ESG performance by a company within its own boundaries can be qualified. But what about its supply chains? These often cross continents and influence actions taken by a range of distant connected international supply chain actors.

There are no all encompassing laws for qualifying ESG performance in supply chains and only a range of sector specific and often ‘E’ or ‘S’ or ‘G’ specific standards, but no generalised approach. The problem is that ESG performance in supply chains encompasses a massive slew of issues. There is no consensus on where in the supply chain to look; what to measure; and how to measure the ESG risks associated with it. Or how to report those risks. And these qualifications need to be undertaken in a manner that can be seamlessly replicated across a widely heterogeneous supply chain population.

Perhaps those that are currently debating this topic are all trying too hard to seek perfection – when perfection is the enemy of progress.

Practical methodology that works

Track Record Global (TRG) has been assessing risk in supply chains for the last 15 years. Although the focus was initially on ‘G’ alone (European Union Timber Regulation 2013) the same approach is successfully being used to qualify the full gamut of ESG risks in supply chains that deliver cotton, leather, recycled plastic, recycled paper; animal products (and other materials) by many of the UK’s leading retailers. The same approach is also used to qualify Forced Labour and Modern Slavery supply chain associated risks.

The TRG methodology consists of 3 principal steps:

Why this approach has brought results for our clients

Technology-enabled supply chain transparency is the key to monitoring, managing and mitigating the associated ESG risks. Technology driven solutions (like TRG’s) keeps costs low, efficiency high, makes the Assessment results accessible – being visible to clients, their shareholders/investors, customers, auditors and supply chain actors alike. Simplicity is key. There must be no ‘black box’ based risk results. Of course there are judgements about the appropriate documentation needed to mitigate risks. But if such judgements are science- or logic- based and completely out in the open then experience demonstrates there are no serious disagreements over the outcomes.

Complex indexes or algorithms should not be used if all the involved parties need to agree with the Assessment outcome.

And when high risks are identified, our client’s have been able to:

• Work with and improve performance of specific problem supply chain actors
• Swop out a poor performing supply chain actors for a better performing ones
• Replace irredeemable high risk supply chains in their entirety with ones proven to be low risk.

There will always be ESG risks in supply chains that initiate in countries or traverse countries where the regulatory capacity is low. But there are often means of effectively and objectively managing those risks.

We believe regular, repeatable supply chain risk monitoring, mitigation and management methods that are technology enabled, using a consistent transparent methodology, are a necessity for a business’s long term credibility – in the eyes of its investors, consumers, staff and auditors.

~ Frank Miller, TRG Managing Director

In a recent report (Rogerson, S., 2019. Forest 500 annual report 2018 – the countdown to 2020, Global Canopy: Oxford, UK. Lead author: Sarah Rogerson, contributing authors and reviewers: Helen Bellfield and Helen Burley.) it was stated than none (not even one!) of the 500 companies that made public commitments regarding removing the deforestation ‘drivers’ from their supply chain will meet those targets.

The question is why? Why did they fail to deliver on their promises? These are big businesses with massive procurement power, yet all have failed to deliver. It’s true – some to a greater degree than others – but nevertheless a pretty hopeless performance by many.

What’s the cause? Why the lack of compulsion to meet these very public targets?

These commitments are focused on the key commodities whose production drives tropical deforestation, namely: palm oil, soy, cattle and timber products. Global Canopy describes what it terms as the ‘implementation gap’ – the gap between what companies say they will deliver and reality. They state that the implementation gap is closely linked to a company’s performance in terms of how it:

• ‘monitors and verifies its suppliers against its own commodity commitment;
• engages with non-compliant suppliers;
• has a grievance mechanism so that issues in its supply chain can be raised;
• is actively involved in collaborative actions to improve sustainable commodity supply chains;
• is transparent and has published supplier lists or coordinates of specific sourcing regions.’

In TRG’s experience – and we’ve been undertaking supply chain due diligence for large business and consumer facing retailers for well over a decade in over 40 countries – what really makes supply chain practices fundamentally change are the following:

1. A commitment from the senior directors of the company (that powers the demand chain – from the company secretary to the commercial director) to realistic supply chain performance  targets
2. Well trained and committed buyers (that talk directly to their tier 1 suppliers) who fully understand and recognise this as a basic product ‘quality’ issue – regarded in the same light as product health and safety requirements. They must be prepared to change to suppliers if their current supply base cannot deliver
3. Well trained and supported tier 1 suppliers (after all they have to pass this new quality requirement up the demand chain to their suppliers) that understand that if they don’t deliver (on this new quality) by a certain deadline, their client is going to stop paying them and find a new supplier that can meet the new spec, and
4. Reliable, efficient and effectively IT systems that support the collection of data sets and mitigating documentary evidence that demonstrate – in a transparent manner – that progress towards targets is being met and if not – then exactly why not, sop that remedial action can be taken in time.

If these are in place, then radical changes in supply chain practises can be made. Companies that are identified under the Global Canopy 500 programme can shut the ‘implementation gap’ if they adopted the above approach.

Frank Miller, TRG Managing Director

All is not lost. Governments, global businesses are making commitments to ameliorate their negative impacts on climate change. Deforestation is recognised as one of the major contributors to global warming. There are a variety of initiatives aimed at slowing deforestation. For instance, there is the New York Declaration on Forests, signed on the 23^rd of September, 2014 – where governments, companies, civil society and indigenous organisations have endorsed “a global timeline to cut natural forest loss in half by 2020, and [will] strive to end it by 2030″. There is the Consumer Goods Forum, a global alliance of 400 companies with combined sales of three trillion dollars, created to achieve net zero deforestation supply chains by 2020.

Government can regulate – when they have regulatory capacity. But the world’s natural forests are often growing in areas where there is very limited or no regulatory capacity. Governments in such circumstances have a limited role.

The controlling reach of big global businesses can be long and large. The influence of the demand chain (the pre-cursor and mirror image of any supply chain) can be both massive and positive in terms of preventing deforestation.

Let’s assume these internationally–known brands operate near the consumer end of the supply chain – are in business-to-consumer or business-to-business relationships with their customers. CEOs of international enterprises, as the conventions above shows, are prepared to commit their business to serious and positive targets. It’s not selfless.  It adds to their brand value. Although at the very top of their organisations – the bosses may have little time to study the detail of how they are progressing against these aspirational targets – interestingly legal counsels are getting more involved, as are major shareholders and those responsible for managing reputational risk take a serious interest.

It’s the buyers in these organisations that make the demand chain beat to the tune of the brand. It’s the Commercial Director and the hard-nosed buyers that have the real immediate in-your-face commercial clout to make practises change – all the way up the supply chain via the tiers of suppliers, to the raw material source.

So if the objective is for the international brands (signed up to the NY Declaration on Forest and the Consumer Goods Forum) to prevent further destruction of the world’s forest and moderate the impacts of climate warming, it’s the buyers within these organisations that need to be educated and have their individual buying performance monitored in a transparent manner. The positive ‘no-deforestation’ beat of the demand chain will show if these initiatives have life or not.

Up to a fifth of global greenhouse gas emissions come from deforestation and forest , according to The World Wide Fund for Nature (WWF).

The negative impacts of climate change will drive a raft of increasingly punitive government regulations and legislation – with big impacts on people’s lives and the way businesses function.

In recognition, signatories to the New York Declaration on Forests (including governments, companies, civil society and indigenous organisations) have endorsed “a global timeline to cut natural forest loss in half by 2020, and [will] strive to end it by 2030″. In addition, a global alliance of 400 companies with combined sales of three trillion dollars, organisations that are members of the Consumer Goods Forum, created to achieve net zero deforestation supply chains by 2020.

Let’s focus on the companies – the commercial organisations that have signed up to these voluntary commitments, which include Kellogg’s, Marks & Spencer, Barclays, Nestlé, the palm oil giant Cargill, and Asia Pulp and Paper.

These organisations have stated publically that over the next 5 to 15 years they are going to fundamentally change the specification of the products (as raw materials; semi -finished goods; or completed ready-to-sell products) they trade.

They are effectively introducing a new quality specification for the products, or raw materials, they buy from their suppliers. They require that these goods to have a new intangible quality – let’s call it Forest-Destruction-Free or FDF for convenience. FDF as an intangible quality; it has to be ‘captured’ and added to the products in the country where the raw materials (whether timber, soy, oil palm, beef, leather etc.,) are sourced. FDF then has to be preserved and demonstrated to be present as the goods travel down the supply chain. Because you cannot measure or test a product for FDF, there has to be credible and ‘inspectable’ control systems encompassing each tier of the supply chain – to demonstrate that the goods continue to have that FDF quality indicator.

For the above to become reality – four practical actions are required:

1. The organisation that has made the external public commitment has also to be internally committed from the most senior level. The Commercial Director; their sourcing Managers; and their buyers who are responsible for paying for goods, need to understand why FDF is important and why it has to be evident in the goods they purchase. They need training – with regular top ups and their performance against FDF targets has to be monitored. If it matters it needs KPIs.

2. The specification for FDF products has to be heard – loud and clear – all the way up the supply chain. The demand chain (the pre-cursor and mirror image of any supply chain that specifies what the supply chain must deliver) has to provide and explain the new requirement to each supplier – all the way to the raw material sources. The specification received at each step along the supply chain has to be really clear. All parties need to know what FDF means for them and their business and how to deliver it. Continuous training is required here.

3. As the products (imbued with FDF) travel down the supply chain – passing through primary, secondary and tertiary processing – transparent processes and systems need to be in place to prevent mixing and dilution of material carrying FDF with physically identical material that doesn’t have the quality. There has to be credible traceability systems employed. These can be physical or digital or a combination of both – whatever is appropriate and cost-efficient.

4. Lastly the businesses that signed up to the New York Declaration on Forests (on the 23^rd of September, 2014), and the Consumer Goods Forum (next meeting 24-26 June 2015) need to have a transparent FDF compliance management system that enables them to credibly demonstrate their progress towards full FDF compliance – and in the last resort – to only allow products with FDF to enter the supply chain.

The four actions above are already being implemented by thousands of businesses placing timber on the European and American markets for the first time and in accordance with the requirements of the European Union Timber Regulation (EUTR) and the Lacy Act. They are focused on the intangible quality of ‘legality’ being present in wood-based products from the moment the tree is felled all the way to the final market place.

The Lacy Act and EUTR are really the culmination of voluntary ‘legality’ and ‘well -managed’ forest programmes initiated by forward-thinking businesses in the preceding years. Those who led these initiatives have consequently stepped into the regulatory furrow (ploughed by governments in the USA and the EU) with ease.  They have worked closely with their supply chains – effectively training them on how to deliver the new requirements. The laggard businesses are still struggling. Their brands and their commercial performance have been significantly damaged with EU and USA governments bearing down on them. Be warned.

I am pleased to introduce to you Track Record Global’s (TRG) new monthly newsletter. It is through this that we will offer you industry insights and TRG’s perspective on important developments and discussions in the areas of compliance, supply chain management and sustainability. We will also periodically include updates on what is happening here at TRG.

Things are changing fast for us – we are expecting further rapid growth over the next 12-18 months, and have just opened a new marketing & sales department. We believe that commercial environments, especially international structures like supply chains, are constantly changing and evolving – and we don’t plan on sitting around while this process happens. We have a vision of the future of the management of product risk and quality, and are systematically adapting our range of services to reflect this.

The management of product quality is at the beginning of an arc of transformation that begins with the management of technical quality, and ends with the overall management of product supply chain quality – the core components of which are intangible (non-measurable but qualified by production that is legal; sustainable; socially acceptable, traceable etc.) and linked to the component raw material sources (conflict free minerals, no civil war, no child labour etc.).

All the indicators point to the fact that the demand for traceable, responsibly sourced products is becoming ever more important to global consumers as well as corporations. Apple has responded to the allegations made against its tin supply chain vociferously, declaring not only its pre-existing concern for responsible sourcing and business practices, but also its intention to do more to improve its sourcing performance, particularly in the areas of human rights and minerals. According to a 2009 Havas Media study, 48 percent of consumers surveyed across nine countries expressed a willingness to pay a 10 percent premium for goods or services produced in an environmentally and socially responsible way. Furthermore, there are indications that China, the nation with the world’s largest population, is seeing a slowly increasing level of market demand for responsibly sourced products. China consumes a huge amount of soy (consumption of the crop has doubled there in the last decade). The figure in 2009 was 55 million tons, 41 million of which was imported. In recent decades, pressure from European consumers and environmental groups has helped to check the spread of soy agriculture into some vulnerable ecosystems, but similarly motivated pressure from China has traditionally been weak or non-existent. However, according to Sibyl Anwander, Executive Director of the Pro-Terra Foundation, domestic demand for certified soy is increasing among the new urban middle classes. She told feednavigator.com that “some consumers [in China] are beginning to cast a critical eye over the way the feed ingredient is being sourced”.

TRG has a wealth of experience in responsible sourcing and traceability through our background and ongoing involvement in forestry and European Union Timber Regulation compliance. We intend to use this to enhance our current product compliance services to offer our customers a more holistic approach to supply chain compliance. Product compliance, safety and technical performance will remain important, but we believe the two approaches can be married into a more meaningful whole. Being able to demonstrate (in a transparent manner) the ethical and environmental quality of the supply chains that produced products will provide a crucial advantage in minimising reputational and regulatory risk.

There are 3 key linked themes for TRG’s future services that form the cornerstones of our future approach to the assessment of compliance through:

1. Viewing product compliance from the supply chain standpoint;
2. A high degree of transparency of supply chain information;
3. The level of inherent supply chain risk determining the level of mitigating documentary evidence required to ameliorate risk.

I am also very pleased to announce our inaugural compliance workshop on ‘the management of own brand product risk’, which will be hosted at Lady Margaret Hall College, Oxford, towards the end of September 2015. This will be a great opportunity for participants to network with experts and individuals involved in retail and general product compliance, as well as to learn more about important regulations, and the process and benefits of commercial supply chain risk management. More information on this event will be forthcoming in future newsletters.

Frank Miller,

MD, Track Record Global.

Since the EUTR came into force in March 2013, Track Record Global (TRG) has had four of its customers audited by EUTR Competent Authorities. Each is a major Operator in the EU timber sector and they’ve all implemented Track Record Global’s Track Vision DDS (Due Diligence System).

The three international Operators based in the UK have all been recognised by the National Measurement Office (NMO) as compliant with the EUTR which substantiates TRG’s claim to have developed one of the most robust and rigorous DDS’s currently available to Operators and Traders.

Because TRG has been at the vanguard of developing a DDS that comprehensively complies with the EUTR, on behalf of our customers we have been able to provide the NMO with straightforward access to the detailed information and evidence required for an EUTR audit.

Where our Track Vision DDS stands out from other organisations, offering similar systems, is the fact that it has been developed from the very outset as an online system. By being able to deliver results to the NMO from a web platform, the NMO has the opportunity to efficiently carry out more audits in a less intrusive manner which is key for the EUTR to succeed and to be seen as an effective regulation. In TRG’s view, it is the way that all regulations of this type will be compliance checked by the authorities in the future.

Without doubt the EUTR is having a positive impact in the reduction of high risk timber crossing the EU border, but to really make a significant impact the NMO needs to spend less time on site and more time reviewing the gathered evidence. This can only really be achieved if the DDS is delivered online.

Another key differentiator to our approach to the EUTR, is that TRG has no intention of becoming a Monitoring Organisation (MO) and will remain an independent body. We carry out audits on behalf of our customers. The information gathered is strictly confidential to them and is securely held by TRG. I really don’t think that MOs offer any advantages. The fact that four of our Operators have already been successfully audited by the NMO proves absolutely that we have developed a comprehensive and robust DDS that allows companies to demonstrate EUTR compliance.

We fully support the EUTR and, although it may yet still be too early to see its full impact, it has already led to more transparency about the structure of supply chains and more awareness and understanding of high risk timber.