I have a five-minute presentation for accountants and lawyers whose responsibility is to flag business risks for their clients. It takes three questions, and these advisors quickly see threats yet to be included in their client discussions and reports.
Are you raising Environmental, Social, and Governance (ESG) risk mitigation with your private sector clients?
The answer is usually no. ESG is most widely tied to public markets, with the impact investment community taking the lead. The advisors explain that their private company clients tend not to have investors, and many businesses are not public-facing.
Did you know that the supply chain is the business function most exposed to ESG risk?
We talk about how difficult it is to have visibility beyond a company’s direct suppliers. And we agree that: as long as there is a connection between businesses and their supply chain, there is a responsibility, and therefore, risk.
At this point, the information is interesting, but the advisors are not sensing any imminent concern or required action. Then comes question three.
What would be the impact of your client losing its biggest customer because they were not sufficiently socially minded?
The light bulb goes off. This risk is material.
As companies report ESG metrics along with their financial results, they are forcing their suppliers to be similarly responsible. As a result, demonstrating and communicating good corporate citizenship must be part of ongoing risk mitigation for all companies – even those considerably downstream.
In late October, supermarkets pulled products that could have a connection to the forced labour and oppressive working conditions of Uyghurs and other ethnic minorities in China. Thought you were buying Italian tomato products? You were, but the Italian producers were sourcing tomatoes for their sauces and pastes from Xinjiang, a remote area of western China. It took one CBC Marketplace investigation for a ripple effect on businesses of all sizes and all the way down the line.
A few weeks later, another report. Sheffield Hallam University in the United Kingdom identified, through shipping records, how cotton from the Uyghur region was in some of the world’s favourite brands, including products of Canadian retailers Aritzia and Lululemon.
From farm gate to dinner plate, field to runway, refinery to fueling station, active ingredient to pharmacy shelves – there is a client you know who is reliant on being part of a coveted supply chain.
Two types of risks can be identified for these clients: controlled and uncontrolled. Both require a communication strategy.
The plan should reflect what your client is doing about the controlled risks as they build a strong company and brand with a positive impact on their employees, communities, and the planet. However, where risk is beyond control, a plan should help weather material effects and reputational damage should fear become a reality.
So, one last question for the trusted advisors reading this article:
As you flag business concerns from customer attrition and cash flow shortage to data security and exchange rate fluctuations, will ESG risks make it onto the list of topics that you discuss with your clients?
Being a good supplier is more than providing reliable products and delivery. Today, it is also about demonstrating an ability to safeguard your customer’s reputation. Start by checking into the risks that you face and taking meaningful and measurable actions to address them. Then, communicate these actions authentically and transparently, ensuring the big customers you cannot afford to lose know that you are worthy of a continued relationship.
Learn more about ESG Communications. Questions welcome!