Sustainability is the Key for Sourcing

Expert Speak

27 July 2022 • 20 min read

Sustainability is the Key for Sourcing

Editorial Team

As sustainability and conservation become ethical concerns, companies must keep in mind the social and environmental implications of their sourcing and supply chain strategies. Sustainable sourcing is essential to all industries.

While the world chants sustainability and conservation, companies must take ethical, social and environmental aspects seriously in their sourcing and supply chain strategies. The world is not always fair and transparent in its activities. This is amply demonstrated by how blood diamonds and illicit cocoa are sourced by large multinational companies, attracting censure from all quarters. Read on to know how crucial sourcing is for any firm in this globalized time.

Incidentally, rough diamonds used by rebel movements or their allies to fund armed conflicts to undermine legitimate governments have also financed a genocidal war in the Central African Republic (CAR) around 2013. Vexed with the miseries emanating from blood diamonds, the Kimberley Process (KP), an international commitment to abolish the sourcing of conflict diamonds into the supply chain, was initiated in the year 2000.

It also ushered in the Kimberley Process Certification Scheme (KPCS) to incorporate safeguards on rough diamond shipments, including certifying the precious stones coming out of its scrutiny as ‘conflict-free’. As claimed by KP, which comes with a UN Mandate uniting 85 countries, including the European Union (EU), the industry through the World Diamond Council, civil society and others as its members, the regime is responsible for countering 99.8 percent of global conflict diamonds.

However, the reality quite doesn’t agree with these claims. A Time magazine report noted that KP is too narrow, which had excluded several atrocities involved in mining rough diamonds but only included those ‘rough diamonds’ used to finance wars against governments worldwide, KP’s official definition of conflict diamonds.

Coinciding with the 22-year history of the KP, the world had also witnessed the Zimbabwean army seize a diamond deposit and slaughter about 200 miners in 2008. But none of these atrocities and human rights violations received Kimberley protection as they did not amount to waging war against governments. This exposes the chinks in sourcing diamonds through KP certifications as not comprehensive.

Though the KP aimed to regulate the rough diamonds trade to avert the flow of conflict diamonds and safeguard legitimate diamonds, there were reports of diamonds being smuggled across the border to the Congo, where KP certificates were being traded internationally.

Considering the narrow nature of the KP, several entities, many countries, WDC and international organizations have asked for KP’s ambit to be stretched to fit in human rights abuses, fair labor practices and environmental impact. The diamond trade is just one small part of the total trade and commerce ecosystem, comprising sourcing, producing, manufacturing, retailing, selling and other business-related aspects.

Slavery continues to thrive in newer forms in every country, disguised as unpaid labor, bonded labor, underpaid labor, and illicit sourcing methods for raw materials. They involve vendors, suppliers, manufacturers, and everybody in the value chain. Sourcing for raw materials has social, environmental, and ethical footprints.

A look at the varied ways of sourcing cocoa to make chocolate sheds more light on illegal sourcing modes.

What is Sustainable Sourcing?

Sustainable sourcing considers social, ethical, and environmental performance factors while selecting suppliers. When supply chains are spreading globally, including entering into developing countries in a quest for lower costs and improved productivity, sustainable sourcing is essential to all industries.

Companies must comply with local laws and regulations, parallel to meeting stakeholders' expectations such as shareholders, customers, employees, non-governmental organizations (NGO), labor unions, government observers and trade associations.

As conservation and protection are the keywords, companies increasingly embed sustainable sourcing into their supply chain and procurement management processes to negotiate risks and welcome opportunities. Sourcing comes with its risks of supply disruption, cost volatility, threats to brand reputation and difficulties with following local rules.

The most important goal of sustainable sourcing is to establish robust long-term linkages with suppliers while bettering companies’ and vendors' performance on environmental, social, and ethical parameters. Accomplishing these goals is instrumental to meeting a company’s corporate responsibility and implementing an overall sustainable business model and structure, which results in conserving resources and saving the environment.

Cocoa Sourcing and Chocolates

West Africa is one of the top cocoa producers, the essential ingredient for the multi-billion-dollar chocolate industry. However, cocoa sourcing seriously tarnished some big companies' ethical and social dimensions. It was mired in many controversies about forced labor and child labor in the African continent.

A 2017 study conducted by the Global Slavery Index in top cocoa-producing Ghana and Cote d’Ivoire (Ivory Coast), both account for about 60 percent of the global output, exposed the forced labor in making cocoa. Which ultimately landed in the supply chains of famous chocolate brands.

The study interviewed cocoa plantation workers aged 18 and above and 10 – 17 residing in medium and high cocoa production areas of Ghana. Those who worked in the plantations between 2013 and 2017 for adults and children in the past 12 months. The Global Slavery Index quizzed adults on their experiences of forced labor in cocoa agriculture and children on the experience of child labor, analyzing 903 adults and 715 children.

According to the Index, around 1.1 million adults worked in cocoa agriculture in Ghana's medium and high cocoa-producing areas between August 2016 and August 2017. The survey found that for every 1,000 adult cocoa workers, an estimated 3.3 percent of them ended up being victims of forced labor. This translates to about 3,700 adults.

During the same time, the study observed that more than 700,000 children toiled. For every 1,000 of them, 1.5 percent were part of forced child labor.

Besides forced labor, cocoa cultivation is physically challenging. It demands the utilization of hazardous cutting tools, pesticides, long hours in the sun, and travel of much distance while carrying heavy loads.

Top Chocolate Companies Faced Heat

It’s common to see chocolate bars wrapped in attractive packages with claims that the cocoa for their production was sourced ethically. This type of chocolate packaging is also in India.

The Guardian’s report from 2021 said eight children who claimed to have been used as slave labor on cocoa plantations in the Ivory Coast had launched legal action, accusing Mondelez, Hershey, Olam, Mars, Barry Callebaut, Cargill, and Nestle of aiding and abetting illegal enslavement of thousands of children on cocoa plantations for their supply chains.

They were branded as defendants in the lawsuit filed in Washington D.C. by the International Rights Advocates (IRA), a human rights firm, in lieu of the affected children. According to the complainants, all from Mali, demand damages for forced labor, including compensation for illegal enrichment, intentional infliction of emotional distress, and negligent supervision.

This was the first time a class action was brought on the cocoa industry in the United States (US) court of law. The court documents and research by the US State Department, the International Labor Organization (ILO) and UNICEF highlight the complainants’ experience of child slavery, which mirrored that of thousands of other minors.

The central allegation, in this case, was that the chocolate manufacturers profited from the illegal work of children. They were taking advantage of contracted suppliers who could supply the core ingredient at lower prices than what it would have cost had adults worked with protective gear.

Besides these plaintiffs, cocoa cultivation in the Ivory Coast has a legacy of human rights abuses, low pay, child labor and structural poverty. According to the plaintiff octet, they were coerced to labor for several years without compensation, travel documents, and no information on their location and reunion with families for several years.

The petition noted that the companies had allegedly misled the world through the Harkin-Engel Protocol to combat the worst forms of child labor in the cocoa industry.

In 2011, a group of eight chocolate manufacturers, Nestle, Incorporated, Mars, Kraft Foods, Hershey, Ferrero, Cargill, Barry Callebaut, and ADM, pledged $2 million in partnership with the International labor Organization (ILO) to the Harkin-Engel Protocol, a 2011 agreement to abolish worst forms of child labor involved in growing and processing cocoa beans, and its derivatives.

Buying Green is Not Easy

While many companies aim to replace their conventional materials by sourcing environmentally friendly ones such as recycled plastic, recycled steel, green steel and others as part of their climate commitments, buying green is not as easy.

McKinsey, the global consulting firm, noted that the production capacity of several low-emissions materials is set to fall short of demand in the upcoming years. According to the study, Europe's need for green steel in 2030 is anticipated to be two times more than the supply.

Similarly, McKinsey projected a global shortage of recycled plastic and recycled aluminium, leading to squeezing the industrial goods and consumer products manufacturers, who promised to prune their supply chain emissions.

If companies fail to lock in sufficient supplies of green materials, they may have to pay steep premiums to avoid breaking their pledged commitments. This will also impact their linkages with investors, customers, and other stakeholders. Owing to rising demand, the prices of recycled plastics are already much higher than those of virgin resins.

A few proactive companies are preparing their value chains to avert these supply shocks by building capabilities and strategies for the future.

McKinsey identified ‘developing baseline insights on emissions over time, defining a sourcing strategy to lower emissions over time and implementing sourcing plans at speed. As some near-term moves to confront the scarcity of green material.

Impending low-emissions Resources Scarcity

Proactive companies know investors, regulators, and other stakeholders want them to decarbonize. This will later help tap growing markets and expand margins.

Decarbonization goals are not limited to reducing greenhouse-gas emissions. According to McKinsey, up to 90 percent of emissions connected to several end products and significant components occur upstream in the supply chain. Due to industrial processes and energy expenditure.

Companies are requesting larger quantities of low-emissions inputs, ranging from raw materials to cutting-edge engineered parts. Recent reviews of some automobile original equipment manufacturers’ (OEMs) quotations revealed the companies specifying renewable-electricity use, recycled materials content, and Science Based Targets initiative (SBTi) commitments from suppliers.

However, green materials production does not align with the rising demand. This leads to more significant gaps as more companies prefer low-emissions resources to honor their climate goals.

Per McKinsey’s analysis, green steel demand in Europe is expected to rise to 50 million metric tons per year by 2030. Considering it grows at the speed needed to meet the EU’s 50 percent emissions reduction target.

By the end of this decade, more than a dozen green steel factories are anticipated to produce in Europe. They are yielding a quantity sufficient as one-third of the continent’s flat steel production capacity. But, even then, have a shortfall of over 10 million tons in 2030.

Steel is one of the many low-emissions resources on track to suffer supply shortages in Europe. Further studies point to wide disparities between the production and demand of recycled aluminium and recycled plastic.  

The Time for Sustainable Sourcing

The longer a company takes to strategize procuring low-emissions resources, the more likely disadvantages will develop. However, ‘it is still early days in the race to obtain low-emission resources and too soon for first mover’s approaches to be proven successful over the long term.’

Overcoming supply chain issues requires ingenuity with partnerships across the value chains to lock in the lower costs.

To better manage the green materials squeeze, these first mover companies focus on developing market insights to manage uncertainties. They are taking a long-term strategic approach to sourcing decisions and building new capabilities beyond supply chain management.

Develop Circular Products

When most activities gravitate towards sustainability, developing circular products is the need of the hour. Circular products are designed to make their components and materials easily recoverable for recycling and reuse. Which also aligns with the plan to reduce demand for materials.

Some products can be changed to embed low emissions materials and parts immediately. While in some cases, the significant lead time of up to two years might be needed to redo product designs and reconfigure manufacturing procedures.

Other strategies to achieve sustainability in sourcing include decarbonizing suppliers’ energy use, adjusting materials mix, partnering with suppliers, building new capabilities beyond supply chain management, charting a sourcing strategy to cut emissions over multiple time frames and implementing low-emissions sourcing plans at speed, among others.

Companies to Guide Responsible Sourcing

As expectations rise on a global scale to make businesses green and sustainable, more than a few companies offer solutions and help businesses achieve those goals which integrate social and environmental responsibilities into supply chain management.

These companies help businesses manufacture the right products in the right place, with suppliers who deliver on time to meet customers’ expectations. Including developing sustainable policies in their supplier selection process and communicating clear expectations to suppliers.

This also includes integrating into buying practices, educating and supporting suppliers in setting their business standards, monitoring supplier corporate social responsibility (CSR) performance, managing stakeholder expectations, and reporting on practices.

Consulting, assessment, risk assessment, ethical data exchange, reporting, advisory and verification services, training, standards, green products guides, and third-party verification are a few more solutions these companies offer.

Third-party verification of a company’s responsible sourcing program provides transparency to its supply chain. Including reinforcing suppliers to grow or produce food and employing safe, efficient, and ethical field or factory environments.

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