How to Reduce ESG Risks from Vendors and Suppliers

Third-party environmental, social and governance (ESG) risk assessments are an important way to ensure that your company works with partners that share its values. At the same time, they can help to head off reputational damage, operational disruptions, and regulatory penalties stemming from ESG issues in your supply chain.

However, The Prevalent 2021 Third-Party Risk Management study revealed that only 45% of companies actively track ESG risks in their extended ecosystems. What’s keeping organizations from assessing third-party ESG risks?

In this article, we outline the third-party ESG regulatory environment; uncover common hurdles to ESG risk assessments; and share some best practices for addressing ESG in your third-party risk management program.

Third-Party ESG Regulatory Oversight is Expanding

Although ESG risks aren’t new, lawmakers are getting more aggressive in enacting legislation to address environmental threats, hiring and labor inequities, and corporate governance issues (e.g., bribery and corruption). Examples include:

• California Transparency in Supply Chains Act requires companies to disclose their efforts to ensure that the goods they sell are not produced by workers who are forced into servitude.
• European Corporate Due Diligence Act aims to unify European Union (E.U.) member states’ approaches to enforcing human rights and environmental laws at the weakest points in organizations’ value chains: their third-party relationships.
• U.K. Bribery Act encourages companies to validate supplier anti-bribery practices with external verification and monitoring.
• U.K. Modern Slavery Act requires organizations to publish an annual statement detailing the steps taken to ensure that modern slavery is not taking place in the business or their supply chain.
• U.S. Foreign Corrupt Practices Act improves corporate governance practices by requiring companies listed in the U.S. to keep records and maintain internal accounting controls to detect transactions that could be considered as bribery.

Each of these laws outlines tangible penalties for offending companies, and some also impose liabilities on organizations that contract the services of offenders.

Manual Assessment Processes Complicate Third-Party ESG Assessments and Reporting

The Prevalent study showing that less than half of companies actively track ESG risks also revealed that 42% of organizations still use spreadsheets to assess their third parties. Collecting environmental impact statements, hiring guidelines, and governance practices from large vendor communities can be a crushing manual process with no way to consistently reveal, score or weight risks. Relying on manual processes saddles risk management teams with inefficiencies, limits actionable insights, and can result in important risks bring overlooked.