Environmental issues can have a profound impact on an organisation’s supply chain, with wide-reaching consequences for its sustainability and operational resilience. The Covid-19 pandemic exposed vulnerabilities in supply chains worldwide. The supply chain landscape is not immune to the disruptive effects of climate-related extreme weather events and evolving ESG legislation. The 2021 UK climate risk assessment commissioned by the Climate Change Committee highlighted that “Extreme events are already a significant cause of supply chain disruption across all sectors with exposure to climate hazards set to increase in the future.”
With Supply Chain ESG Risks: Harnessing the Potential of Internal Audit, AuditBoard has collaborated with the Chartered IIA to highlight the role of internal audit in aligning supply chain operations with ESG values, targets, and overall business strategies. Download the free guide here.
These climate-related disasters and new legislation to counteract these events will shape the way organisations approach environmental issues in their supply chains. As globalisation creates an even greater complexity and extends supply chains, the risk of these environmental concerns having an impact on an organisation’s supply chain grows. The increased likelihood of these risks materialising is apparent, and action is required by internal audit and organisations.
Organisations now more than ever need to show due diligence when assessing suppliers to ensure that they are practising environmental sustainability and have appropriate contingency plans in place for when a climate change-related event occurs. Extreme weather events have had a significant impact as of late, affecting the availability of goods due to disruptions in transportation and manufacturing. Floods in Germany and Belgium in 2021 disrupted the transportation of goods, blocking roads and rail links, resulting in a major impact on supply chains in both countries. Extreme weather swings in North Africa and Southern Europe have led to a shortage of tomatoes and other fruit and vegetable imports for the UK. Wildfires in the Mediterranean damaged crops and vineyards whilst also disrupting the transportation of goods in Greece and Italy.
When supply chains are operating effectively, there is a natural temptation to put more emphasis on increasing efficiency and profitability and less on worrying about what will happen if something goes wrong. There is also the reality that if an organisation is under stress, it looks to cut costs and the focus on ESG often comes a distant second to a cheaper price. Internal audit may need to test the organisation’s consistency of focus against its financial and ESG risk appetite. Lessons were learnt during the Covid-19 pandemic and now the ensuing crises of geopolitical conflict, environmental disasters, and economic woes have altered the mindset of organisations. These events underline the need for organisations to consider the risks associated with their supply chain. The global supply chain landscape is fraught with complexity, and challenges often emerge from unforeseen events. Although climate-related disasters are ultimately unpredictable, the impacts of climate change have led to an increase in the frequency and severity of these disasters.
And as global temperatures continue to rise, it is increasingly likely that it is going to be a constant for the foreseeable future. Internal audit can work with risk management in the 2nd line to assess the effectiveness of any business continuity and crisis management plans. This is to stress test the organisation’s ability to cope with supply chain disruption caused by these climate-related extreme weather events. Reducing the carbon footprint and increasing environmental sustainability has now evolved into a non-negotiable aspect of modern-day supply chain management, and even more so with the appearance of specific supply chain regulations.
These regulations are designed to protect the environment and ensure that supply chains are sustainable and ethical. After years of ‘greenwashing’ and lip service on environmental initiatives carried out by organisations, their stated activities now must be backed by evidence. Internal audit can help ensure the organisations are complying with these regulations. By working with procurement/ supply chain teams, internal audit can provide assurance against the due diligence processes carried out by organisations on potential/existing suppliers. This includes requiring suppliers to sign and comply with a code of conduct that includes environmental standards, implementing a system for monitoring and reporting on supplier performance, and training employees on environmental regulations and compliance procedures.
In addition to these domestic regulations, organisations need to ensure that any overseas 2nd and 3rd level suppliers are demonstrating their compliance with their local regulations. This is not just about regulatory compliance and crisis management; it’s about organisations’ commitment to sustainability. Along with preparing for the risks that climate change may pose to an organisation, there is an opportunity for organisations to reduce their carbon footprint and improve their supply chain sustainability. Sustainability is increasingly becoming a cornerstone of supply chain management. Not only do organisations need to look at their carbon footprint, but a critical aspect of supply chain sustainability is also evaluating the environmental practices of its suppliers. For example, scrutinising suppliers’ carbon footprint, waste management processes, and responsible use of natural resources
Furthermore, it involves a comprehensive examination of suppliers’ adherence to environmental regulations and guidelines. However, this is complex as the need for business continuity and profits may clash with these sustainability goals. Download Supply Chain ESG Risks: Harnessing the Potential of Internal Audit here.