The COVID-19 pandemic has highlighted material levels of vulnerability of the operational models of organizations to ESG-related risks and critical need to re-assess risk management and to build more resilient business models.

In particular, the pandemic has exposed the vulnerabilities of the supply chains of many organizations and the necessity for organizations to better plan, prepare and strategically manage their supply chains risks. 

Ensuring the resilience, efficiency and agility of supply chains, combined with the need to demonstrate responsible supply chain practices pose important challenges to organizations across all sectors.

As organizations revive and revise their business and operational models in response to COVID-19, there is a critical need for management to review and to reassess risks across the supply chain. In turn, organizations must re-examine the key drivers of supply chain risks and to implement robust risk management processes focused on building supply chain resiliency.

Key insight to supply chain risk management from DNV GL survey

DNV GL:

COVID-19 has highlighted the need for improved supply chain risk management. What has WBCSD noted to be the key challenges and immediate areas of change? 

WBCSD:

We have observed increased recognition of the benefits of improved risk management applied to supply chains. Organizations are highlighting critical needs to review and to reassess their application of risk management techniques to build confidence, assurance and resilience across supply chains.

A changing business context and revised operating models have changed the risk profile of supply chains requiring forward-looking risk assessments.  Supply chains may be particularly vulnerable due to their complexity, global dimensions and the roles of sub-supplier and third-party resources. The governance, risk identification and assessment, monitoring and reporting needs are significant.

In parallel, internal and external stakeholders are demanding clarity, transparency and assurance on the assessment of risks across revised supply chains. By leveraging ESG-focused scenario analyses and materiality assessments, organizations can begin to build resiliency and assurance to manage reputational risks and a diverse range of stakeholders. In turn, organizations become better placed to identify and address key vulnerabilities to their business performance and long-term stability.

Organizations must consider how effectively ERM is applied across their supply chains and critically align operational risk management actvities (governance, oversight, monitoring, reporting and decision-making) to external reporting of risks and sustainability performance.

DNV GL:

The survey found that companies have focused on spreading risk through diversifying their supplier base. Does this match what WBCSD has seen through its members and can you share any additional insight?

WBCSD: 

A more granular assessment of supply chain risks is being adopted. Motivations vary  but the post-pandemic experience suggests important drivers are managing potential operational and reputational risks. 

Stakeholder demand is increasing for clear sustainable performance reporting aligned to transparent sustainable business practices. Companies are being increasingly held to account to “Walk the Walk” and face heightened risks of reputational damage and ESG-focused litigation if they cannot demonstrate effective, sustainable performance across their supply chains. In particular, companies are having to focus on developing the risk management processes, tools and infrastructure to support risk identification and assessment at secondary and tertiary levels of the supply chain.

DNV GL:

The majority of businesses felt the need to address supply chain continuity. How is this achieved and where do companies typically look to start?

WBCSD:

We observe that organizations are seeking support to address supply chain assurance and business continuity. Organizations have had to adjust their approaches to risk monitoring, prioritization and audit to provide assurance of revised operational practices and the assessment of current and future risks.. In turn, internal reporting and external disclosure require review and adjustment. 

We are seeing increased need and desire for improved early risk identification methodologies in particular to screen potential emerging ESG-risks. There is also appetite for enhanced risk assessment tools that extend risk assessment   beyond impact and likelihood criteria to criteria such as vulnerability, speed of onset, responsiveness and adaptability.

Solutions founded on digitization, AI and Machine Learning, data mining and Big Data are being pursued  to support supply chain monitoring and continuity management. However, organizations should apply robust frameworks to provide the effective governance, oversight and assurance of these data, tools and the models.

DNV GL:

It’s been highlighted that a large share of companies consider a more sustainable supply chain to be more resilient. What aspects should be considered bring this strategic change and benefit to a business? 

WBCSD:

Strategic change requires companies to develop and communicate a clear, common understanding of value chain and non-financial capital impacts and dependencies. A clear narrative on company vision and purpose is essential to engage internal and external stakeholders.

In this regard, it is notable that the survey highlights primary areas of sustainability action related to transparent, communication and reporting of sustainable performance, namely

• Requiring suppliers to provide information about sustainability;
• Undertaking dialogue with suppliers to share understanding of sustainability challenges;
• Implementing and communicating a sustainable supply chain policy.

As organizations are strive to embed sustainable business practices in their day-to-day management processes, clarity of purpose, policy and performance are key. It is WBCSD’s experience that companies that integrate insight and forward-looking perspectives of sustainability assessments (e.g materiality analyses, scenario analyses, sustainability reports) into strategic planning and business performance planning are typically strongly positioned to identify potential vulnerabilities and to proactively and successfully drive strategic business change (and as a consequence build resiliency).

DNV GL:

The survey has analysed the 120 companies who are deemed to be ‘Leaders’ by demonstrating maturity and agility in their approach to supply chain management. What experience can you share from your membership on how they have responded to the pandemic?

WBCSD:

Through the pandemic response period, analysis of WBCSD member performance indicates that our members have responded more resiliently to the challenges and market disruption – supporting the survey finding of alignment of mature, sustainable supply chain management and the resiliency of leading companies.

Nonetheless the complexity and global nature of some supply chains mean that they are vulnerable to a wide range of diverse risks that require significant oversight and assessment. 

Companies with a firm ESG-risk focus commonly have a clear long-term vision and a strong understanding of the company value chain – they are better aware of the impacts and dependences of their business model and better positioned to instigate well informed, management responses.

WBCSD Guidance to support ESG risk management and supply chain resiliency

Supply chain resilience is the supply chain's ability to be prepared for unexpected risk events, responding and recovering quickly to possible disruptions to return to its original situation or grow by moving to a new, more desirable state in order to increase customer service, market and financial performances.

The application of enterprise risk management (ERM) techniques enable the identification, assessment and prioritized management of supply chain risks and support organizations to build resilience by strategically addressing supply chain vulnerabilities.

In collaboration with the Committee of Sponsoring Organizations of the Treadway Commission (COSO), WBCSD has developed award winning, guidance to support the application of ERM techniques across business operations and to confront the increasing prevalence and severity of ESG-related risks.

The guidance helps risk and sustainability practitioners speak the same language, communicate the broad impacts and dependences of the company and address how these might translate into risks. It addresses critical ESG and supply chain management challenges such as robust governance and oversight, risks associated with delivering company strategy and business objectives and how companies can assess and prioritize complex, interconnected risks, such as those faced across supply chains.

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