Retail Supply Chains and ESG

ESG Tool Kit: Chapter 7

You are reading part 7 of the 10-part ESG Factsheet Series. Explore all the chapters here.

ESG FAQs  |  What is ESG  |  ESG Ratings  |  ESG Reporting  |  ESG Climate and Risk  |  ESG Human Capital Management  |  Supply Chain and ESG  |  Real Estate and ESG  |  Plastics and Packaging and ESG ESG Glossary of Terms

Corporate supply chains have become more complex in recent years, and stakeholders at all levels — including consumers, investors, regulators and employees — are increasingly expecting businesses to account for the ESG performance of their suppliers. In addition, companies are finding it important to identify and address risks related to supplier performance. This can include issues like greenhouse gas emissions, deforestation, materials sourcing, human and labor rights and corruption. As retailers build their ESG strategies, many are including an assessment of supply chain impacts and efforts to engage suppliers.   

As unsustainable supply chain practices become increasingly expensive and socially unacceptable, retailers must prioritize the resilience of their operations at all levels.

Greenhouse gas emissions from supply chains, part of Scope 3 emissions, are becoming an important consideration. Scope 3 emissions are emitted from sources a company does not own or control but that are related to its operations. Companies are facing pressure to measure and report on their Scope 3 emissions; some are setting Scope 3 emissions reduction targets and engaging with suppliers to ensure these targets are achieved.

Retailer supply chains extend across the globe. The power of social media to highlight risks can erode consumer trust or lead to consumer boycotts. Emerging consumer, investor and regulatory expectations are leading retailers to understand and mitigate the ESG risks throughout their supply chains.

Challenges

Companies in all industries are facing growing scrutiny and demands to measure and account for the operations of their supply chains, and there are material and reputational consequences for companies that do business with partners that have, for example, significant (and increasing) carbon footprints, accusations of human rights violations (especially in developing regions), and other practices considered to be unethical or unsustainable.

Retail supply chains also face increasing disruptions due to extreme weather events, labor and product shortages resulting from the COVID-19 pandemic or labor unrest, and wild fluctuations in consumer demand. Costs of labor and materials are increasing as developing regions build their economies, and global decarbonization efforts mean higher costs of fuel and premiums on “green” shipping options. As unsustainable supply chain practices become increasingly expensive and socially unacceptable, retailers must prioritize the resilience of their operations at all levels.

Solutions

There are a few strategies retailers can use to improve the sustainability of their supply chains and, as a result, bolster the overall success of their business:

Embrace technological enhancements

New cloud-based and artificial intelligence technologies offer a range of solutions that can help optimize supply chains. These solutions include inventory management, real-time crisis response, supplier auditing and verification, and more.

Improve procurement policies and practices

As regulatory, investor and public scrutiny grows around supply chain operations, retailers can mitigate their risk exposure by proactively evaluating and engaging with existing and potential suppliers. Sustainable sourcing policies demonstrate a commitment to best practices, and these must be supported by supplier audits, assessments and subsequent engagements or corrective actions where issues are identified. Supplier audits (whether conducted in-house or through a third-party firm) are key to this process; they provide transparency into suppliers’ potential vulnerabilities. When corporations use the audit results to engage in meaningful dialogue with their suppliers, they can effect change, strengthen supplier relationships and ensure long-term business value.

Partner locally and sustainably

While major suppliers can offer volume discounts, some retailers avoid concentrating too much of their business with single suppliers. Fragmenting partnerships and doing business with smaller, local vendors offers several sustainability benefits, such as reducing risks of major disruptions, reducing emissions from overseas shipping, supporting local economies and increasing the range of product offerings to consumers.

Explore innovative fulfillment options

Retailers are exploring new fulfillment options that decrease freight and shipping needs and allow consumers to receive their goods as quickly as possible. For example, Target acquired the delivery service Shipt to offer at-home delivery options and Amazon has been expanding its network of lockers and fulfillment hubs that allow consumers to buy online and pick up in person. Some retailers are even transforming existing stores into local online order fulfillment hubs.

What retailers are doing

Retailers are taking strides to ensure the transparency and sustainability of their supply chains. Clothing retailer Pact partners only with Fair Trade Certified factories that provide safe working conditions, uplift local communities and protect the environment. It even offers options for customers to offset the carbon footprint of shipping their orders. Similarly, Outerknown partners with Fair Trade USA and provides detailed and accessible information about its entire value chain and supplier list, from where it sources its cotton to the companies and regions that manufacture its clothing products. The company also enlists its customers as supply chain contributors and allows them to re-sell pre-worn clothing on the Outerknown website.

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Last Updated: 4/15/2022