Many impact investors evaluate investments according to environmental, social, and governance (ESG) factors, such as whether a company respects workers’ rights and whether it releases pollutants into the atmosphere. However, this assessment may be incomplete if it looks only at a company’s direct actions without considering those of its suppliers.

Complex supply chains may obscure ESG risks, particularly for companies that source products from developing regions that lack strong regulatory oversight. A company may abide by high standards as it produces an end product, but if businesses along its supply chain engage in problematic practices, the overall impact of investing in it could misalign with an investor’s values. In addition, ESG issues in supply chains may threaten a company’s brand image or expose it to disruptions from conflict, protests, or regulatory reforms.

Potential Abuses in Supply Chains

For investors who are concerned about ethics in supply chain management, a wide variety of issues may be material. Some fall under the category of environmental harm, such as industrial operations that pollute local water sources or agricultural practices that deplete soil nutrients. Transportation may cause environmental damage through greenhouse gas emissions or by introducing plant and animal species to new regions, leading to bioinvasions. An estimated 80–90% of a typical consumer company’s environmental impact occurs through its supply chain.

Other potential issues relate to human rights and worker welfare. In countries with inadequate regulatory oversight, unsafe working conditions can put workers’ lives at risk—an issue brought to international attention by the devastating Rana Plaza factory collapse in 2013. Suppliers that pay less than living wages are another potential problem, as are those that institute or benefit from forced labor.

Impact Investing and Supply Chain Management

As with other issues, investors concerned about supply chain management may choose to engage in shareholder dialogue or public campaigns to put pressure on companies that do not take responsibility for their supply chains. They may also choose to screen potential investments for supply chain ethics, for example by applying a labor lens to their portfolio, or to divest from companies that rely on abusive suppliers.

In order to implement these strategies, investors need to know what problems exist in a company’s supply chain. This is a significant challenge given that information on business practices and working conditions along a company’s supply chain is not always available, and claims of sustainability can be hard to verify.

Investors can turn to resources from organizations like KnowTheChain and UN Global Compact to learn more about companies’ supply chains and to monitor progress. Some investors have supported shareholder resolutions asking companies to be more transparent about their suppliers, such as As You Sow’s resolution for Monster Beverage to disclose information on human trafficking in its supply chain. Blockchain technology may also be useful for tracing products and promoting transparency.

Want to learn more about supply chain management? Read:

• Measuring—and Managing—the Carbon Footprint of Shipping
• Bioinvasion in Supply Chains: A Cause of Environmental and Economic Damage
• Slavery in Supply Chains: Investors Can Take Action
• How Are Tech Companies Addressing Forced Labor in Supply Chains?
• Blockchain and Supply Chains: Helping Achieve ESG Goals

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