Why investors should face up to supply chain challenges
In a world of growing social and governance awareness it is vital investors understand and manage their exposure to supply chain risks, says Newton head of responsible investment, Ian Burger.
With global markets becoming increasingly complex and interconnected, supply chains play a pivotal role connecting manufacturers with distributers and customers across the globe. Yet these interlinking commercial webs can conceal a raft of serious underlying problems of concern to investors, according to Newton’s Ian Burger.
Describing the current supply chain landscape, Burger says it is not unusual for many of today’s companies to have in excess of 100,000 suppliers in their supply chain. With increasing regulation and also public interest in this area, he believes companies need to improve management of their supply chains and take more account of underlying inequality, labour problems and, in some extreme cases, human rights abuses.
Commenting on the types of underlying problems hidden in some international supply chains, Burger says: “Common issues in supply chains are the use of child, forced and bonded labour. It is estimated there are 152 million children¹ that are classed as child labour – half of which are working in hazardous conditions. Other supply chain related issues can include inhumane working conditions.
“This is not just an emerging market phenomena, it also exists in developed markets too. Take, for example, agricultural workers in Spain where it is widely reported there are poor working conditions in some areas. Further issues with supply chains extend into illegally long working hours and/or low pay.”
Some progress is being made to address these issues. Burger notes the UK and US governments have introduced landmark national legislation, including Modern Slavery Acts designed to protect workers.
A growing number of governments and companies have also ratified conventions such as the United Nations Global Compact – with six out of 10 of its principles focussed on human rights and labour relations. A number of the United Nations sustainable development goals also address labour relations and human rights issues.
However, Burger is concerned governments are still broadly failing to address the root causes of labour relations and human rights abuses.
“Over 60% of the world’s employed population are in informal employment and that figures is actually much higher in emerging markets. In reality, governments are failing to enforce the laws,” he says.
“Many UK companies still do not meet the requirements to the Modern Slavery Act². Approximately, 136,000 people are considered or estimated to be in modern slavery in the UK alone³. A sizeable minority of people also live in countries that have not ratified international labour organisation standards on freedom of association and collective bargaining which can be very important for protecting workers rights,” he adds.
While there are undoubtedly many unscrupulous employers taking advantage of vulnerable workers in some countries, Burger says some less malign factors can often also help facilitate and camouflage labour abuses.
“It clear there is a lack of expertise among many procurement professionals – the very people who are responsible for sourcing components and materials through supply chains. From a practical standpoint, it is very challenging to comply all aspects of supply chains, given the size and complexity of existing structures,” he adds.
Beyond basic compassion and responsibility, Burger says these problems present real challenges to investors and can expose them to some potentially damaging ethical, reputational and financial risks.
“It is vital that investors understand and manage their exposure to supply chain risks. Companies that manage their supply chain poorly, can be subject to reputational risk as brand image increasingly drives consumer demand.
“In turn companies can be subject to operational inefficiencies, low employee morale, delivery disruptions, distracted management teams and unnecessary focus from regulators. They may also be subject to one-off audits and investigations. Legal challenges can lead to significant fines. Additional company resources may be required to meet any imposed sanctions and – in a worst-case scenario companies may lose their license to operate.”
Now more than ever before, says Burger, it is critical to understand the potential risks involved in underlying supply chains and work to manage exposure to them effectively.
Consumer sensitivity to labour and human rights concerns, he says, have increased significantly over the last decade – as have the regulations and conventions on human rights. All this brings added pressure on investors to consider and explore what really lies beneath the underlying supply chains that support their investments, he concludes.
¹International Labour Office. Global Estimates of Child Labour as of 2017.
²The Modern Slavery Act 2015 is a UK Act designed to combat modern slavery and related trafficking in the UK.
³Reuters. Five years on, is the UK’s landmark anti-slavery law fit for purpose? 18 October 2019.