The hidden ESG risks in your supply chain and how to mitigate them

In today’s global economy, businesses are under increasing pressure to manage Environmental, Social, and Governance (ESG) risks within their supply chains. While many companies focus on their direct operations, the reality is that a significant number of ESG risks lie further upstream, hidden in often complex supplier networks that span multiple regions and industries. 

With an increasingly volatile global economy (including sanctions against trading with certain countries) and with mandatory reporting on the horizon requiring companies to assess and report on their supply chain, failure to address these risks could lead to reputational damage, regulatory penalties, and operational disruptions. If you’re a smaller company, then you might not think this applies to you. However, if you supply into any larger company that does need to report then they may ask you for this information in future.

In this blog we outline what these key ESG risks are and the practical next steps you can take to start managing these risks.

Key ESG Risks in Supply Chains

• Carbon Footprint and Climate Impact. Supply chains contribute up to 90% of a company’s total greenhouse gas (GHG) emissions and this is added into scope 3 emissions.  Energy-intensive manufacturing, long-distance transportation, and inefficient logistics can inflate a company’s overall carbon footprint.  A carbon intensive supply chain could also be a financial impact if you find yourself having to pay carbon taxes in the future. Scope 3 emissions are notoriously difficult to measure and control because they originate from sources outside a company’s direct operations, making it more difficult to set reduction targets and monitor progress against them.  Additionally, inaccurate or incomplete reporting of scope 3 emissions can lead to compliance issues under emerging regulations, loss of investor confidence, and accusations of greenwashing. As regulatory bodies and stakeholders increasingly focus on full value chain emissions, companies that fail to address scope 3 risk being left behind. Read more about our services in this space.
  

• Human Rights and Labour Violations. Unethical labour practices, including child labour, forced labour, and unsafe working conditions, can exist deep within supply chains. The complexity of and lack of transparent information in global supply chains makes it difficult for companies to monitor labour practices beyond their first-tier suppliers. In many cases, subcontractors and informal labour are used in regions where legal protections are weak or poorly enforced. This makes it easier for exploitative practices to increase unnoticed. Businesses in scope to report under the new EU Taxonomy risk facing legal consequences under new due diligence laws, but all companies could lose access to ethical investment and suffer long-term brand damage if human rights and labour violations come to light. This was the case in 2020, when a Sunday Times article revealed that workers at a garment factory in Leicester, which was reportedly within the Boohoo’s supply chain, were being paid as little as £3.50 per hour, far below the UK’s minimum wage.  Unsafe working practices, with poor Covid-19 protections during the pandemic, were also highlighted.  The resulting fallout led to a 20% drop in share price, major retailers paused trading with the brand, and investors started to demand better ESG practices.
  

• Resource Scarcity and Environmental Degradation. Depleting natural resources, water pollution, and deforestation can lead to supply chain instability and reputational damage.

  Many supply chains depend on natural inputs such as water, timber, or rare minerals; resources that are becoming increasingly scarce due to overexploitation and climate change. This creates volatility in availability and pricing, exposing companies to operational and financial risks.

  Additionally, suppliers operating in regions with lax environmental protections may engage in unsustainable practices that not only threaten ecosystems but also expose the company to activist campaigns, legal action, or exclusion from green markets.

How Businesses Can Enhance Supply Chain Transparency and Resilience

To mitigate these risks, businesses need proactive supply chain management strategies that promote transparency, accountability, and sustainability.

Mapping out your supply chain, including both direct and indirect suppliers, is critical but not necessarily easy.  Starting small and continuously improving your methodology will help break this up into more manageable chunks, and you can then start to assess which suppliers are likely to contribute most to ESG risks.  You might choose to do this first through geography, or by identifying suppliers from industries that are known to have greater environmental impacts.  There are tools that you can use to help, such as the Modern Slavery Index, Corruption Index, and Walk Free, and undoubtedly AI will start to provide improved supply chain visibility in time.  You could also choose to invest in a supplier management platform such as Ecovadis which will do the heavy lifting for you.

Setting ESG standards and supplier requirements will support your current and future procurement needs.  Clear ESG criteria is invaluable for your suppliers to understand your expectations of them, particularly if the criteria is aligned with international frameworks.  Supplier codes of conduct, sustainability policies and labour rights commitments will require your suppliers to up their own game.  Putting supplier codes of conduct and sustainability policies in place means you will need to establish a process to conduct regular audits and assessments, possibly with a focus on suppliers/industries/geographies where you have highlighted a greater risk.  You can choose to do these on-site or use third-party auditors to help verify compliance.  A real-time monitoring system will help you to detect ESG risks early, and data will also underpin all future reporting and disclosures.  Of course, it’s to be expected that not all your existing supplier base will be in a position to comply with all of your new requirements.  You could choose to collaborate with suppliers to design more sustainable outcomes.  You could help with training or provide incentives for suppliers to adopt greener production practices and services.  We’re seeing a lot of companies provide virtual or face-to-face supplier sessions outlining their sustainability journey, progress made to date, and what to avoid.  Sustainability is new to many companies and learning from others is a great way to step up and start to think about laying some ESG foundations.

Finally, objectively assess your supply chain and try to diversify and shop local!  Reducing dependencies on single-source suppliers makes economic and sustainable sense and will minimise disruptions.  Local and sustainable sourcing, perhaps also considering social enterprises, will lead to lower carbon emissions, improve supply chain resilience, and add to your own social value programmes. 

This checklist will help to evaluate and improve your supply chain’s ESG performance:

✅ Have you identified your key suppliers and mapped your entire supply chain? 

✅ Do you have ESG criteria incorporated into supplier contracts? 

✅ Are you tracking scope 3 emissions from your suppliers? 

✅ Have you assessed labour conditions and ethical sourcing policies? 

✅ Do you conduct regular ESG audits and inspections? 

✅ Have you implemented traceability and transparency systems? 

✅ Are you engaging suppliers in ESG training and capacity-building? 

✅ Do you have contingency plans for supply chain disruptions due to environmental or social risks?

Tackling hidden ESG risks in your supply chain goes beyond mere risk mitigation; it's about building long-term resilience and gaining a competitive edge. By investing in responsible supply chain management, businesses can enhance stakeholder trust, ensure regulatory compliance, and promote sustainable growth.

Is your supply chain ESG-ready? We offer a range of services starting from assessing and building ESG foundations, right up to designing ESG strategies or bespoke responsible procurement plans. Contact us today and we can work with you to ensure your supply chain is resilient, compliant, and sustainable. Authored by Sarah Kirton.