Gemma Thompson

20 October 2023
Topics in this article
  • ESG
  • Risk & Resilience

What should CEOs be concerned about, and what should they do?

It’s the end of the Second World War, the United Nations is newly established, and the international community vows to never again allow such atrocities as those of that conflict. A milestone document is created – the Universal Declaration of Human Rights (UDHR).

Designed to be a common standard of achievements for all people everywhere, the UDHR was facing a somewhat impossible task: harmonizing political, legal, social, religious, and philosophical contexts across worldwide geographies and cultures. Throw in the eruption of globalization alongside, and you get a sense of how wide-ranging, complex, and nuanced human rights are.

The 1990s saw some stand-out divergence of declarations across Islam, Africa, Latin America, and Asia, reflecting a fact that is abundantly clear still today: rights are valued within the context of different social and economic structures. With multinational organizations operating across paradigms, by the turn of the century, trade was seen as a vehicle to export human rights values worldwide.

Since then, disasters such as the Rana Plaza factory collapse in Dhaka and the Foxconn scandal in Shenzhen have further pushed multinationals to the forefront of the human rights debate. This debate poses how far-reaching the responsibility of multinationals should stretch when it comes to workers within their supply chains and extending to all continents within which they work. After all, the extraterritoriality of human rights abuses is no shield against liability.

Concerns, risks, and impacts

In today’s digitally connected world, buoyed by social media and news alerts, awareness of human rights issues has never been greater. Shareholder activism and consumer consciousness are demanding organizations face into their supply chains and take action to ensure workers and communities are protected.

Human rights violations such as forced labor and modern slavery, poor working conditions, excessive working hours, and damaging communities through mining and industrial agriculture are common breaches that lead to very real reputational, investor, and financial risk for companies.

Many violations are a result of natural tensions between typical supply chain models. Since so many companies experienced the consequences of sourcing from Asia during the COVID-19 pandemic, recent years have seen an increase in sourcing from alternative markets. Within the fashion industry, Turkey has emerged as a solution to ensure the delivery of products in short order and on a frequent basis (a need fueled by fast fashion’s speed to market standard).

However, what makes Turkey an ideal country for driving profits in apparel sourcing are the same characteristics that indicate the potential for human rights risks: low labor costs, skilled workers, and inexpensive (but high-quality) materials. This is because the reality that sits beneath is a country with weak labor legislation where the quest for cheap prices drives a race to the bottom among suppliers on wages and working conditions.  

And so, where is the balance? How do companies manage costs by utilizing low-cost country sourcing and benefit from global supply chain specialization, whilst also managing human rights in their supply chains?

The first thought might be to move away from higher risk, often less economically developed countries (LEDC), but perhaps an answer is the contrary: to tune in more than ever. Rather than your organization’s responsibility ending at the point of (out)sourcing, there is a further level of supplier engagement, due diligence, and accountability that can be applied.

Increasing calls for supply chain transparency certainly seem to infer so, as does the introduction of regulations such as the German Supply Chain Due Diligence Act (SCDDA) and future regulations to follow. The SCDDA places a clear onus on organizations over their supply chain performance and mandates action and meaningful remediation in response to any human rights violation by its indirect suppliers (supply chains).

As more countries follow suit, there forms a stronger case for identifying alternate approaches and getting ahead of the potential risks that can arise from a global operation. As more countries and more companies act, more solutions will appear, and what constitutes “reasonable efforts” will no doubt evolve.

Alternate approaches

The key question is whether human rights are a risk to be avoided or managed. More often, human rights are deeply rooted in poverty, and most solutions present the “easiest fix” to be switching supply to a lower-risk country.

But given lower risk is likely to mean higher cost and a worsening situation for the workforce left behind, could that cost of change be better spent investing in and managing the existing risk? Some companies think so.

Cocoa is a trade synonymous with human rights risks. Yet, some companies such as Tony Chocolonely and Hotel Chocolat have doubled down on addressing those risks, putting their efforts at the core of their company ethos. With the motto: “Let’s make chocolate 100 percent slave-free”, Tony Chocolonely applies five key sourcing principles to ensure they deliver on their promise.
The first is to trade directly and on equal footing with cocoa farmers and cooperatives to ensure cocoa beans are traceable.  Secondly, they are prepared to pay a premium to ensure a Living Income Reference Price (LIRP), enabling cocoa farmers to earn a living income, run their farms, and provide for their families.

The third principle is to empower farmers by working together to professionalize farming cooperatives, and as a follow-up, the next principle is to ensure that the farmers and cooperatives receive at least a five-year commitment to sales at a higher price. Finally, there is a focus on improved quality and productivity through investing in agricultural knowledge and skills related to growing cocoa and other crops.

Undeniably, this is an example of positive action being taken to tackle modern slavery and exploitation. Yet just last year, Tony Chocolonely reported finding 1,700 child workers in its supply chain. The headline may have shocked customers who trust the brand to provide them with an ethical choice for movie night, but what if we consider the discovery proof that the company’s stance on illegal practices is working? Identification and accountability are key steps to enacting the change required; longing for issues to remain hidden is not.

Of course, you must ask if all companies can afford to be responsible, especially to the extent of those leading the way, but in the age of social media, the argument seems to sway toward ‘how can you afford not to be?’. Just one day after The Sunday Times alleged Boohoo paid its UK factory staff £3.50 an hour, £1bn was wiped off its value.

And yet the counter may be that consumers of some brands are, in reality, neither conditioned nor ready to pay a premium, even if they may abandon that brand in the event of a supply chain ‘incident.’ In the real world, these considerations are being debated in real time, forcing businesses to decide on their risk appetite.

So, what do you do?

When addressing human rights risks in your supply chain, multiple complex questions will arise, such as how can we influence suppliers we have no direct relationship with? How far down the supply chain do we need to assess for it to be effective? What technologies are in this space, and to what extent can they help us to map and manage suppliers? What is our ability as a business in capability and budget; to drive change or manage existing risk?

Reflecting that human rights risks and their impact will vary by organization, a sensible first step is to define what ‘human rights risk’ is to your company. Zoom in on human rights before zooming back out and consider if this is the opportunity to embed a more holistic risk management strategy, which will make sense in some cases, but not others.

You must balance what is possible with what is practical, considering how regulation, market positioning, future objectives, and the cost of prevention, monitoring, or managing supply chain partners might influence your risk appetite.

We most often see three steps taken;

1. Determine what is really important to your business:
Ultimately, “selling” in a risk program is hard, and many a proposer has left the boardroom with support for a good idea but no funds to implement it. Whatever you propose to do must matter, so find the angle that ties that idea to business priorities and clearly articulates the benefit of it to the decision-makers. It could be regulation, risk, revenue, brand positioning, or something else.

2. Finding the right balance:
Like many risk elements, a human rights program is nuanced. There is a real risk of not just being busy fools but also poor fools, buying platforms and tools to solve a challenge that no single approach will.
The reality is that most businesses will need to find the balance between appetite and budget. Finding that balance means zooming in on “key risks” and “must do’s” and zooming out to look at other risk, supplier, or supply chain management initiatives, subsequently creating a vision and a compelling case for change that aligns with business priorities in the point above.

3. Data, insights, action:
In a world where there are no perfect solutions, it is important not to let that distract or delay you from doing the best that you can today, ensuring, at the very least, reasonable efforts are made and at best, taking a proactive role in assuring the right standards and behaviors down the supply chain.
This will involve a blend of human and technology solutions, to collect data and create frameworks to inform affirmative action. A simple framework is depicted below. 

In this model, we summarize some of the actions businesses can take in seeking to:

Prevent bad practices through diligence in sourcing and supplier data management.
Monitor current supply sources to identify key risk areas on an ongoing basis.
Manage risks either through some form of proactive short, or long-term intervention.

Like any business program, articulating the value of doing something and knowing exactly what to do are big hurdles, but ones that are relatively easy to overcome with the right market knowledge and a pragmatic approach.

Soon, all businesses will need to demonstrate that they have taken reasonable steps to ensure against human rights abuses in their supply chain. And right now, around 66% of CEOs* cannot sleep soundly at night, sure that they have.

To learn more about ESG and related Risk Management, contact us today.
*CEO stats from The Supply Chain Barometer 2023

Let’s talk.

If you are looking to drive purposeful and profitable change, get in touch.

Contact us