Ethical Sourcing and Responsible Labor Are About Dollars and Sense

Knowing who stitched a fleece jacket and where the materials came from may seem like a cause best relegated to consumers and advocacy groups bent on social justice. Yet as concerns over sourcing, sustainability, and fair labor practices grow, the pressure to perform ethically and responsibly is on the rise.

“Businesses that lack a clear understanding of their supply chain and the conditions in which they operate face a number of key risks, including financial loss and long-term market viability,” observes Amanda Archila, executive director of Fairtrade America, a non-governmental organization (NGO) with a global certification standard used by more than 2 million farmers and 2,500 businesses.

Adds Sanchita Banerjee Saxena, a member of the professional faculty at the University of California, Berkeley Haas School of Business and a senior advisor for human rights consulting firm Article One: “In many cases, organizations are not seeing the impacts they expect. They lack the visibility and understanding of root causes that are essential.”

Despite a growing focus on ethical and responsible business practices, monitoring and validating results is no simple task. For one thing, the complexity of today’s supply chains is nothing short of breathtaking. For another, monitoring materials and people half a world away is difficult. As a result, it’s crucial to establish a strategic vision but also adopt tools to ensure businesses meet objectives.

Labor Pains

Hardly a day goes by without one company or another winding up in the crosshairs of media coverage about sourcing or labor policies gone wrong. Whether the product is diamonds or cocoa, clothing, or rare earth materials, there’s a growing focus on whether corporations rely on fair and ethical standards. There’s also growing scrutiny about working conditions -- including the use of child labor, sweatshop labor and sometimes forced labor -- at farms and factories scattered across the world. For example, in Bangladesh, workers are paid about 33 cents per hour. In India, the figure is 58 cents.

For a business that crosses the red line and lands in the public spotlight or under the scrutiny of regulators, the results can range from serious to devastating. Yet even a business-as-usual approach has repercussions. A study conducted by the World Economic Forum in collaboration with Accenture found that organizations that lack a strategic focus on ethical sourcing and labor typically have 5% to 20% lower revenues, along with a decline in brand value of 15% to 30%. They also incur a carbon footprint that’s 13% to 22% higher.

Businesses that lack proactive monitoring put themselves at risk in several key areas, Archila warns. These include failing to meet regulatory requirements and industry standards, customer and shareholder expectations, climate change and sustainability objectives, and undermining the long-term viability of sources and markets. “Companies that do not invest in their farmers and manufacturers are not investing in themselves,” she argues.

While ethical sourcing and labor may appear on the radar for a board or ESG committee, many companies, particularly those in fast fashion and agriculture, continue to underperform. “We have seen incremental improvements in this space but far too many companies have either ignored these ethical sourcing and labor issues or pursued a path that’s misguided,” Saxena says. “Too often, companies focus on policies, programs and interventions that are too narrow -- and many are reluctant to make crucial changes that cause bad behavior and violations in the first place.”

The task won’t become any easier in the years ahead. Countries, states and even local governments are imposing regulations, standards and laws. For example, California enacted a supply chain transparency law in 2011 and the UK enacted its Modern Slavery Act in 2015. Now the European Union (EU) has introduced a draft of the European Supply Chain Act, which requires EU companies and others to audit their suppliers across the entire supply chain, including both direct and indirect relationships.

Says Evan Smith, CEO of Altana, a company that sells software designed to track sourcing and labor practices within a supply chain: “We are moving past the point where business leaders said, ‘I don’t have a right to ask my suppliers about their suppliers because it’s a competitive secret’ to an environment where complete supply chain visibility -- upstream and downstream -- is expected.”

Getting to the Source

At the heart of any successful ethical sourcing framework is an ability to extend thinking and actions beyond laws, regulations and fair trade guidelines. It’s essential to understand economic factors, environmental issues, and the fundamental needs of farmers, workers and others. “It’s important to collaborate with producers and suppliers to develop solutions that meet everyone’s needs,” Archila explains.

In many cases, the process is incredibly complex, and it incorporates numerous factors. For example, Archila points out that the cocoa industry intersects with an array of political, social, and environmental issues. These all contribute to the foundational price of the commodity, yet many cocoa farmers aren’t able to earn a secure living. Solving the problem could be a simple as expanding their farming land to increase their yield, yet this could also lead to deforestation or water problems.

Until recently, getting to a common and secure single source of truth was difficult because various entities in a supply chain typically held their own data and any clear standards for data use were absent. When consultants or companies attempted to aggregate the data and create a supply chain map -- if they could even obtain the necessary information -- the results were often fuzzy or even meaningless.

Saxena says that companies must evolve beyond spot audits and quantitative snapshots and adopt a holistic model. While it’s impossible to monitor a faraway farm or factory 100% of the time, it is possible to ratchet up visibility, along with audits and controls, with the help of local groups or other partnerships, such as Fairtrade. “Organizations must reach a point where they are actually interviewing workers, observing practices over time and gauging what is taking place in a more collaborative and authentic way,” she explains.

In addition, companies such as Altana hope to change things. For instance, its application, Atlas, applies AI to more than 2.5 billion public and private records. This includes phone numbers, email data, IP addresses and numerous other identifiers. Altana incorporates data sovereignty techniques to mask proprietary data while making the underlying sourcing information available. Smith says this approach can spot potential cases of illicit trade, human rights violations, drug trafficking, environmental lapses, regulatory breaches and other problems.

Another software company, Sourcemap, tracks supply chains from raw materials to finished products. It pulls data from enterprise resource planning (ERP) databases, spreadsheets and other sources that extend across secondary and tertiary suppliers. Once a business identifies raw materials and components suppliers, these entities -- farms, mines, and facilities where the work takes place -- can validate the relationships and join the network. The company’s founder and CEO, Leonardo Bonanni, describes the software as a “LinkedIn for the supply chain.”

In the end, perhaps only one thing is entirely clear: The focus on ethical sourcing and labor practices will become even more intense in the coming years. Customers, media, shareholders, employees and others increasingly expect companies large and small to engage in responsible and sustainable business practices. Concludes Saxena: “This is an issue that will impact virtually every company in one way or another.”