Theme 2: supporting suppliers and building resilient supply chains

What is the issue?

The COVID-19 crisis has highlighted the lack of resilience of supply chains in respect of labour rights during a large-scale disruption. Supply chain management over the recent period has tended to focus on efficiency, for example through reducing inventory levels, while still providing on-time-in-full deliveries, and shorter lead times.¹ These priorities have increased pressures on labour practices. In addition, given high levels of supply chain complexity, businesses are unable to fully trace the origin of products and services, creating potentially hidden exposures to supply chain risks and vulnerabilities.²

Supply chain issues under a COVID-19 magnifying glass

Supply chains’ labour risks vary depending on whether essential or non-essential products or services are involved. Essential product supply chains will be more exposed to risks related to working conditions, while non-essential supply chains will be more exposed to the risk of blocked access to social safety nets.
Brands cancelling orders at short notice, materials shortages in exporting countries, triggering of force majeure clauses in contractual agreements are having and far-reaching impacts in the wider supply chain.
Increased risk of exploitation of marginalised people and exposure to modern slavery and human trafficking in relation to income shocks.

The short-term supply chain risks of COVID-19 vary depending on whether chains are associated with essential or non-essential products and services. Production of non-essential products and services may have come to an almost complete halt at the height of the crisis, while production of essential products and services may have continued relatively uninterrupted. Different risks apply to each category, but are not exclusive to that category, and may switch from one to the other over time. In addition, our observations are slightly less rigid in relation to emerging markets, where risks listed for non-essential supply chains may also be felt by some workers in essential supply chains, particularly those in the informal economy.

Supply chain type	Main social risks	Sectors
Essential products and services	Poor working conditions Forced and child labour Denial of freedom of association and collective bargaining Long hours Insufficient wages	Large-scale food production Protective equipment Health services Retail – food and beverage Mining Utilities Public transport
Non-essential products and services	Inadequate or non-existent access to medical care No access to social safety nets Loss of income to cover for long periods of inactivity Denial of freedom of association and collective bargaining	Small-scale food production Garment Informal economy activities Manufacturing Aviation Construction Large-scale infrastructure

Key near term investor actions

Stewardship

Below is a list of actions for investors to consider now around their stewardship activities, which it is hoped will help set expectations for portfolio companies around resilience of supply chains. The questions are not exhaustive and should be adapted to individual business sectors, geographies and types of supply chain.

The considerations cover all asset classes and security types. Proper due diligence is key for private investors to reduce costs derived from labour issues, especially given the limited liquidity of private markets, which could make it difficult to divest.³ For infrastructure, labour and human rights’ issues are among the biggest concerns around ESG performance of the asset class⁴, however infrastructure-based stimulus packages could play a key role in the recovery by creating jobs and absorbing job losses from other sectors.⁵

Questions for companies:

Considerations around working conditions

Does the company carry out due diligence in supply chains to assess whether workers are provided access to Personal Protective Equipment (PPE) and sanitation as well as sufficient and relevant training to reduce risk of infection?
Does the company have a clear breakdown of staff in supply chains beyond tier 1, by job contract and demographic, to understand the extent and duration of supply chain exposure? (For example, the contract may include percentages of direct staff, contractors, hourly staff, full-time staff, part-time staff, etc. Demographic may include gender, race, age, disability, etc).
Does the company provide a communication or grievance mechanism for workers in its supply chain, enabling them to report on breaches of different policies or health and safety issues?
What measures is the company putting in place to support vulnerable suppliers and workers (i.e. paying suppliers early, advocating for social safety nets from host governments, providing emergency funds).
Does the company engage with relevant stakeholders (e.g. local NGOs, local government) to understand the impacts of the COVID-19 crisis on the ground in supply chain host countries

Considerations around business models and supply chain operations

Does the company have full traceability of its supply chain? Does it understand the extent and duration of supply chain exposure, at least by country of supply?
Does the company support vulnerable supply chains by honouring contracts, not cancelling orders or changing payment terms?
Does the company carry out due diligence to assess and mitigate human rights and modern slavery risks? Has the company identified the extent of the impact of the crisis on its plans and commitments in terms of human and labour rights’ risk assessments and due diligence efforts?
Does the company carry out health and safety assessments down supply chains to understand suppliers’ preparedness to prevent the spread of disease within their own workforce? Have the company’s monitoring activities been affected by the crisis, and is it looking into alternative solutions to overcome current challenges?
Does the company carry out risk assessments of classified essential supply chains to identify and mitigate labour risks around recruitment of new workers hired to satisfy/meet increased demand?

Examples of corporate good practice

Company examples

Morrisons | Sector: Food and beverage retailer | HQ: UK

Morrisons, a UK supermarket group, changed its payment terms from 14 days to 48 hours to help small suppliers during the pandemic. The supermarket has around 3,000 small suppliers. It also changed its classification of “small supplier” so an additional 1,000 suppliers could benefit from the change in payment terms

Source: https://uk.reuters.com/article/us-health-coronavirus-morrisons/uks-morrisons-speeds-up-supplier-payments-during-coronavirus-outbreak-idUKKBN2101I6

Kee Song | Sector: Meat producer| HQ: Singapore

The company put in place social distance protocols among workers and allowed working from home where possible. Protective equipment was quickly distributed, and training and advice were made available in different languages. Disinfection of hands and boots was an existing protocol. These measures allowed the business to keep operating with no recorded cases of COVID-19 so far among workers.

Source: https://www.eco-business.com/news/covid-19-and-meat-plants-in-asia-a-contrast-in-fortunes-to-the-united-states

Examples of corporate bad practice

Tyson Foods | Sector: Meat producer | HQ: US

Tyson Foods meat producing plant in Pasco, Washington State, was required to stay open during the crisis. Reports from the county’s director of community health showed the staff did not respect social distancing measures and not all wore masks, while some wore them incorrectly. As a result, 150 of the around 1,200 employees tested positive for COVID-19; a 12% implied infection rate compared to less than 1% in the surrounding area.

Source: https://www.ft.com/content/f6e2b4ad-4a62-4c6f-8348-38704e3e81f6

Boohoo Group PLC | Sector: General retailers | HQ: UK

Suppliers of the UK online retailer were accused of paying workers as little as £3.50 an hour, which is less than minimum the wage in the country. Suppliers allegedly also forced workers to report for work when social distancing measures were not in place, in breach of government rules. The retailer saw its sales increase during the outbreak, but, following the negative headlines, its shares lost more than one fifth of their value.

Source: https://www.ft.com/content/935b8eb4-b000-47ec-9ca5-489262885d30 and https://www.ft.com/content/19f9c4e9-e1d6-41a7-a352-5884549fcc9a