Managing environmental and social risks in supply chains

In recent years, there has been an increasing focus on environmental and social risks in global supply chains. In fact, it is often in project supply chains, rather than direct project activities, where the most significant risk of undetected adverse environmental and social impact exists, such as risks related to forced labor and the biodiversity impacts that may come from the sourcing of certain materials. Therefore, good environmental and social supply chain management in infrastructure projects is critical to optimize positive development outcomes and adequately address the risks.

To better understand those risks we have defined and separated environmental and social supply chain management (SCM) in two main buckets:

• Environmental SCM, which covers the project’s purchasing of living natural resources, goods, and materials (such as cement, metals, fuel, wood and wood-based products, food, or fiber commodities) and any risk of conversion of natural and/or critical habitats related to their production or management.
• Social SCM, which covers the risks of child labor, forced labor, and the serious health and safety issues in the project’s primary supply chain (that is, workers engaged by ‘primary suppliers’).

Environmental and social SCM touches upon several of the IDB’s Environmental and Social Policy Framework’s Performance Standards (ESPS). In particular, it relates to ESPS 1 (Assessment and Management of Environmental and Social Risks and Impacts), ESPS 2 (Labor and Working Conditions) and ESPS 6 (Biodiversity Conservation and Sustainable Management of Living Natural Resources).

4 steps for successful environmental and social SCM in IDB projects

In our latest IDB publication, Managing social and environmental risks in supply chains for IDB-financed projects, we address the following questions:

• What standards are expected of purchasers of goods and materials in relation to IDB-supported projects?
• What steps can a designated purchaser or procurer of goods take to identify and address labor issues and biodiversity risks in supply chains?
• What steps can be taken to mitigate the labor issues and biodiversity risks in supply chains in practice?
• How and which requirements of the IDB’s Environmental and Social Policy Framework (ESPF) apply to project supply chains and to which suppliers?

To successfully manage the risks and impacts, the publication highlights four steps:

1. Identify potential supply chain risks as part of a project’s initial environmental and social risk assessment. To assess the risks, we need to: (i) do a basic supply chain map; (ii) assess the risk of child or forced labor, occupational health and safety, and—where relevant—adverse impacts on biodiversity in relation to all suppliers providing goods or material sourced from areas of natural or critical habitats; (iii) assess the adequacy and effectiveness of the supplier’s labor management and environmental management systems and processes; and (iv) look at the leverage and control of project supply chains to address the risks.

2. Develop appropriate supply chain management plans to mitigate and address environmental and social risks and any adverse impacts. The plan should set out specific steps and measures to be taken by the purchaser (and/or other functions within the relevant implementing agent) to address the risks identified during the initial supply chain risk mapping. The combination of risk severity and purchaser leverage will help determine what mitigation or other measures are feasible. However, implementing agencies should be able to demonstrate reasonable efforts to address all significant supply chain risks identified (see below for some examples of issues faced when preparing the SCM plan).

3. Monitor and report on environmental and social supply chain issues and risks. Once the management plan is in place, we need to ensure it is being implemented adequately through effective supply chain monitoring, which requires a combination of indicators to assess evolving risk profiles. Indicators should include qualitative and quantitative measures and be tailored to the supply chain context and broad risk profile in question. Below you will find some examples of “red flags” you can find when monitoring supply chains.

4. Respond to grievances related to project supply chains.  Having a good grievance mechanism is very important to provide valuable information to purchasers on supply chain risk level and impacts that can feed into wider risk assessment and monitoring processes.

Supply chain management in practice

Let’s now look at an example to see how you could identify and address supply chain risks in a project.

Imagine that you need to buy uniforms and personal protective equipment (PPE) for the construction of a hospital. As part of the mapping, you determine that the anticipated or likely primary suppliers are agents and direct manufacturers located around the globe, mainly in Bangladesh and China. The mapping also determines that the likely regions of origin for the main material (cotton) are not directly known (material bought on international markets).

Once the mapping is completed, you prepare a risk assessment taking into consideration four risks:

• Child forced labor risk (evaluated as low).
• Forced labor (some risks in cotton supply chain exist).
• Risks related to workers’ health and safety (some risks in relation to factory conditions, depending on country and supplier).
• Biodiversity risks (evaluated as low).

The SCM plan therefore should focus on forced labor and worker health and safety. The plan would then make specific recommendations such as:

• To include requirements concerning forced labor and worker health and safety in supplier contracts.
• To engage with new and existing suppliers to raise awareness of expectations under the ESPF (and specifically ESPS 2).
• In specific cases, to shift to other suppliers that can more clearly demonstrate capacity to manage and address relevant risks.

As illustrated by this example, supply chain risks can be managed (even if it’s not always easy)! Good SCM means greater visibility of goods, products, and workers in the supply chain and a clearer understanding of project-related environmental and social risks. It requires close engagement with suppliers and other stakeholders throughout the project cycle and is an integral part of the broader environmental and social risk management of projects.

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Would you like to learn more? Download our publication: Managing social and environmental risks in supply chains for IDB-financed projects