How companies can ensure more sustainable and ethical supply chains

Many Canadian CEOs have set ambitious sustainability targets. To meet them and deliver measurable impacts, leaders are placing more attention on their company’s supply chains.

In a recent KPMG poll, Canadian CEOs identified supply chain complexity as their organization’s greatest barrier to achieving sustainability goals. That ranked ahead of a lack of appropriate technology, inadequate governance and controls, and shortages of skills and expertise.

"The pressure to ensure supply chains are sustainable and ethical is being felt by Canadian leaders from several angles,” says Kim Swanzey, ESG partner and Sustainable Supply Chain Lead at KPMG in Canada. "It is far more difficult for an organization to effect change throughout its end-to-end supply chain than within its own operations. Challenges include historical opaqueness across large parts of the value chain, inconsistent and incompatible systems, and limited authority or influence over single entities.”

The rapidly evolving regulatory environment is one of the most pressing drivers for change. Canadian leaders need to be aware of a growing number of requirements and standards across geographic, industrial and financial jurisdictions.

Domestically, Bill S-211 came into effect on January 1, 2024, requiring businesses of a certain size to publicly report the steps they’ve taken to reduce the risk of child and forced labour within their supply chains. Canadian organizations operating internationally must also contend with a slew of global supply chain standards, including the EU’s Corporate Sustainability Reporting Directive (CSRD), the Carbon Border Adjustment Mechanism (CBAM), the Deforestation Initiative (EUDR) and, in the U.S., the Uygher Forced Labor Prevention Act (UFLPA).

“Bill S-211, CBAM and EUDR are mandatory disclosures, and leaders also need to be aware of the multitude of voluntary industry standards that are emerging simultaneously with these compliance obligations,” says Ms. Swanzey. “Today’s requirements are focused on disclosure, but looking forward companies should anticipate a requirement for enhanced governance and even assurance over reported information.”

There’s a common thread across all of these regulatory and voluntary standards. They require a substantially heightened level of visibility over a company’s suppliers and vendors. That goes beyond tier 1 suppliers (direct suppliers) and tier 2 suppliers (suppliers or subcontractors for tier 1). Companies must demonstrate line of sight down to raw materials – a level of granularity far greater than previously required. They must also show they understand the risks within their supply chain, and have a process for effectively monitoring and managing those risks.

“In many cases, companies need to evolve their approach to supply chain management to meet these emerging requirements and achieve their sustainability objectives,” says Ms. Swanzey. “The opportunities are there, but so are the challenges.”

Seizing these opportunities can give companies another way of differentiating themselves and maintaining a competitive edge in the market. The first step is to establish an understanding of their end-to-end supply chain, and identify the relevant geographic, products, practice and entity risks.

“Starting with an understanding of relevant risks allows companies to tailor their supplier management system, and demonstrate that they are scaling resources appropriately and responsibly,” says Ms. Swanzey.

Once companies have determined what risks and business opportunities to target within their supply chain, they have to identify data needs like labour and production practices, traceability systems and greenhouse gas emissions at each stage of the value chain. For most organizations, it will be challenging to collect data from the range of suppliers, and doing so in a way that allows for consistency, comparability and utility.

“Each supplier will have their own systems, format and standards for reporting. This makes aggregating and comparing results difficult, and raises questions around completeness, accuracy and reliability,” explains Alain Sawaya, national lead, Supply Chain and Procurement at KPMG in Canada.

He says organizations can look to emerging technology solutions to collect and standardize this data. “Tools are being developed that adapt existing traceability solutions to help pinpoint where the goods are sourced, produced and consumed within a company’s supply chain. This will help leaders create a more complete risk profile for their value chain, including information that might have previously been difficult to collect through more inefficient means such as surveying.”

Ultimately, supply chain technology solutions aim to streamline the collection, management and use of data. For a long time, companies could ignore their extended end-to-end supply chains, engaging only on business risks and financial materiality. Today, the paradigm for supply chain oversight is changing rapidly. Organizations of all sizes need to oversee their performance, keeping abreast of both regulatory and industry expectations.

“Even companies that aren't directly or formally rolled into these requirements need to be aware of them – because their downstream purchasers likely are,” says Mr. Sawaya.