Building a Sustainable Supply Chain

Deloitte’s new report was released at the 7th China International Import Expo in Shanghai. The report provides guidance for companies on how to develop sustainable supply chains in a complex and highly dynamic business environment.

The key messages of the report are that:

• Regulators are deploying new tools that require companies to integrate sustainability into their supply chain.
• Net Zero, climate resilience, ESG compliance, and circular economy goals require supply chain transformation. This is not a paperchase. Non-compliance will result in fines (“effective, proportionate, and dissuasive”), legal liability (misleading investors), and reputational damage.
• This is occurring during a period of significant supply chain disruption resulting in an increasing gap between the risks and opportunities on the ground and companies’ abilities to address them.
• Global supply chains run through China and the Asia Pacific region. Companies must start transforming their supply chain. They must start now, they should leverage technology and data insights, and they should enable their suppliers to meet these requirements.

What is a Sustainable Supply Chain?

The dimensions of a sustainable supply chain:

Despite progress, risks remain in the supply chain

Despite many improvements, real risks remain in the supply chain. 50 million people were living in modern slavery in 2021 (generating US$ 236 billion in illegal profits every year), every year (ILO), 2.78 million people die because of workplace safety hazards - that’s over five people dying every minute (ILO). Companies report that, on average, GHG emissions in their supply chain are 26 times greater than from their own operations (CDP).

There is now renewed pressure to address these issues, as regulators introduce stricter regulations. For example, companies that violate the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) will face potentially high fines, as well as serious reputational and legal risks. The EU's Corporate Sustainability Reporting Directive (CSRD), Carbon Border Adjustment Mechanism (CBAM), Regulation of Deforestation-free Products, Batteries Regulation, and Critical Raw Material Act all provide higher compliance requirements for companies. Other countries are also strengthening their regulatory frameworks. China, for instance, is taking significant steps reduce GHG emissions, improve energy efficiency, and build a circular economy.

Value can be created by getting it right though. This is not only good for people and the planet, but it also brings benefits to business. Improved risk management, business continuity, operational efficiency, cost savings, higher ESG ratings and lower cost of capital, to name a few. Ultimately, trusted businesses outperform others.

No regret actions.

In the past, supply chain prioritised price and reliability, and sustainability was often a “nice to have.” This has clearly shifted, and sustainability is now a “must do.” Compliance and ambitious sustainability commitments all require supply chain transformation.

Deloitte’s advice:

Start now. Waiting too long will lead to mistakes, frustrations, increased risk, and missed opportunities. To meet this challenge, companies must ensure that their commitments and obligations align with realities on the ground. This requires companies to move away from supplier due diligence and monitoring that comprises of largely paper-based checks and find a new level of transparency that focuses on risks and opportunities and results in real changes on the ground.

Use data. Investment in solutions that gather, process, and analyse data will pay off as they will identify blind spots and opportunities for cost-effective, and targeted improvement initiatives. The flow of good quality information and insights will also help sustainability leaders increase collaboration and create links between finance, legal, internal risk management and procurement departments leading to better steering and governance.

Enable suppliers. Collaboration with suppliers can range from pre-planning manufacturing schedules to avoid excessive working hours, to providing guidance on renewable energy procurement. Information and business case insights can help motivate suppliers to act, but, often, sharing success stories are more persuasive. Establishing targeted partnerships and the introduction of incentives to reward desired outcomes may encourage behavioural change more broadly.

The case for action is clear. With regulatory sentiment turning and the urgency for Net Zero action increasing, the importance of supply chain sustainability has never been stronger.

Companies must take action to integrate sustainability risks and improvement goals into supply chain strategy, governance, operations, and data, and increase their collaboration with suppliers. We recommend:

5 Steps to Supply Chain Sustainability

Contact

Lily Li
Partner
China Sustainability National Leader
lilyxcli@deloittecn.com.cn

Allan Xie
Partner
China Sustainability Consulting Leader
allxie@deloittecn.com.cn

Robert Hansor
Director
China Sustainability Consulting
rhansor@deloittecn.com.cn