Environmental, Social, and Governance (ESG) presents challenges for companies as ESG lacks a universal definition and framework for reporting. ESG data collection and reporting are important to investors who value companies that disclose accurate ESG information. Proactive ESG approaches improve the culture and well-being of companies and have positive impacts on critical global issues, including pollution, carbon emissions, forced/child labor, and strategic trade controls. Companies involved in international trade face several ESG issues that can be addressed through proactive supply chain risk management approaches. This report discusses the importance of companies disclosing ESG metrics to include supply chain due diligence within its ESG reporting.
A critical outcome of ESG is that it allows investors and stakeholders to view the risk management of a company, which leads to better investor relations and stronger profits in the long term. More and more investors want to ensure they are investing in a company that values its employees and the impacts the company can have in the global community. Corporate ESG requirements vary according to the sector companies operate within.
Environmental reporting may include biodiversity and ecosystem loss, greenhouse gas emissions, toxic waste management, energy consumption and overall impact within the climate crisis.
Social issues may include the way a company treats its employees and investors, wages, and programs used to ensure diversity, equity, and inclusion.
Governance helps manage the conditions employees work in and potential discrimination within the hiring process and the overall conditions.It is also important for companies that manage data to handle private and important data carefully. Governance also involves management practices, managing risk for supply chains, and ethical business practices such as forced/child labor controls and foreign corruption.
It can be challenging to define and discloseESG information consistently. ESG policies should be implemented in ways that fit a company’s specific sector, with flexibility as companies evolve.
This document relies upon the following visualization to define the three ESG pillars and their subcomponents:
The solar panel industry in China and its impacts on the supply chain are examples of what ESG can prevent. Polysilicon is a material that is crushed and used to make solar panels. In the Xinjiang territory in China, a significant percentage of polysilicon is produced within industrial parks the government has set up.
The Uyghur people native to the region experience discrimination based on their ethnicity and religion. They are forced into labor camps disguised as programs to alleviate unemployment. The Uygur are stereotyped to be lazy and unmotivated to work, which is a false perception the government uses to force these people into the labor camps.Within these camps, they are “re-educated” and relocated far away from their families. They are not paid minimum wages and are forced to work jobs that are viewed as less professional, such as crushing polysilicon.
The solar industry is built on forced labor and religious and ethnic discrimination. The Uyghur region produces the most polysilicon and holds power over the supply chain. When 95 percent of the solar panel industry relies on this region, the entire industry is tainted by human rights, environmental, and governance violations.
The graphic below, from Sheffield Hallam University’s In Broad Daylight report, shows the downstream customers of the Hoshine Silicon Industry. Hoshine Silicon Industry was listed by the US in the Uyghur Forced Labor Prevention Act Entity List in June 2022.
Another example of ESG violations within the Uyghur region is in the automotive industry. Similar to the solar industry, the automotive industry is also exploitative and corrupt in the Uyghur region. The majority of the parts are exposed to forced labor, causing the roots of the industry to be corrupted. There are incentives used by the government to encourage workers and companies to move to the Uyghur region. For example, free rent, subsidized utilities and training employee programs. The reality is that companies manipulate workers into forced labor and labor transfers and discriminate against Indigenous people within Xinjiang, thus affecting the automotive industry.
There are frameworks like ESG, for example, the GRI, Global Reporting Initiative, and SASB, Sustainability Accounting Standard Board. GRI has universal standards set for companies to report on economic, environmental, and social factors. This report stands out because it is universal, unlike ESG, where it is not specific and easy to compare and measure. SASB is also industry-specific for reporting on companies' sustainability. These frameworks hold companies accountable for their actions like ESG. This can highlight and improve the issues companies experience.
Investors should do their due diligence and improve their tracing of the company's practices and supply chains. Consumers should also be mindful of the products they interact with and the companies that produce them. Consumers are a key aspect of companies and their success. When they hold companies accountable, they have the power to highlight certain issues. It is recommended that governments implement laws and fines against these violations of forced labor and environmental damage.
There are many benefits of ESG, such as better customer loyalty, sustainability, financial improvement, and overall better employee performance. ESG initiatives show that companies care about their impact on the environment and the people that make up the businesses. Overall, ESG policies can improve risk management and the impacts a company has on a global community.
Although there are positive impacts of implementing ESG policies, there are also intricate details to be aware of. ESG is a concept that has gained popularity, resulting in companies using this framework to attract investors. When ESG is not implemented for the intrinsic purpose but for financial gain, this takes away from the main purpose. For example, there have been violations in the solar panel industry. Solar panels work to create more sustainable energy, but the root of the products and the way the company functions violate multiple ESG pillars. It is important to implement ESG to create safer, more sustainable, and equitable work environments, not to attract more favorable investors.
ESG is a framework that can highlight specific issues within a company and how it operates. ESG can be defined differently depending on the company and its needs. Creating a standard definition and ways of reporting can maximize the framework.
An integral part of ESG is the investors and their role in the company. ESG shows investors which companies may be more valuable to work with regarding their principles and how they operate their business. Reporting ESG can also show investors the long-term risks and benefits.
In the context of the challenges and opportunities presented by ESG, supply chain due diligence emerges as a crucial component for companies striving to uphold these principles. The solar panel industry in China, as discussed earlier, illustrates how a lack of supply chain due diligence can result in severe ESG violations. By integrating robust supply chain risk management into ESG reporting, companies can mitigate the risk of engaging in practices that violate environmental, social, and governance standards. This proactive approach ensures that companies not only safeguard their reputation and investor relations but also contribute positively to global issues such as human rights abuses, environmental degradation, and ethical business practices. In essence, supply chain due diligence becomes the linchpin in successfully implementing ESG initiatives, aligning companies with sustainable practices, and fostering a more responsible and ethical global business environment.
More about the Author: Anne Marie, Researcher, is a recent graduate of Mount Allison University in New Brunswick, Canada, where she studied the intersection between religion and the climate crisis. Anne Marie is passionate about amplifying the voices of indigenous populations within discussions and decision-making processes related to the climate crisis.She was invited to present her thesis on Buddhism and the climate crisis and how our conversations shape the crisis narrative at Saint Mary’s University in Halifax, Nova Scotia.
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