Issue Brief: Global Supply Chain
The term “global supply chain” refers to the various stages of how goods and services are produced, distributed, and brought to market around the world. For any product—from footwear and computers to dish detergent and fruit—a complex network exists of suppliers, manufacturers, transporters, distributors, and vendors that all play a role in delivering an end-product to the consumer. And frequently, more than one player is involved at each stage. A manufacturer, for example, may receive raw materials from multiple suppliers and in turn provide products to multiple distributors. For sustainable and responsible investors, the supply chain may be the most important lever for reducing company risk and encouraging societal or environmental change.
Today, a vast majority of consumer goods are made in overseas markets where labor and environmental regulations and enforcement are lax or non-existent. Responsible global supply chain management must include setting and implementing clear supplier standards and monitoring systems to address labor, human rights, and environmental concerns. One has only to think of the U.S. apparel scandals in the mid-to-late 1990s involving the use of child labor overseas—or the current campaign led by some Girl Scouts surrounding palm oil production that endangers the dwindling numbers of orangutan in Southeast Asia—to appreciate the importance of responsible supply chain practices.
In its complexity and reach, supply chain management plays a vital role in a company’s business operations, financial success, and the creation of shareholder value. From an investment perspective, the benefits of sound supply chain management are significant. In regulated countries, governments may shut down plants or operations where product contamination, worker safety, or environmental violations are discovered. In addition to business disruption, this may affect the parent or contracting company’s reputation and brand value. In contrast, companies with good supplier oversight and strong reputations are more likely to obtain “license to operate” in other countries, creating more opportunity for business expansion.
Supply Chains Entail Broad Sustainability Challenges
Calvert assesses how companies manage the environmental, social, and economic impacts of their global supply chain, and encourages good corporate governance practices. While supply chain concerns cut across all industries, some industries present greater risks than others. Companies that rely on natural resources, extractives, or agriculture generally run the highest sustainability risks, and are most closely scrutinized by Calvert. So whereas a computer software company typically has a negligible supply chain, a computer hardware maker may rely on conflict minerals and be high risk. Service industries, such as banking and consulting are less likely to involve supply chains or controversial products.
In terms of the environment, the most prevalent supply chain issues involve water usage and scarcity, greenhouse gas emissions, deforestation and land depletion, habitat preservation, mineral extraction, and other forms of environmental degradation. Many companies—such as beverage or semiconductor fabricators—rely on water for raw materials or manufacturing, yet have not accounted for risk from drought, worsening water quality, or water rationing. The list of key industries with high environmental impacts is long, including agriculture, extractives, chemicals, food and beverages, retailing and manufacture, automotive and transport, electronics, and energy. Many of these same industries face challenges in terms of labor issues, particularly apparel and footwear companies, as well as retailers and manufacturers generally. These industries must be scrutinized for workplace health and safety policies, fair wages, working hours, discrimination, diversity and responsive management, among other issues. Companies in these industries will ideally require their suppliers to embrace the International Labor Organization (ILO) core labor standards across their operations and monitor their performance against those standards.
Transparency a Key Hurdle
Calvert considers a range of corporate and industry “leading practices” in evaluating how effectively a company monitors and manages its suppliers’ sustainability impacts. Topping the list is transparency and disclosure. For some industries, we will ask a company to provide a list of its suppliers to Calvert or to disclose this information publicly. Another key marker is whether companies actively gauge their suppliers’ progress on sustainability issues and publicize their track records. Finally, Calvert considers how companies handle suppliers that have violated company policy or have poor track records—are these infractions ignored, or are they addressed in a responsible and transparent fashion? In addition to asking companies to monitor their suppliers more effectively, Calvert is part of the Global Reporting Initiative’s (GRI) supply chain working group that is looking at new, higher standards for corporate disclosure around supply chain management.
One of the primary challenges in assessing supply chain risks is identifying where companies source their raw materials or partially processed materials. Many companies’ suppliers tend to be private companies that are not traded on the stock market—making it difficult for Calvert to directly influence them. Additionally, companies may purchase raw materials like coffee or cocoa on the commodity markets—which may combine materials from hundreds or thousands of suppliers into one source—obscuring any information about how or where the material was obtained. Although these challenges might seem insurmountable, investors like Calvert are able to exert considerable influence over the supply chain by encouraging companies to understand their raw material or commodity risks and take action as individual corporations or with other stakeholders.
Markers of Success
Some methods for evaluating company responses to supply chain risk include third-party, independent certifications, as well as participation in roundtables and best-practice initiatives. Calvert looks at a variety of certifications across industries to help us understand company risk and responsiveness. For example, we have asked companies that source palm oil to commit to using 100% certified sustainable palm oil by 2015 and have asked chocolate companies to source Fair Trade certified cocoa. In the apparel industry, Calvert has worked with large retail companies to discourage their use of Uzbek cotton because of child labor concerns, and have urged companies to work through the Better Cotton Initiative. With regard to conflict minerals, Calvert recently joined the Enough Project in urging the Securities and Exchange Commission to provide further guidance on provisions in the Dodd-Frank Act requiring companies to disclose their efforts to source and remove conflict-related minerals from their supply chains.
SRI criteria will vary from fund to fund. Please see a fund's prospectus for details.