European Businesses are Addressing Supply Chain Risk

The Covid-19 pandemic and Russia’s invasion of Ukraine, have transformed the nature of supply chain management. Until those two crises struck, businesses had been very lax about conducting due diligence on their suppliers. For those calling for greater due diligence, these businesses were running legal, commercial and reputational risks. According to the Financial Times, in Europe, businesses are now more alert to the need for due diligence on suppliers, and regulators are erecting requirements and frameworks for future due diligence.

Nikolai Badenhoop, a researcher with the European University Institute, argues that despite a general trend toward describing financial instruments as being “green” or “environmentally sustainable”, current EU legislation which provides “clear definitions, standards and disclosures” of what constitutes green or environmentally sustainable financial instruments, has not been applied to supply chains. Badenhoop calls supply chain risk “a blind spot of the green finance debate”. In order to address the problem, Badenhoop proposes ways in which present legislation can be used to cover supply chains. However, as the Financial Times notes, greening supply chains is particularly complex for large multinationals, who have “tens of thousands” of suppliers. Collecting all the relevant information is an arduous task on its own, and it’s a task that is made even harder by the use of suppliers in countries where the required information is difficult to come by. A multinational, for example, may use a rare earths supplier in Burundi, where the information is not only hard to come by, but where the environmental standards are drastically different from those in the European Union. This is an unavoidable part of globalization, where supply does not neatly align with regulatory standards.

However, the Financial Times quotes Marie Navarre, head of sustainable research at Allianz Global Investors, as saying that, with Covid-19, and Russia’s invasion of Ukraine, businesses have been forced to address supply chain risk. For example, countries who invested heavily in Russia have taken a big hit, because they ignored the geopolitical risk of that investment. What they cared about was access to cheap fossil fuels. Their organizing principle was the need to access supply as efficiently as possible, rather than to create a resilient supply chain. Businesses have realized that there is a silent risk in the current just-in-time model. Pursuing efficiency-at-all-costs is not a free lunch. There is a price to pay.

Full Coverage Painting & Flooring believes that businesses have to do more to build green and robust supply chains, even at the cost of losing some efficiency. The reward for this will not just be a green supply chain, but it will be a supply chain that is more resistant to the kinds of shocks the world has experienced since the Covid-19 pandemic. Germany has already enacted a supply chain law that obliges businesses with over 3,000 workers to conduct due diligence on suppliers to ensure that no human rights abuses are taking place, or face penalties of up to €8 million or 2% of their annual global turnover. The measure is likely one of many and we will see a more Europe-wide response.