ESG criteria are not three single letters, but work as a whole. Having a strong ‘G’ for governance in supply chains can ensure effective corporate governance and provide a way for the ‘E’ and ‘S’ to be just as effective.
Against an uncertain backdrop, implementing ESG criteria has the potential to create a competitive advantage for Latin American companies and accelerate responsible transformation.
SMEs and family businesses play an important role in the region’s supply chains, accounting for a predominant percentage of formal employment and contributing to the region’s GDP
Supply chains have not been free from disruption, forcing countries and organizations to redefine their strategies to mitigate the impacts of the pandemic on critical commodity shortages, while continuing to drive development and growth.
In Latin America, disruptions in global supply chains have affected production, prices and employment, and show an uncertain future. In fact, the International Monetary Fund (IMF) stated that average inflation in Latin America and the Caribbean will increase to 14.6% this year, and will reach 9.5% the following year.
In addition, the increase in geopolitical conflicts, such as Russia’s invasion of Ukraine, further increases the uncertain scenario and the possible impact on products in supply chains. In this context, companies have been under pressure to look not only for ways to mitigate disruptions, but also for new efficiency strategies and revenue opportunities, looking beyond their operational boundaries and creating new business models in collaboration with their logistics chains. For example, the acceleration of process automation and the digitalization of operations have demonstrated significant adaptability, but, at the same time, have opened up new risks such as cybersecurity vulnerabilities.
In addition, Latin America is a region with growing internal tensions, characterized by an entrepreneurial ecosystem led by small and medium-sized enterprises (SMEs) and family businesses. While SMEs play a fundamental role in supply chains and constitute 99.5% of the region’s companies, generating 60% of formal productive employment, family businesses are essential to Latin American economies, representing 75% of all companies valued at more than US$1 billion and 60% of the region’s total Gross Domestic Product (GDP).
Given this uncertain outlook, the risks in supply chains are greater, and seeking ways to proactively prevent negative impacts, taking into consideration the particular characteristics of the region, becomes crucial. It is precisely for this reason that implementing ESG criteria that permeate supply chains is especially relevant for Latin American business leaders (C-Level and senior management). However, for this transformation to be responsible, it is essential that companies prioritize their ‘G’ of Governance and define ‘how’ they will achieve their objectives, aligning their business strategy with their purpose and values.
The good governance ‘G’
Good governance requires companies to be clear about who they are, why they exist, what drives them and, therefore, to define their purpose and values in balance with their environment. Their long-term development will depend on ‘how’ they achieve their objectives.
However, many companies fail to implement ESG because they do not prioritize their ‘G’, and focus on environmental actions (‘E’) that are easier to make visible, even resulting in bad practices such as greenwashing, i.e., appearing sustainable without being so. In this regard, the report ‘Measuring Stakeholder Capitalism’ identifies five actions that enable companies to adopt a holistic approach to good governance: governance purpose, quality of the governing body, stakeholder engagement, ethical behavior and oversight of risks and opportunities.
To implement these actions and for the transformation to have a real impact, it is necessary to look not only at the company’s own actions, but those of the entire logistics chain, and to ensure that what is required internally is also required of suppliers. In a recent publication by the World Economic Forum, Defining the ‘G’ in ESG, Governance Factors at the Heart of Sustainable Business, the key indicators that supply chains must address should focus on ensuring transparency; compliance with contracts; knowing the reality of the countries where operations are carried out; being very careful at each stage, link and place in the logistics chain, in addition to having double verification.
For example, in Latin America, Ecopetrol has been adopting and reporting its ESG metrics for two years. On its path to internal transformation, it has established processes to measure its impact by focusing on quality of information over quantity, and has involved regulatory and standard-setting departments. At the same time, it is working with its suppliers to help them measure their Scope 1 emissions.
ESG criteria are not three single letters, but work as a whole. The important thing about having a strong ‘G’ in supply chains is that it will result in effective corporate governance that will ensure that the ‘E’ and ‘S’ are also strong. In fact, the most successful organizations will be those that implement their ‘G’ not only to mitigate risks, but also to create new opportunities and business models that generate value for their entire ecosystem, including supply chain actors, their workforce, society and the environment.
3 priorities can enlighten the transformation journey for supply chains in Latin America:
Defining a governance strategy that involves both managers and executives of large companies and leaders of SMEs in the supply chains. On the road to a good ‘G’, leaders must transform the organization, strategies, operations and business models, taking into account the large number and diversity of actors in the region.
Measuring and understanding the level of exposure to risk, as well as defining ambitious goals linked to the strategy and implementation of initiatives. To carry out transformation, measurement is the first step for organizational transparency and active engagement. At the same time, it identifies areas for development.
Implementing initiatives that have supply chain collaboration at their core: new technologies and innovative solutions open up opportunities for companies to measure and report metrics in a more consistent manner, while continuing to promote growth and sustainability in collaboration with supply chain stakeholders. There is a unique opportunity to develop collaborative efforts focused on common challenges and systemic failures, with incentives for all parties involved.
Creating a collaborative roadmap between companies while engaging the public sector will give a new competitive advantage to the region and help accelerate the responsible transformation of industries, with benefits for growth, people and planet.