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The social impact and opportunities of international companies' ESG policies on the supply chain.

ChiaFen LEE, 2023-May-30

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Taiwan's industries play a crucial role in the global supply chain, and the associated challenges of carbon reduction, such as carbon taxes and fees, are currently a matter of public concern. To achieve net-zero goals, many international corporations have implemented supply chain transformation strategies. Upon reviewing the Google Cloud Sustainability Survey 2023, a noteworthy observation emerged: there seems to be a shift in corporate priorities from ESG (Environmental, Social, and Governance) to “only E”, driven by heightened expectations regarding net-zero goals. However, I think it is still important to examine whether the ESG policies of international corporations have a social impact on their supply chains or if they create corresponding opportunities.

This study delves into Apple's Supplier Responsibility reports for three consecutive years (2021, 2022 and 2023) to gain insights. Additionally, Adidas' 2022 Supply Chain report was reviewed to understand the similarities and differences in social strategies among different brands.

Key Questions to Address

  • How do corporations disclose their social policies and efforts?
  • Is there a specific methodology to verify the social impact they claim to achieve?
  • What are the global trends in social impact and/or human capital, and how are international corporations responding to these trends?
  • What insights do academics offer on the social aspects of ESG?
  • For suppliers, is it a threat or opportunity?

Introduction

Literature Review

Case study

Summary & Discussion

Reference

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Introduction

Literature Review

Case study

Summary & Discussion

Reference

Trends

Measurement and Verification

CBA (Cost-benefit analysis)

CBA is a systematic approach used to evaluate the financial and economic feasibility of a project or policy by comparing the costs incurred with the benefits generated. It is a quantitative technique that helps decision-makers assess whether the benefits of a proposed action outweigh its costs.

SROI (Social return of investment)

SROI is a framework and methodology used to assess and quantify the social value or impact created by an organization, project, or intervention relative to the resources invested. The SROI approach goes beyond traditional financial metrics by considering the broader social, environmental, and economic outcomes. It aims to measure and communicate the value generated in terms of social and environmental benefits, in addition to financial returns.

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Disclosure Standards

GRI (Global Reporting Initiative)

GRI stands for Global Reporting Initiative. It is an independent international organization that has developed a widely recognized framework for sustainability reporting. The GRI framework provides guidelines and principles for organizations to measure and report their economic (200 series), environmental (300 series), and social performance (400 series).

SASB (Sustainability Accounting Standards Board)

SASB stands for the Sustainability Accounting Standards Board. It is an independent nonprofit organization that focuses on developing industry-specific sustainability accounting standards for publicly traded companies. The goal of SASB is to provide investors with standardized and decision-useful information on the environmental, social, and governance (ESG) factors that are material to a company's financial performance.

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  • Supply Chain Due Diligency

Companies will be pressed in 2023 to invest more resources into managing the resilience and sustainability of their supply chains in the face of a more rigorous regulatory landscape governing corporate responsibility around the impact on human rights.

  • DEI (Diversity, Equality, and inclusion)

As a result of COVID-19 and the intense competition for talent amid a period of exceptionally high employee turnover, employee expectations around health, well-being, culture, flexibility and benefits have evolved over the past two years.

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Amplifying and promoting the “S” in ESG investing: the case for social responsibility in supply chain financing (V Baid and V Jayaraman, 2022)

  1. With wide and diverse range of different social issues in every country and inconsistency in ESG data makes it harder to measure the social aspect of ESG. To take a further leap in the area of measurement in ESG, a consistent and comparable approach to social measuring and reporting that is robust and transparent needs to be achieved.
  2. There are a number of methodologies commonly used to measure social impact into monetary valuation and CBA SROI and Wellbeing are the most common.
  3. 1) UK - The UK Social Value Act (PPN 06/20, UK Cabinet Office, 2020) applies to all Central Government Departments, their Executive Agencies and Non-Departmental Public Bodies. It considers five themes under the policy – COVID 19 recovery, fighting climate change, tackling economic inequality, well-being and equal opportunity (PPN 06/20). This policy has been supported by business as it will create a level playing field for businesses including small and mid-size enterprises (SMEs) and voluntary, community and social enterprise (VCSEs).�2) Germany - The Supply Chain Due Diligence Act (Lieferkettengesetz) requires large companies to make sure social and environmental standards are observed in their supply chain.�3) France - The 2017 “Devoir de Vigilance” law requires action by companies to investigate their own activities and supply relationships for corruption, human rights abuse and sustainability.

⇒ Further reading: History of “S” in ESG, Methods of social impact measurement, Due Diligency legislation

Introduction

Literature Review

Case study

Summary & Discussion

Reference

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Piggy in the Middle: How Direct Customer Power Affects First-Tier Suppliers’ Adoption of Socially Responsible Procurement Practices and Performance (Marshall et al., 2019)

  • The role of first-tier suppliers in adopting socially responsible procurement practices is crucially important as they are the ‘piggy in the middle,’ frequently caught between buyers who want socially responsible initiatives implemented in lower tiers and second-tier suppliers who may be unable or unwilling to adopt these initiatives.
  • This paper uses bases of power theory* to examine the impact of buyer companies’ power usage (non-mediated and mediated) on first-tier suppliers’ adoption of socially responsible procurement practices (process-based and market-based) with their own (second-tier) suppliers.
  • Our findings show that non-mediated power use (expert and referent) influences the adoption of process- based and market-based practices, while mediated power use (coercion, legitimacy, and reward) has no significant impact on the adoption of either type of practice.
  • The adoption of market-based socially responsible procurement practices leads to enhanced performance for first-tier suppliers who adopt these practices with their second-tier suppliers.

⇒ Further reading: Bases of power theory*

* French and Raven (1959) give a classification of five different types of power used in relationships. They are 1) expert power, 2) Referent power, 3) Coercive power, 4) Legitimate power, and 5) Reward power.

Introduction

Literature Review

Case study

Summary & Discussion

Reference

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S&P Global - Key ESG trends for 2022

  1. Social issues in supply chains will command more attention.
  2. Climate transition strategies will increasingly embrace social issues.

S&P Global - Key ESG trends for 2023

  1. Employment practices adapting to new workforce dynamics will be tested in the face of economic and labor-market uncertainty
  2. More resources will be devoted to managing human rights impacts in supply chains amid new sustainability regulations

Introduction

Literature Review

Case study

Summary & Discussion

Reference

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Q. How do corporations disclose their social policies and efforts?

GRI and SASB

Q. Is there a specific methodology to verify the social impact they claim to achieve?� CBA and SROI

Q. What are the global trends in social impact and/or human capital, and how are international corporations responding to these trends?

Q. What insights do academics offer on the social aspects of ESG?

  1. Environmental supply chain practices are the subject of the majority of sustainable supply chain studies (Carter and Rogers 2008; Huq et al. 2014)
  2. Environmental practices are widely implemented, standardized, and reported due to the extensive adoption of environment management systems, such as ISO14001, as well as more stringent environmental regulations requiring standardized environmental reporting, while social management systems and regulations lag behind (Klassen and Vereecke 2012).

Q. For suppliers, is it a threat or opportunity?

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Introduction

Literature Review

Case study

Summary & Discussion

Reference

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Introduction

Literature Review

Case study - Apple

Summary & Discussion

Reference

Organizations supported by Apple (by year)

24 → 60 → 70

Labor agencies mapping and Responsible Labor Recruitment (by year)

470+ → 1182 → 2500+

Worker satisfaction (by year)

196,647 → 264,963 → 459,000+

Health and wellness education program (since 2017)

1.98M → 2.95M+ → 3.7M+

Infectious Disease Preparedness and Response (IDPR)

Guideline → Assessment → Training

Swift coding program (since 2017)

3,500 → 15K+ → 28K+

Expanding mental health support

In China(1)

Supplier Employee Development Fund (SEDF)

New(2)

Supporting women’s reproductive health

In Vietnam (3)

  1. In 2022, we continued working with leading experts from Beijing Normal University, who specialize in Occupational Health Psychology, to enhance our holistic approach to health and wellness by conducting a pilot on mindfulness and positive management training with selected line leaders and production managers.
  2. As part of this commitment, we opened a physical home for the Apple Education Hub in China — a learning lab, built in partnership with Zhejiang University outside of Shanghai. The lab is a physical extension of Apple’s ongoing dedication to offering and improving educational access.
  3. In Vietnam, where up to 70 percent of employees at participating suppliers are women, we continued with our long-standing program that addresses reproductive health.

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Introduction

Literature Review

Case study - Apple

Summary & Discussion

Reference

Highlight - Not only talking something good, but also something bad. And explain what they learned and how to improve.

  • (Fact) 10 instances were discovered of suppliers hiring students in violation of our Code and Standards to fulfill labor demand requirements.
  • (Corrective actions) Worked closely with suppliers to help them develop plans that address the specific needs of the students, including repayment of missing wages, safe return to their school or home, re-assignment to job postings.
  • (Preventive actions) Updated our Code and Standards to explicitly state that suppliers may only hire students in connection with an approved education or training program at an educational institution

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Introduction

Literature Review

Case study - Adidas

Summary & Discussion

Reference

1 The S-KPI measures a set of social indicators, such as accident rates, worker satisfaction, and worker empowerment. Due to positive progress in our suppliers’ overall performance in 2022, we have upgraded our 2025 target for the number of suppliers expected to achieve a ‘4S’ rating. The overall target seeks to achieve 100% adherence to or 90% overachievement against these foundational social impact measures, with ‘3S’ being the minimum expected supplier performance.

2 The fair wage benchmarks include industry wages, minimum wages and living wages. These benchmarks are set and tracked through a ‘FLA Fair Compensation Tool,’ which has broad industry adoption and is being rolled out progressively to strategic Tier 1 suppliers.

3 The measurement of wage parity for production line workers and their immediate supervisors (i.e., line leaders) forms part of a broader gender strategy rollout to applicable strategic Tier 1 suppliers who complete self-assessments to identify and then close gender gaps in operating practices and procedures.

4 In conducting due diligence we seek to identify, prevent or mitigate potential adverse human rights or environmental impacts, with priority given to addressing the most severe impacts.

Highlight - S-KPI

  • 2022 marks the first year where we have measured supplier performance using the S-KPI tool.
  • The S-KPI assesses a factory’s performance in delivering a safe and fair workplace by measuring effective due-diligence processes, as well as the ability to deliver positive social impact.
  • The S-KPI measures a set of social indicators, such as accident rates, worker satisfaction, and worker empowerment. In total, the S-KPI has 15 units of measures (‘UOM’).
  • In 2022, almost 75% of our key manufacturing facilities achieved a rating of ‘4S’ or better, which significantly exceeded the original target that we set for 2025 (70% of suppliers rated 4S).

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Summary

  • Both Apple and Adidas use GRI and SASB to disclose ESG data.
  • Both Apple and Adidas conducted social compliance audits in their supply chains. (Some were unannounced.)
  • Both Apple and Adidas emphasized the increasing transparency on human rights across thier value chain.
  • Both Apple and Adidas highlighted gender equality is important, and Adidas also set “Fair compensation“ as a priority (1).
  • Both Apple and Adidas deployed worker satisfaction surveys regularly.
  • Both Apple and Adidas provide grievance channels (Hotlines) and they’re digitized(2).
  • Both Apple and Adidas offer supplier capacity building training. Apple offers more advanced and non-work-related programs and have more collaborations with local communities and experts.
  • Adidas set specific KPIs to evaluate suppliers’ social impact.�Neither Apple nor Adidas use CBA or SROI to evaluate their social impact on their supply chains.
  • Adidas, as a member of the Fair Labor Association (FLA), they received four ‘Sustainable Compliance Initiative’ (‘SCI’) Assessments(3) from the FLA in 2022.
  • Apple disclosed negative report transparently and took both immediate and preventive actions.
  • Apple’s reports are available in PDF format, but Adidas’ main reports are only available on-line.

Introduction

Literature Review

Case study

Summary & Discussion

Reference

(1) In 2022, we completed wage data collection among our strategic suppliers in Cambodia, Indonesia, and Vietnam, representing 62% of all strategic suppliers.�(2) To make the grievance channel more accessible during COVID-19.

(3) The FLA has assessed the supply chain of its member brands by utilizing a variety of monitoring models (e.g., in-person, virtual, or a hybrid approach of both in-person/virtual), despite the ongoing challenges posed by covid-19.

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Discussion

  • COVID-19 is both a crisis and an opportunity. More tools are digitized, and resources are easier to access without boundaries.
  • Adidas did not disclose the details of responsible recruitment or zero-recruitment fees in their report. However, this issue is of utmost importance, particularly in the textile and footwear industries, which heavily rely on labor-intensive processes and migrant workers often constitute a significant portion of the workforce employed by Adidas' suppliers.
  • The number of Adidas’ tier 1 suppliers are decreasing(1) and shifting from Vietnam to Indonesia (footwear). Besides, Apple has directed the removal(2) of 25 manufacturing supplier facilities and 205 smelters and refiners from its supply chain since 2009. The impact on local communities is a mystery.
  • Two trends are revealed in Apple’s report - �1) Advanced manufacturing (Automations, robots)�2) Mental health support�Apple consistently allocates resources and provides training in these two areas. I believe the reasons for their focus on supporting mental health are twofold: the ongoing impact of the pandemic and the implementation of follow-up programs following the tragic suicide cases in the Longhua assembly-line in China back in 2010.

Introduction

Literature Review

Case study

Summary & Discussion

Reference

(1) The reduction in facilities reflects the completed divestiture of Reebok and associated impacts on sourcing operations.

(2) In the event that a supplier is unwilling or unable to improve their operations to meet Apple’s requirements, they risk removal from Apple’s supply chain.

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Limitations -

  • There may be a lack of standardized metrics or reporting frameworks for social impact measurement, which can make it difficult to compare results across different companies or industries.
  • The transparency of sub-tier suppliers is still a challenge and it may cause uncertainties.

Further study -

  • Both Apple and Adidas’ suppliers in Taiwan are distributed in different industries, such as electronic components, servers, and textiles. Through interviews, it will be helpful to understand the impact and opportunities on the front line.
  • If CBA and SROI can’t used by corporations, what the alternative can be?
  • International Supply Chain ESG Strategy vs. Local Industry Transformation — Can Taiwan's SMEs take the opportunity to transform to a higher level?

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Introduction

Literature Review

Case study

Summary & Discussion

Reference

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Introduction

Literature Review

Case study

Summary & Discussion

Reference

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Introduction

Literature Review

Case study

Summary & Discussion

Reference

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  • Unglesbee, B. (2023), “3 years later: How COVID-19 exposed the vulnerability of suppliers and workers to the power of big buyers”, available at https://www.supplychaindive.com/news/covid-19-suppliers-workers-cancellations/646471/ (Published March 31, 2023)
  • World Socialist Web Site, 2023 “Chinese youth and workers face jobs crisis as US sanctions hit”, available at https://www.wsws.org/en/articles/2023/04/28/jfjy-a28.html
  • Yadavalli, V.S., Darbari, J.D., Bhayana, N., Jha, P.C. and Agarwal, V. (2019), “An integrated optimization model for selection of sustainable suppliers based on customers’ expectations”, Operations Research Perspectives, Vol. 6, 100113.

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Introduction

Literature Review

Case study

Summary & Discussion

Reference

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Appendix

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Ref. https://www.msci.com/documents/10199/9d2eeece-c2db-3d86-873f-faaac8cd62ef

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Ref. https://www.spglobal.com/esg/insights/featured/special-editorial/key-sustainability-trends-that-will-drive-decision-making-in-2023

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Social issues in supply chains will command more attention. 供應鏈社會議題會獲得更多關注

In 2021, companies became acutely aware of their dependency on — and the fragility of — their supply chains. In 2022, we believe this trend will persist as the global economy continues to recover from the pandemic and as management teams focus on heightened supply chain costs and risk of disruption.

Beyond the resilience of supply chains, we also think that social issues in supply chains will garner greater attention, particularly as efforts grow to curb human rights abuses and improve labor conditions. 特別是遏止侵犯人權和改善勞動條件的努力

Existing and proposed legislation will make supply chain traceability and social risk management more important this year. 現有與即將制定的法規將更加重視供應鏈的可追溯性與社會風險管理Despite delays in the EU Sustainable Corporate Governance directive in 2021, mandatory human rights due diligence legislation at the national level in member states such as Germany, the Netherlands, and France will move a larger swath of companies to identify and act against human rights violations in their supply chains. 辨識與採取行動以預防供應鏈中侵害人權的風險

Additionally, continued action in the U.S. and other key markets to restrict imports based on forced labor in supply chains will push companies to evidence credible human rights monitoring efforts up the chain. This will be true beyond Tier 1 suppliers and will include raw materials.

Ref. https://www.spglobal.com/esg/insights/key-esg-trends-in-2022

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Climate transition strategies will increasingly embrace social issues. 氣候轉型策略將更多地涉及社會議題

Despite expectations for governments and companies to make meaningful progress on their climate commitments in 2022, they will be doing so in a broader economic and geopolitical climate marked by inflationary trends, higher energy costs, and tightening monetary policy. These shifts will challenge the climate agenda and sharpen attention on managing the social implications of the transition.

In 2022, a key challenge will be balancing actions taken on the ‘E’ with the ‘S’ when implementing climate transition plans to account for impacts on developing nations and vulnerable domestic populations. 在氣候轉型計畫中，如何取得「環境」與「社會」的平衡，以減緩對開發中國家與國內弱勢族群的衝擊，In particular, efforts to promote the low-carbon economy may be disrupted in the absence of credible plans to promote economic and social inclusion, access to affordable critical services, and the availability of decent work. Indeed, at COP26 in November 2021, more than 30 countries signed pledges to support workers and communities hurt by the transition to a green economy. In the face of potential economic headwinds, the support provided to emerging economies to balance climate goals with those of economic growth and poverty alleviation will deeply affect social stability and momentum on the global climate agenda.

Ref. https://www.spglobal.com/esg/insights/key-esg-trends-in-2022

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22

GRI新發布之「通用準則 2021」於2023年1月1日生效。

新「通用準則 2021」包涵3個範疇的框架：

  • GRI 1：基礎 2021

介紹 GRI 報告的目的和系統，設定所有組織必須遵守的關鍵概念、要求和原則，按照 GRI 準則進行揭露。

  • GRI 2：一般揭露 2021

更新和合併揭露：揭露行為、營運與員工、治理、策略、政策與做法、利害關係人議合。

  • GRI 3：重大性議題 2021

提供組織如何確定、列出和管理其每個重大主題的指南和修訂之揭露。

行為準則：

所屬行業可能相關的重大主題資訊，要求組織在決定其重大主題和決定每個重大主題的報導內容時，均須參照適用之行業準則；目前已公告的行業準則有：

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重點：

  • 關注影響力（impact）、重大性議題（materiality）、盡職調查（due diligence）、利害關係人議合（stakeholder engagement）。
  • 主題準則刪除 GRI 412 人權評估、GRI 307 有關環境保護的法規遵循、GRI 419 社會經濟法規遵循等 3 個準則（已整併或內化至新版通用準則中）
  • GRI 同時發布首個針對特定行業的揭露準則，該準則增強了與組織運營相關影響資訊揭露，以及組織邁向低碳經濟轉型的進度。未來類似針對特定行業所制定的標準，範圍將包括：煤炭、採礦、農業、水產養殖和漁業等40個行業別。

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Ref. https://www.eticanews.it/wp-content/uploads/2020/06/SASB.NFRDWhitepaper.FINAL-005.pdf

Global Reporting Initiative (GRI)

永續會計準則委員會

Sustainability Accounting Standards Board (SASB)

新發布之「通用準則 2021」預計2023年1月1日生效。

2018年10月

透過與利害關係人議合，評估經濟、環境與社會的顯著衝擊而訂立重大議題。

透過永續產業分類系統（Sustainable Industry Classification System, SICS®）選擇與企業本身屬性最為相近的業別；接著對照Materiality Finder，進而揭露其所屬業別的重大主題與對應指標。

GRI 1：基礎、GRI 2：一般揭露、GRI 3：重大性議題，三個通用標準

環境、社會資源、人力資源、商業模式與創新、領導及公司治理，五大面向。

經濟(GRI 201~207)、環境(GRI 301~308)、社會(GRI 401~418）特定主題準則

11個主產業別（含77個子產業別）特定揭露準則

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利害關係人（包含投資人）

投資人

一體適用，通則性揭露

揭露具產業差異性，提高資訊可比性

GRI及SASB於2021年4月共同發布「永續報告實務指南-參考GRI與SASB」。該篇指引說明共同揭露GRI及SASB準則的方法，GRI與SASB準則為互補而非替代（GRI的特色在於組織影響力的全面揭露，SASB則著眼於揭露企業財務的重大影響）。優點有：

  1. 提供完整的企業績效與表現、連結永續及財務資訊。
  2. 符合大多數利害關係人的資訊揭露需求。
  3. 提供企業檢視重大議題及其影響的框架。

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隨著國際貿易對於「供應鏈」人權愈發關注，近幾年來各國先後完成各項供應鏈法案，例如美國加州2010年的《加州供應鏈透明度法案》（California Transparency in Supply Chains Act）、英國（2015）、澳洲（2017）的《現代奴隸法》（Modern Slavery Act），以及德國國會於今年6月11日以壓倒性的票數通過的《供應鏈企業責任法》（Lieferkettengesetz）等。無論是基於強制或是自發性行為，企業必須依循國際標準進行內部人權調查和問責、並落實企業社會責任，已成為國際趨勢，更是台灣這個以出口導向為導向貿易大國要更加關注的議題。

各國參考的重要國際準則，包括《聯合國工商企業和人權指導原則》（UN Guiding Principles on Business and Human Rights），以及國際勞工組織（ILO）《工作基本原則與權利宣言》（Declaration of Fundamental Principles and Rights at Work）所揭示的各個項目積極保護範疇，並落實於公司治理、金融監管及勞動政策法規之中。

Ref. 新疆棉事件後，台灣應重視企業社會責任及供應鏈人權保護法制化問題

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Introduction

Literature Review

Case study - Adidas

Discussion

Reference

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Discussion - Take Apple as an example, to imagine the social impact on supply chains, driven by a strong ESG policy

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Introduction

Literature Review

Case study

Summary & Discussion

Reference

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Drivers of supplier sustainability: Moving beyond compliance to commitment (Foerstl et al., 2015)

  • Based on findings from a cross-case analysis of eight first-tier (FT) suppliers and an integration of resource dependency theory (RDT), this study explores the drivers and mechanisms of FT supplier engagement in sustainable supply chain management.

Introduction

Literature Review

Case study

Summary & Discussion

Reference