2021. This is the same proportion of consumers who are willing to pay more for products when packaging is minimal or made from recycled materials.2Sustainability in packaging: Inside the minds of global consumers,” McKinsey, December 16, 2020.

Regulators are more concerned too. With increasing environmental, social, and governance (ESG) regulations—such as the German Supply Chain Act, as well as child labor and modern slavery legislation—social responsibility and compliance are likely to continue their march up the corporate agenda.

And there may be even more at stake: emerging data indicate that ESG-compliant businesses have an added edge. Companies with higher ESG ratings have a 10 to 20 percent valuation uplift compared to their peers, while ESG leaders also benefit from better financing availability and terms.3Five ways that ESG creates value,” McKinsey Quarterly, November 14, 2019.

Yet to date, it’s the “environmental” component of ESG that has been at the forefront of conversation, while “social” and “governance” components have seen comparatively less attention. Transparency on these fronts can be difficult to achieve; the social elements of a supply chain can be hard to quantify, with few precedents or sources for comprehensive data collection.

In the consumer-packaged-goods (CPG) industry, these questions are increasingly at the forefront as companies evolve their strategies in a difficult economy. The stakeholder environment is complex. On the retail side, there is an opportunity for better labeling, building trust so consumers can tell easily which products are verifiably responsibly sourced. From a regulatory perspective, simply managing the increasing number of requirements can be a challenge, given that ESG regulations can cover everything from environmental impact to worker treatment and diversity and inclusion practices. As one executive said to us, “Regulations are adding to the pressure on us to create transparency along our supply chain”.

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Becoming socially sustainable

A truly comprehensive and effective responsible-sourcing strategy is rooted in a deep understanding of best practice in the social components of supply chains, as well as a robust auditing process based on a granular breakdown of the supplier base.

There are several social-contract principles that can be implemented to improve the social sustainability of companies, of which six are proving essential for responsible sourcing across the entire supplier base:

  • Treat workers fairly through mechanisms including labor standards, fair pay, safe working conditions, and protection for vulnerable workers.
  • Ensure human rights through zero tolerance policies on child labor, forced labor, unsafe conditions, and abuse.
  • Support workers’ families by adhering to labor laws and supporting a family-friendly work environment, including by offering insurance, paid sick leave, and support for migrant workers.
  • Invest in the future by supporting suppliers with guidance or coinvestments in education and training schemes to improve well-being.
  • Promote inclusive businesses by measuring diversity, equity, and inclusion.
  • Partner with suppliers to proactively improve community well-being through economic development, strategic philanthropy, and volunteering.

Adaptable benchmarks can help companies measure the progress and development of these six principles—while also providing insights on how best to improve responsible sourcing.

And while measurement is critical, so too is governance if any meaningful progress across these principles is to be sustained over time. Governance levers can improve the odds of supplier compliance across the supply chain, with three key shifts:

  • Ensuring ethical practices across the entire supplier base and managing the business with integrity.
  • Assigning responsibility for transparency and traceability to ensure sufficient transparency across the supply base.
  • Collaborating with suppliers to embed governance and tracking practices, and continuously improve business-as-usual ways of working.

To incorporate social and governance principles within their supply chains, companies can choose one of two routes. They can create their own capabilities and governance structures to gain full transparency of their supply chains, or they can partner with a certified assurance company that specializes in responsible sourcing.

Regardless of how a company chooses to ensure the sustainability of its supply chains, it is important to start the process. The decision between these two options could look different for each organization.

Option one: Manage responsible sourcing in house

While the in-house option is a complex undertaking with in-depth data requirements, it offers flexibility for the organization that’s focused more on determining its own priorities and processes. Three steps are involved in collecting and making use of the data needed to get supply chain transparency. First, building a data foundation by sourcing required data and assembling it into an architecture that a system can readily use. Then, insights can be generated by identifying risks and data gaps. Finally, reporting and steering to create transparency on responsible sourcing for cross-functional stakeholders like COOs and CPOs, who make use of KPI dashboards.

Option two: Partner with a recognized assurance company

For the second scenario, companies can partner with an accredited assurance company, leveraging the benefits of an established reputation in the market. Assurance providers can provide substantial capabilities: tight auditing and certification processes; brand recognition and associated trust; expertise when governmental regulations shift; and connections to global supplier networks, which can help establish transparency along the supply chain.

Working with an assurance partner can help develop a program of robust governance and supply chain transparency trusted by farmers and consumers. For example, the growth and distribution of a banana has several points across the whole value chain, from growers to the final point of sale, where the assurance program delivers a fair deal to growers, processors, and their families.

The case of the fair banana

Even for something as simple as an individual banana, there are multiple steps in the value chain. Each one of these steps should be considered when evaluating the social sustainability of the product. Value assurance providers can assess the full value chain, from the staff in the grocery store selling the banana, to the farmers picking the bananas in the fields, to the workers shipping the bananas from the farm through to the store, to the sales and marketing teams that promote the grocery store and its products.

Expanding social sustainability’s impact

It’s easy to think that the main virtues of socially responsible sourcing are primarily ethical, or measured mainly in increased sales for products that meet the bar. As important as those outcomes can be, they are far from the only ones that leaders are achieving. Preliminary research has found that businesses that act on social principles see a number of performance improvements on more traditional metrics as well.

Simply paying a living wage, as opposed to a minimum wage, can reduce worker turnover by 30 percent.4 Employee engagement is four times higher in purpose-driven companies.5Purpose, not platitudes: A personal challenge for top executives,” McKinsey Quarterly, December 3, 2020. There is also a 36 percent greater likelihood for ethnically diverse companies to outperform their peers.6Diversity wins: How inclusion matters, McKinsey, May 2020.

To get their fair share of these results, CPG companies now face a choice: to go it alone and build the capabilities in-house for robust supply chain scrutiny and governance, or partner with a leading assurance provider who can provide the necessary oversight to ensure responsible sourcing. What is clear from the current operating environment is that companies no longer have the choice to do nothing at all.

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