Supply chain reporting is coming - are you ready?
The world is changing, and so is the way companies report on their social and environmental performance.
The US Securities and Exchange Commission (SEC) has introduced new rules requiring publicly listed companies to disclose ESG (environmental, social and governance) metrics for each of their business units within 120 days of the end of each fiscal year. In the European Union, the Corporate Sustainability Reporting Directive has been approved and is now being implemented by national parliaments. Listed groups in the UK aren't immune to these winds of change - FTSE 100 groups are already required to comply with the Task Force on Climate-related Financial Disclosures (TCFD), and will be required to comply with standards issued by the International Sustainability Standards Board (ISSB).
While many large organisations are aware that these new regulations are coming into effect, it may not be clear what impact this will have on small- and medium-sized enterprises or why supply chain reporting matters. In this post we'll explain why it's happening, what you need to know about supply chain reporting, and how you can prepare for its implementation if necessary.
Why is this happening?
If your business is part of a listed group's supply chain, you are likely to be affected by ESG reporting.
ESG reporting is coming - and there are good reasons why it's happening:
ESG reporting will help you improve your business. It enables you to identify areas where improvements can be made, such as reducing waste or increasing productivity.
You can’t reduce your carbon footprint until you can measure it. You can’t improve your social impact until you find a way to quantify your existing impact. ESG reporting places a wider range of stakeholders and issues at the heart of your decision-making, including some you might not have considered before – such as employees, the natural environment, the local community, underserved communities affected by your supply chain’s activities and equity, diversity and inclusion.
ESG reporting will help meet new requirements from customers and regulators. For example, some listed companies may require their suppliers to provide information about how they're managing their environmental impacts including greenhouse gas emissions and water stewardship. Other listed companies may require information on human rights risks within their supply chains; this means knowing what steps are being taken by suppliers of raw materials and components used in products sold by those companies.
What do you need to know about supply chain reporting?
A recent report from Deloitte and the Chartered Institute of Procurement and Supply (CIPS) found that just 13% of UK firms have visibility of their complete supply chain, with 71% of firms reporting limited or no visibility of suppliers beyond the second tier.
If you want a clearer picture of your supply chain and the risks involved, it's time to start thinking about how you can get one in place before the new regulations come into force and your customers start asking for your data.
The new regulations will require firms to report on their supply chain in two ways. The first is by identifying the main risks associated with the product or service they provide, including those related to their supply chain. The second is by identifying upstream suppliers who have a high risk of being involved in serious breach of human rights.
How can you prepare for supply chain reporting?
Supply chain reporting is coming, and it's time to start preparing. Here are some steps that you can take:
Map your suppliers. A good first step toward understanding the sustainability of your supply chain is mapping the companies that make up your supply chain (e.g., manufacturers, distributors) and what they do. Identify which ones have access to data that will help you understand how far along in their own journeys toward more sustainable business practices and then get them on board with providing this information as part of their contractual obligations with you as a customer or partner company.
Negotiate access to data from suppliers via legal agreements with clear parameters around what information will be provided when (and why), and who owns it after sharing with third parties like buyers/investors/analysts. This way everyone knows what they need from each other upfront so there aren't any surprises later when someone needs something specific from another party - which may not always happen if all parties aren't aware beforehand! It also helps ensure compliance across departments within large organisations since everything is spelled out clearly beforehand rather than having employees guess what might be expected based on past experience only.
Understand what data you regard as commercially sensitive, versus the data that, while proprietary, will enable your customers to meet their reporting obligations. Negotiate appropriate safeguards on the use of your data.
It is important to prepare for the implementation of ESG reporting, including supply chain reporting, to ensure your business meets the standards and customer expectations.
The EU's new requirements will be implemented from 2024 for all EU-listed entities. In addition, SMEs and foreign groups with a major presence in the EU will also be required to report on their suppliers' environmental performance via the CSRD framework. Requirements for SEC registrants are expected to go live in 2023. Adoption of the ISSB's standards is expected in the UK from 2024. UK firms will find it hard to avoid the tsunami of sustainability measures - and early adopters will benefit from considerable competitive advantage.
Next steps
It is important to prepare for the implementation of ESG reporting, including supply chain reporting, to ensure your business meets the standards. Supply chain reporting is an emerging area that will soon be required by many companies around the world. By understanding what this means for your organisation and how it will impact its operations, you can prepare accordingly so that you do not fall behind and can continue to serve your listed customers in the UK, EU and North America. Click here to book a free consultation with our director, Tim Dee.
