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      In our previous blog, we outlined why sustainability must be integrated into supplier risk management processes, and the benefits businesses can generate by doing so. In this blog, we will explore how sustainability should be embedded in supplier risk management processes within businesses.

      Supplier sustainability risk is key to ensuring compliance and business continuity, which enables supply chain resilience. Companies must consider the extent sustainability is currently integrated within their supplier risk management processes, and whether it meets their industry’s regulatory requirements. This will look different for each company, depending on their respective maturity and scale, the sector they operate in and the products they sell. 

      Brian Connell
      Brian Connell

      Director

      KPMG in the UK

      Annabel Reoch
      Annabel Reoch

      Global Head of Ethics and Compliance

      KPMG in the UK

      We outline below how KPMG can support your business to build a roadmap that ensures future compliance and reputation protection, regardless of where you are on your journey:

      • Assess what sustainability issues are material to your business

        and validate this with key stakeholders across the business e.g. Sustainability, Procurement & Supply Chain, Legal, Risk and Compliance.

      • Conduct a gap assessment

        to determine whether your company’s supplier risk management processes are ‘future fit’ to ensure compliance with upcoming sustainable supply chain regulations and compare performance against industry peers.

      • Map supply chains

        to identify level of risk and criticality of product among suppliers, going upstream as close to origin as possible.

      • Develop a broad sustainability risk assessment

        to understand the risk exposure of your suppliers. Ensure material sustainability risks are addressed holistically and not in isolation – environmental and social sustainability topics are heavily linked and must be managed as such.
        Sustainability risk assessments can include high-level inherent risk assessments or may involve more in-depth research, such as human rights saliency assessments, which assess a business’ human rights risk across their operations and value chain, leveraging instruments such as the UN Guiding Principles on Business and Human Rights (UNGPs).

      • Conduct supplier due diligence

        by assessing the supplier’s public profile and any adverse media/controversies, gathering and assessing documentation such as suppliers’ sustainability policies, certifications, SAQs (self-assessment questionnaires) and audits. Particular attention should be paid to suppliers located in conflict-affected and high-risk areas (CAHRAs), where there is a particularly high risk of human rights abuses.

      • Review contracts with suppliers

        to assess which sustainability clauses are currently in place (if at all) and which could be added to new and existing contracts – this helps drive sustainability performance across the value chain. While this can be a complex and time-consuming exercise, AI tooling can help analyse contracts at scale and insert clauses where they’re missing.

      • Develop action plans

        for suppliers to mitigate risk in high-risk topics (identified in step 2). Collaborate with suppliers to better understand root causes of human rights and environmental risks, and subsequently develop continuous improvement plans that account for the cultural and geographical nuances in each region the supplier operates in. Such initiatives may include training, participation in cross-industry collaborations, joint innovations, co-investments or implementation of technology and tools.

      • Track supplier performance

        against agreed KPIs and metrics, engaging in ongoing dialogue with suppliers to ensure improvements are clearly communicated and reported on. Sourcing teams should integrate sustainability criteria within supplier scorecards, alongside more ‘traditional’ criteria like cost, quality and on-time delivery. Suppliers’ sustainability performance and commitment to action plans can then influence future vendor selection and spend allocation.

      • Suspend or terminate relationships

        with suppliers that still present high risk after attempted mitigation plans are established. This should be a last resort option – the priority must be to consult with stakeholders, invest in a time-bound responsible exit strategy, consider the impacts an exit could have on human rights and the environment, and ensure any existing grievances have been remediated.

      • Update supplier risk profiles

        based on the insights gathered through management of supplier risk (steps 1-5), so that sustainability considerations are driving Procurement’s decision-making across sourcing, contracting and negotiations. This should be a continuous process that evolves through time as richer data becomes available on suppliers.

      How to ensure successful integration of sustainability into supplier risk management

      • Cross-functional collaboration across risk domains

        Sustainability is cross-cutting and multi-disciplinary, impacting many functions across the business, including Procurement, Supply Chain, Legal, Technology, Risk and Compliance. It needs to be fully integrated into a business’ governance structure, with responsibilities and accountabilities well documented and formalised.

        This ensures supplier risk is assessed holistically, so that stakeholders across the business collaborate to identify and manage interconnected sustainability risks. Additionally, it enables suppliers to be engaged in a coherent and joined-up manner. Rather than suppliers having to respond to disparate information requests from across the business, they can provide more strategic responses – this prevents supplier fatigue and maintains strong relationships between supplier and customer.

      • Use technology and AI, but not at the expense of human capabilities

        Technology can enable automation opportunities across the full supplier risk management lifecycle, as well as AI-driven insights such as forecasting of sustainability-related supply chain disruptions, or real-time alerts from controversies checks or regulatory changes.

        These capabilities may be present within your existing ERP solution, or alternatively external ‘point solutions’ may need integrating with your ERP. Attention and due care should be paid before significant technology investments, to fully understand the existing technology landscape, key business requirements, and potential implementation challenges. Importantly, all businesses should assess the skills and capabilities that are required of their workforce when using such technology, and what training and support is required to ensure the transformation is a success.

      • Move from ‘moment in time’ to ‘business as usual’

        Sustainability risk management should evolve and not remain static. It is crucial that rather than just being an exercise carried out at onboarding or contract renewal, it is monitored on an ongoing basis, and is embedded within supplier policies, processes and controls. Insights should feed into continuous improvement plans – leading to mutually beneficial outcomes for customer, supplier, as well as people and planet.

      If you’re interested in finding out more about how KPMG can help you integrate sustainability within supplier risk management, please contact Annabel Reoch or Brian Connell.

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