ESG and the big supply chain clean-up

An era preoccupied with responsible corporate citizenship has forced companies to look at themselves from every angle of ESG. Great gains are being made as a result, with businesses pledging to clean up their own acts. Now, stakeholders are pushing for more, and major businesses are expected to wield their significant influence to improve the sustainability of their entire supply chains.

This key theme was in focus as Hudson Sandler joined some of Russia’s leading industrial companies on a recent webinar hosted by IHS Markit to discuss supply chain ESG risks and opportunities and how issuers need to take these into consideration.

Growing pressure to ensure their supply chains are sustainable and responsibly managed is being driven from one end by final consumers. According to WWF, online searches for sustainable products have increased about 70% globally over the last five years, while a recent report by The Carbon Trust found that two thirds of end-consumers want to understand the climate footprint of manufacturing supply chains and would welcome carbon labelling.

Consumer demand for more sustainable products generates a knock-on effect up the supply chain, as manufacturers are forced to source more responsibly produced raw materials; the CDP recently reported around a 25% jump in manufacturers asking their suppliers to report environmental data.  

For investors, supply chains are also an explosive issue. We saw this with Boohoo, one of the biggest fashion retailers in the UK, which in July last year had $500m wiped off its market value during one day after labour abuses were revealed in its factories. This was a real learning experience for international investors, as Boohoo had previously been rated in the top 20% of companies for ESG and had an AA rating from MSCI, with its shares held by 20 ESG funds. But, Boohoo had not declared its suppliers or joined the Ethical Trading Initiative.

Today, investors no longer follow a tick box approach; they want evidence of real improvement.

We discussed the issue with Severstal, a leading vertically-integrated steel and mining company, and En+ Group, the world’s largest supplier of low-carbon aluminium. These two industrial giants shared their insights from different perspectives.

Olga Kalashnikova, Severstal’s Head of Environment, described how companies must deeply analyse their own supply chain to ensure all of the services and materials they are consuming are being managed in the most sustainable way. Anna Retivova, En+’s Head of IR, described how, as a major supplier, raw materials producers can contribute to creating a sustainable supply chain for the manufacturers they supply.

Olga explained how Severstal works with its suppliers across the supply chain to reduce their overall environmental impact and improve labour standards. For example, Severstal is working to integrate its strict safety standards into the policies of its local contractors. The company is also putting major efforts into calculating and managing its Scope 3 emissions. Through this analysis the steelmaker aims to ascertain which suppliers are contributing most to Severstal’s Scope 3 emissions so it can work with them to develop strategies to achieve carbon neutrality. This is good news for the environmental performance of a whole ecosystem of smaller businesses, but will also eventually improve Severstal’s ESG performance and attractiveness for its investors and customers.

Olga noted that a major challenge of working with the supply chain is the ability to track third parties’ data, especially when working with smaller, unregulated companies in jurisdictions where the sustainability agenda is less prominent. Blockchain has a role to play here; when combined with programmes to expand data collection, blockchain can provide a verifiable stream of information that is accessible for every node of the supply chain. 

From En+, Anna focused on the opportunity for the aluminium producer with its position at the beginning of major global supply chains. Thanks to major hydropower assets in Siberia, the company produces aluminium with the lowest ever carbon footprint. This makes it in high demand for manufacturers of vehicles and packaging looking to reduce their scope 3 emissions.

En+ has been campaigning for industry-wide commitment to disclose the carbon footprint of aluminium products through carbon labelling, as this would empower manufacturers to avoid suppliers with ‘dirtier’ production processes more easily. For the aluminium industry specifically, this could have a real impact on its collective contribution to climate change, given that aluminium produced using coal fired power has a carbon footprint approximately seven times higher than aluminium produced with renewable energy.

The theme of transparency was the golden thread throughout our discussion, which acknowledged that communications have a critical role to play in ensuring the actions taken by businesses are understood and valued. Those businesses which can demonstrate and explain simply and effectively their progress in developing sustainable supply chains will not only improve their reputations with investors, but crucially with customers too.


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