Consumers and investors demanding supply chain transparency

Consumers and investors demanding supply chain transparency

Sharing is in vogue, and not just in social media networks.

Increasingly, corporations are opening up and reporting more of their non-financial information. In 2011, only around 20 percent of the Fortune 500 reported their performance on environmental, social and governance (ESG) issues, but that jumped to 57 percent this year, according to a new report from the Governance and Accountability (G&A) Institute, which saw similar growth among S&P 500 firms.

What's more, this and other recent reports -- from research firm Verdantix and the Underwriters Lab (UL) -- show firms slow to embrace transparency are likely to suffer by losing the faith and patronage of an increasingly inquisitive and empowered consumer base. Manufacturers' supply chains used to be largely invisible and unimportant to consumers, but that is changing fast, in part because consumers both in developed and developing markets are demanding more transparency.

"Consumers are more informed than ever about what brands are responsible," says Sara Greenstein, president of UL Environment.

UL's Product Mindset report, released last month, showed the ingredients or components that go into consumer products play an increasingly important role to consumers, who respond to firms with the most transparent supply chains. "Each year, consumers are getting more sophisticated," she adds, referring to their ability to research, parse and interpret product information. "Consumers are becoming a stronger demand driver for sustainable products."

Oftentimes, concern for their own health and safety, and that of their families is what drives consumers to demand transparency. It's not simply an altruistic endeavor to understand the pedigree of the products they purchase.

Leaders in electronics

The Verdantix report focused on the consumer electronics industry and found a number of U.S. firms are leaders in supply chain transparency. "The U.S. consumer electronics firms in our research, particularly Apple, Dell and HP, are significantly more advanced in terms of regularly auditing suppliers, and importantly, in how they disclose and communicate the results of these audits with the public," says Verdentix's lead analyst on the report, Abbie Curtis. "There are social and environmental issues across electronics supply chains, and by disclosing the scale of the challenge and the actions being taken to improve standards, these firms are leading their Asian counterparts."

The most transparent of these firms go beyond regulatory compliance and perform their own audits, as well as commissioning third-party audits, to further examine and convey the environmental and social ramifications of their supply chains. "There will always be concern with audit programs that do not involve independent third parties, but in a sector where reputational risk is so high it makes business sense for firms such as Apple to build knowledge of their supplier base through conducting their own audits," she says.

Next Page:  Who leads?

Photo courtesy of Sergey Nivens via Shutterstock

Curtis notes that the U.S. lead, in terms of transparency, may not always be so strong. Asian consumer electronics firms generally source components from Japanese and South Korean suppliers, who are under stricter accountability regulations than China. "As these firms globalize their supply chains, which they are already doing, they will need to enforce standards with more rigor and disclose performance more transparently," she says of the top Chinese firms.

Looking more broadly than just the consumer electronics industry, Greenstein of UL Environment says governments play a vital role in whether companies even start down the road toward supply chain transparency. "Our data shows that country by country, where you have government regulations and incentives in place, you see a greater tendency toward [reporting] and, in fact, the U.S. lags behind China, India and Germany in that respect."

Invest with confidence

The G&A Institute, the U.S.-based data partner for the Global Reporting Initiative, has found correlations between firms that actively report on ESG issues and those firms' appearance on lists and indices of firms with strong reputations for sustainability.

Investors care about ESG reporting, as well, with asset managers increasingly considering ESG reporting when they make investment decisions. A November 2012 report from the U.S. Social Investment Forum found a 22 percent increase in this practice since 2009. 

Taken more broadly, all stakeholders, including consumers, are putting sustainability considerations into their personal investments. Louis Coppola, senior vice president of the G&A Institute, says evaluating stakeholder engagement is a key starting point for companies looking to boost the transparency of their supply chains and devise a strategy for increasing and improving sustainability reporting.

"When we start working with a new company, I ask them to look at where they are in terms of their competition," Coppola says. "And then we do a sustainability materiality process, which is going through a list of issues that the company is involved in." These could include issues pertaining to environmental impacts but also social and human relations issues.

This starts with a consideration of all the firm's strengths as well as weaknesses, as they pertain to these issues. "You take wide view," he says. "Will global warming put their factories under water due to rising seas? Are there opportunities or strengths that they can take advantage of when it comes to these issues?"

From there, G&A works with the firm to locate points of leverage, to identify its greatest strength and areas of opportunity. Following this internal discussion, the company plans a strategy for stakeholder engagement. This might include a partnership with an NGO, or a process for employee outreach and opening lines of communication with consumers.

"For consumer-facing brands," he says, "consumers are definitely driving more transparency."

But even many companies that do not interact with consumers directly are moving toward more supply chain transparency at the behest of their customers. Walmart and Coca-Cola are examples of firms that have required more reporting from many of their suppliers, as a function of sustainability reporting or specific programs, such as packaging waste reduction or water conservation.

Coppola's offers this simple advice for firms that are lagging behind in terms of transparency and want to improve their reporting chops: "Look to the leaders."