The approach that many corporations take with their supply chains passes the costs down to the small businesses and workers that rely on them. These workers are far more vulnerable to supply chain disruptions – which are becoming more frequent and more destructive as climate impacts worsen.

In part two of this three-part series, we discuss the ways that large companies and small and medium-sized enterprises (SMEs) can establish partnerships founded on trust and transparency. The ripple effects of strong partnerships could improve supply chains and working conditions for workers around the globe.

 

Adel Guitouni.

"We actually said that we can outsource this activity that is costing us too much here to another part of the world where they can pay people cheaper to do it. So even from a financial perspective, like having something that is traveling thousands and thousands of miles to be able to be added in this supply chain, and then we assemble, and we send to somewhere else and so on, we were able to off load the real cost to the society and to the environment."

Adel Guitouni, Associate Professor of Business, University of Victoria

 

Becca Coughlan.

"So much of the time in the Global North, we think that we know better and we know what other people need or, you know, should be doing. But workers are living this day-to-day. They know exactly what they need and, you know, have different perspectives and might be able to shed light and provide solutions on different things that, you know, we aren't even thinking about sitting here in our cushy lives."

Becca Coughlan, Senior Advocacy Manager, Remake

 

Sheri Hinish.

 "We have to think about the total economic impact and the value creation lens of everything that we do because we can't leave people behind.  We already have climate migration. We already have people who aren't able to meet basic needs and that also affects our supply chains. It affects the communities where we operate. We saw with COVID-19, for example, like if you're a business and you've been in this environment where it's lowest cost, highest profit, if the society that's supporting your manufacturing plant isn't healthy and able to meet basic needs, you will fail."

Sheri Hinish, Global Sustainable Supply Chain Leader, Ernst & Young (EY) & Podcast Host, Supply Chain Revolution

 

Transcript

Daniel Baker (WRI) 0:04: Welcome back to WRI’s Big Ideas Into Action podcast. My name is Daniel Baker, communications manager here at the World Resources Institute and the host, editor, and producer of this 3-part podcast series called, Voices on Supply Chains.

In the first episode, we identified the glaring blind spot when it comes to corporate sustainability targets and what those corporations know about the needs of the SMEs – or small businesses – in their supply chain.

The power imbalance between buyers and suppliers has created a fragile system that is extremely susceptible to disruptions...which are becoming more common and destructive thanks to climate change.

Part of the challenge is that companies tend to focus on their largest suppliers and those closest to them in the supply chain, as Lydia Elliott from the We Mean Business Coalition’s SME Climate Hub explains.

Lydia Elliott (SME Climate Hub) 0:59: If you have this big company with 10,000 suppliers, there's probably going to be a group of supplies within it that are their high emitters. They'll do their own Scope 3 analysis and they'll say, ‘Okay, if we take this top 20% [of suppliers] that will be 80% of our emissions and we’re going to stop there.’ Because that is an easier task but also is a task with higher impact.

Now some of those are SMEs, in that top 20%, so there are the higher-performing, higher-emitting, more strategic to their business SMEs that would definitely be in that group. So they do engage with those ones the same way they may engage with others [suppliers], they might just give them a bit more help or more training or support if they needed it.

Daniel Baker (WRI) 1:39: But the remaining 80% of suppliers may be the ones furthest upstream, with fewer resources to adapt to new sustainability targets or reporting requirements on their own.

WRI is, at its core, an environment and climate-based organization. So we would be remiss if we didn’t remind you how important SME engagement is when it comes to ensuring a future where people, nature, and climate can all flourish.

Lydia Elliott (SME Climate Hub) 2:04: The environmental argument for going after the 20% is probably that, eventually you have to go after that 20%, number one. Number two, if you look at it on a global scale SMEs are incredibly important in terms of emissions. So, by pushing SMEs to the back of the queue, you don't give them much time to prepare or change. In some ways it helps because technology might be more, you know, mature. They're not kind of testing something; they're being given a solution that like, ‘This solar panel works. You can put up. It makes sense.’

But in other ways, they're not getting the same signals that a larger company might be getting. So if, you know, a big supplier has had the last five years to prepare for this, a small supplier then is given, ‘You have to do this now.’ Or they're only going to see results in 5 years.

However, you approach it, you're not giving the SMEs the same preparation time that you're giving a big supplier in your supply chain.

Daniel Baker (WRI) 3:01: Remember from episode 1, Scope 3 emissions – which for our purposes can be considered supply chain emissions – often account for 70% or more of a corporation’s emissions.

And as an organization that uses the power of partnerships to create systemic change, it’s oh so topical that this episode is all about how corporations can start building partnerships by more equitably distributing the costs throughout their supply chains. Something the current just-in-time methods don’t support.

Dan Viederman (Working Capital Fund) 3:33: I’m Dan Viederman, and I’m a partner at a venture capital fund that’s trying to support and build equity in supply chains; mostly focused on marginalized workers around the world. The name of our fund is the Working Capital Fund.

The paradigm of sourcing is for a buyer, or brand, or retailer to identify requirements and then RFP it out or engage a bunch of suppliers, and the suppliers will the compete to provide and then get the contract. For the most part, that negotiation happens without reference to sustainability characteristics or conditions whatsoever. And so it’s certainly rare for a company to create sustainability targets in partnership with their suppliers.

Adel Guitouni (University of Victoria) 4:16: My name is Adel Guitouni and I am an Associate Professor with the School of Business at the University of Victoria.

We actually said that we can outsource this activity that is costing us too much here to another part of the world where they can pay people cheaper to do it. So even from a financial perspective, like having something that is traveling thousands and thousands of miles to be able to be added in this supply chain, and then we assemble, and we send to somewhere else and so on, we were able to off load the real cost to the society and to the environment.

Sharmon Lebby (Ethical Denim Council) 5:00: My name is Sharmon Lebby and I am the project manager at the Ethical Denim Council. If we can just get the brands, and the retailers, and the importers to do what they say they’re going to do; to respect these contracts, to not try to constantly undercut and get discounts, and push prices down as far as they can, that then allows the suppliers to do what everybody’s expecting them to do.

Dan Viederman (Working Capital Fund) 5:21: The absolute fundamental human rights requirement is that the business do not exploit the most vulnerable people in their operations and supply chains while they’re engaging in this business negotiation.

And, unfortunately, what’s been happening over the last several decades is that the most vulnerable people in supply chains have essentially been subsidizing the businesses with their effort and their toil. This is most directly true when we see workers crossing borders for jobs and carrying debt with them that they’ve paid, essentially, to get the job overseas. But it’s also true when a worker works unpaid overtime or has to work on weekends rather than taking care of their kids to meet the needs of their employer.

It’s indisputable that you can create products in unsustainable ways. You just can’t do it for a long period of time and hope to develop business sectors and societies that we all want.

Daniel Baker (WRI) 6:15: We just heard about some of the human toll of our just-in-time supply chain methods. Jason Judd and his team at Cornell University’s Global Labor Institute just published a report, in 2023, that details the environmental impacts of such a system.

Jason Judd (Global Labor Institute at Cornell University) 6:32: On the flooding side, we looked at Bangladesh. We could plot on a map the position of factories and then we could project the flood levels around those factories in 2030; from sea level rise and from rainfall or riverine flooding. And we saw in 2030, under what we call a hundred year flood (or an RP100), fully 27% of the existing apparel factories in 2030 would be inundated at a half meter or more. And a half meter doesn't put you out of business, but it does stop production. It could stop it for a day. It could stop it for a week or two or three; it depends on the factory.

You don’t have to wait 100 years between floods. They’re becoming more common.

Daniel Baker (WRI) 7:15: The dangers of flooding and heat aren't theoretical. They’re here and the effects are very real.

Jason Judd (Global Labor Institute at Cornell University) 7:21: Here's an example of the impact or the scale of extreme heat in in Pakistan, in Karachi, where there's lots of apparel production. In 2030 the analysis shows that 190 out of 365 days in the year the combination of heat and humidity -- we call that the wet bulb globe temperature --  will exceed 31 degrees Celsius; this threshold at which productivity really starts to fall off.

We also ran [analysis in] 29 other centers in places like Colombo in Sri Lanka, or Hanoi and Ho Chi Min in Vietnam also had a high number of high heat days, and we saw that those numbers would jump quickly between 2025 and 2030, and then jump again between 2030 and 2050. So it's hot already in these places, even for workers who are accustomed to the heat, and it's going to get hotter fast

Daniel Baker (WRI) 8:17: Now, some corporations might invest in the bare minimum infrastructure for their SMEs, because it benefits their bottom line.

Jason Judd (Global Labor Institute at Cornell University) 8:24: High heat means less output, and less output means, you know, lower earnings and lower margins.

Daniel Baker (WRI) 8:29: But a partnership means a lot more than adding some A/C units to an unbearably hot factory. ...When we asked the experts about partnerships between corporations and SMEs, we got a lot of different answers of what that looks like.

Taj Eldridge (Jobs For the Future) 8:43: I’m Taj Eldridge. I am the Managing Director for Climate Innovations at JFF [Jobs For the Future] Labs. Sometimes people just assume a partnership has to be fifty-fifty. I don't think so. I think a partnership is about benefit, and if both groups find their own individual benefit in that relationship. And so again putting the economic hat on it's about incentives. So I think if incentives are aligned, and incentives are different from each for each part of that partnership, then it may make sense.

Daniel Baker (WRI) 9:11: What the group did agree on is that partnership does not look like corporations literally moving their operations to other parts of the world.

Jacques Leslie (YaleEnvironment360) 9:20: My name is Jacuqes Leslie, Los Angeles Times contributing Opinion Writer, I write frequently for YaleEnvironment360.

Companies have tried or I should say are beginning to try to think about this by wondering if they can move a lot of their supply chain to closer where the manufacturing process is taking place, or in some cases they're talking about creating dual supply chain, so that if one is blocked, they can turn to another. But these things are very expensive. It's not easy to do and, particularly when companies are relying on, say, a whole constellation of parts manufacturers in a place like China or Vietnam, it's not easy to move away from them.

Jason Judd (Global Labor Institute at Cornell University) 10:10: The industry left to its own devices, the apparel industry, will never agree on a set of rules and it won't enforce them on itself. This model of self-regulation private regulation, it’s very, you know, it's very 2005. It's very pre-climate crisis. So the way to get over this collective action problem is to have a set of rules that say, ‘Here's the standard and firms that don't meet the standard will face a sanction.’

New rules being written in the European Union mean that these lead firms -- like H&M, Nike, Costco etc., even if they're American firms -- if they're doing if they're doing a significant amount of business in Europe, they're going to fall under the European rule that requires those lead firms to not just know where their stuff is coming from, beyond tier one, but also to know under what conditions it was made. It's called the Corporate Sustainability Due Diligence Directive. And it means that lead firms are going to be, in one way or another, on the hook now for what happens to workers and what happens to the environment along their supply chains. That's new.

Sheri Hinish (EY & Supply Chain Revolution Podcast) 11:11: And oh, by the way, if you don't have credible and authenticated lineage or chain of custody with that data and what they're [your supplier is] doing and their supplier’s supplier is doing, you're going to be caught on the carpet, and you're going to be fined and you're going to be held accountable. In the age of social media and digital, I mean, it takes one post. You know, child labor, forced labor, casual labor, those things happen all the time, but I think now it becomes viral.

Hi, my name is Sheri Hinish. I currently work at EY as their global sustainable supply chain leader and I also have a podcast, the Supply Chain Revolution.

By and large, I do like the accountability culture, you know, where you can no longer just make these commitments and not be held to some sort of standard of being a responsible and ethical corporate steward. So that's what's changing and that is going to force collaboration, even with smaller suppliers, because you can't just stop at tier one anymore.

Daniel Baker (WRI) 12:24: Stronger protections for workers in the U.S., for example, could have ripple effects throughout the supply chain.

Becca Coughlan (Remake) 12:30: My name is Becca Coughlan, and I am the Senior Advocacy Manager at Remake. Remake is an advocacy organization fighting for fair pay and climate justice in the fashion industry.

In this country unions are having a moment again. Workers are sort of gaining power again, in a way that they haven't had for a very long time. So that's super crucial and I think even that happening in the global North has huge ramifications for what happens in the global South.

Daniel Baker (WRI) 12:59: That being said, we’re trying to highlight the importance of partnership directly between buyers and suppliers; AKA, the private sector. And next, you’ll hear from Vicky Sins at the World Benchmarking Alliance. Vicky leads the work examining the credibility of decarbonization and energy transition plans for some of the world’s biggest companies in the highest-emitting sectors.

Vicky Sins (World Benchmarking Alliance) 13:22: On the adaptation side, there's a huge exposure currently which is already being looked at but it's missing the private sector lens. So currently adaptation is very much considered a public goods or public affairs almost, just like we do on the social elements, we automatically look at governments or public finance to fill that gap.  But then we also have, you know, the loss and damage discussion. If you just look at the outcome of all the commitments, the financial commitments that have come out of COP28, if you would add those up, public finance is a fraction of what that amount of monies that would be needed in order to facilitate that.

So we need to be very strong at articulating what is the role of the private sector and private finance, because if we don't and then we go back to your earlier question on who's shouldering the majority of the risk, the bill will end up -- not the financial bill, but the bill that they feel it impacted on the lives of the people -- it will end up with the ones that are currently already not able to either be heard, have their voice represented, or be able to absorb these risks from a financial perspective or from a general, social wellbeing perspective.

So I think it is very difficult to voice one risk, but I think currently, the additionality of all the risks that have come to fruition where we are now, due to the inaction we've seen over the last decades, is the biggest risk on the most vulnerable that we have in our supply chains. 

Daniel Baker (WRI) 15:09: And now that we’ve put the onus back on corporations, this is a perfect time to add another word to our proposed solution...procurement.

Vicky Sins (World Benchmarking Alliance) 15:18: I think a strong procurement policy is a very important one. There in that procurement policy, you can be very explicit about what you expect from your suppliers.

Daniel Baker (WRI) 15:29: Partnerships are founded on two T’s:  transparency and trust.

Becca Coughlan (Remake) 15:32: So much of the time in the Global North, we think that we know better and we know what other people need or, you know, should be doing. But workers are living this day-to-day. They know exactly what they need and, you know, have different perspectives and might be able to shade light and provide solutions on different things that, you know, we aren't even thinking about sitting here in our cushy lives. [Companies should] actually ask workers and worker representatives what they want and need.

Vicky Sins (World Benchmarking Alliance) 16:00: Often we get the remark from companies to say, ‘Yeah, but this is such a big issue, this is not for us to solve.’ And we [at the World Benchmarking Alliance] are like, yeah, but back to that trust point, we do expect these companies to be very transparent. They are the one to know what their strategy is in terms of fulfilling their climate targets, so they are the ones that also need to be very transparent about what the impact is. If you want to move away from a certain region because you're no longer using, I don't know, coal and that comes from a specific region, you need to plan for that. We don't require you to do that tomorrow, but we know that in 10 to 15 years time, we expect the reliance of that to be reduced. So that means that you need to start planning with governments and with finance to really transition these jobs to new green and decent jobs in the future. 

Daniel Baker (WRI) 16:52: And the best way to establish that trust and transparency? Fair contracts. Professor Guitouni, Becca Coughlan, and Sheri Hinish explain why fair contracts are the foundation for partnerships.

Adel Guitouni (University of Victoria) 17:05: Contracts that are based on incentives, they create better surplus and build actually better trust compared to contracts that are based on penalties. So this is what is the evidence, but unfortunately, most of the people that are higher in these companies, they look at this from a transactional perspective from how much they're making on this kind of deal and so on. And because of the governance of corporations, we don't actually accept to consider multi-year performance metrics because in order to be able to value the collaboration and trust, you need to consider a long-term prime horizon to be able to evaluate that.

You need with the relational model, which is actually collaboration trust and so on, you need actually to build this kind of now evaluation over a bigger time horizon; five years, ten years, whatever, and that's what happened in most companies, that they were able to transition seriously toward more sustainable behavior.

Becca Coughlan (Remake) 18:08: In terms of fairer contracts, we need brands to actually, not just use the word ‘partner,’ but actually partner with their suppliers. Instead of dictating self-serving contract terms to them, enter into a contractual relationship with your suppliers that is based on mutual input, mutual agreement in which you are equally liable for not holding up your end of the deal as they are for not upholding theirs.

Sheri Hinish (EY & Supply Chain Revolution Podcast) 18:36: We have to think about the total economic impact and the value creation lens of everything that we do because we can't leave people behind.  We already have climate migration. We already have people who aren't able to meet basic needs and that also affects our supply chains. It affects the communities where we operate. We saw with COVID-19, for example, like if you're a business and you've been in this environment where it's lowest cost, highest profit, if the society that's supporting your manufacturing plant isn't healthy and able to meet basic needs, you will fail.

Daniel Baker (WRI) 19:15: We’re still not at the stage where influential corporations are legally obligated to make binding sustainability commitments to their suppliers or the surrounding communities.

Andrew Olah (Ethical Denim Council) 19:25: People use this word like they use supply chain, the word ‘partner.’ And I think that word needs to be deleted from the discussion.

I’m Andrew Olah. I’m the Founder of the Ethical Denim Council. The word partner implies a shared win. Well, the brand’s win might be 55% or 60% of the selling price. For a retailer, it might be 70-80% of the selling price. And to a garment factory, it might be that the only win that they get is that they cover their cost.

The worker, for instance, in Bangladesh makes $72/month, and the people buying make much more. And the company makes billions. So I think that the word partnership sounds great, but I’m not sure it’s really the right word in business. Most suppliers that I know just want to be a vendor and be paid. They’re not looking for partnerships.

Jason Judd (Global Labor Institute at Cornell University) 20:18: We didn't find lead firms, apparel brands, that have focused on adaptation and have made plans either top-down plans -- here's what here's what suppliers must do -- or are consulting suppliers on adaptation measures. We're sure there's a little bit of it happening out there, but we spoke with lots of brands and lots of suppliers, as well as workers for this paper, and very, very, very few of them, brands and suppliers, had figured out what their approach was going to be. These factory-level problems are deemed external to the firm’s balance sheet.

Daniel Baker (WRI) 20:51: Even when sustainability targets are set – achieving those goals is still usually confined to a specific department; separate from the rest of the company.

Namit Agarwal (World Benchmarking Alliance) 21:00: My name is Namit Agarwal. I work as the Social Transformation Lead at the World Benchmarking Alliance. You know, very few companies are actually engaging with rights holders in the due diligence process and this is where I think the trust deficit kind of becomes quite dominant. So if that opportunity for rights holders and workers to participate in risk identification in due diligence in helping companies set out what are the actions that they need to take, that is a big gap when the rights holders are not part of those processes.

So that I think is quite critical both in terms of the steps that companies have taken, but [also] what are some of the significant gaps that exist in these two sectors.

Vicky Sins (World Benchmarking Alliance) 21:49: It is still very much treated as two separate elements, and the social element like Namit often sees is, we engage with different stakeholders within the company when we talk about human rights, when we talk about social impact, then when we talk with the climate team. Right? Those are often still two separate teams in different geographies, different parts of the company, and they don’t often see that that both of their strategies have to go hand-in-hand, because they need to be translated into addressing two sides of the same coin, the way we say, because you can't have a successful decarbonization with stranded communities and stranded people and you can't do it the other way around as well.

Daniel Baker (WRI) 22:33: It’s clear that partnerships are not a panacea but still offer lots of promise, so long as they are mutually beneficial to both large companies and SMEs in their supply chain.

Don’t miss the next episode as we wrap up our series by sharing examples of partnerships between corporations and SMEs.

Thank you to our guests who lent us their expertise and insights for this edition of Voices on Supply Chains. The story continues at www.wri.org/CREST.

For all of us at WRI, my name is Daniel Baker – host and producer for the series. The series is part of a project which is funded by the Ares Charitable Foundation as part of their CREST Initiative; a 5-year career preparation and reskilling project that aims to close the gap between the demand for a skilled workforce for green jobs and the number of people prepared for these opportunities to build an equitable, low-carbon economy.

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