AGC on getting to grips with supply-chain risks

Managing ESG risks in supply chains is a top priority, say AGC’s Shigekuni Inoue and Yew Meng Lim.

This article is sponsored by AGC.

As Asia has emerged as the world’s most important hub for manufacturing in recent decades, scrutiny over the region’s supply chains has inevitably increased. Many corporates have incurred serious damage to their reputations after serious environmental and social failings in their supply chains were uncovered.

ACG is a Japanese company operating in sectors including glass, electronics, chemicals, life sciences and ceramics. We sat down with Shigekuni Inoue, senior executive officer at AGC Inc, and Yew Meng Lim, executive director at AGC Asia Pacific, to discuss how corporates need a holistic strategy around managing ESG risks to meet investor expectations.

What are the main ESG risks in manufacturing supply chains in the APAC region?

Shigekuni Inoue

Shigekuni Inoue: There’s a large range of ESG risks that can significantly affect the environmental footprint of a company and to a loss of trust from stakeholders. The risks vary from industry to industry. In glass and chemical manufacturing, for example, environmental concerns are more prevalent due to the various types of natural resources that have potential knock-on risks for supply-chain continuity, nature and human rights. This is on top of existing issues involving large volumes of GHG emissions, due to the energy-intensive traditional practices in the sectors.

To manage these risks effectively, it’s important to come up with a holistic strategy for ESG risk management systems. These need to focus on enhancing labour conditions and promoting active supplier and stakeholder engagement to ensure compliance with ESG standards in each country and region. At the same time, companies in supply chains need to invest in clean technologies to help them cut their GHG emissions. The overall goal must be to not just to minimise adverse effects, but to promote sustainable growth.

At AGC, we try to achieve these aims in several ways. Firstly, we invest in cleaner technologies and innovative processes to lighten our ecological impact. We want to realise a circular economy, where resources are consistently reused and recycled to help cut waste and preserve natural habitats. Secondly, we’ve prioritised fair and secure workplaces that meet global standards for health and well-being. And thirdly, we engage in robust internal and external discussions to foster transparency and rigorous ethical standards within our operations.

Why are investors taking more interest in ESG risks in the supply chains of manufacturing companies? 

SI: ESG supply-chain risks are starting to garner increased attention from investors, as they are now seen to materially affect a company’s financial outcomes. There are many examples where damage to a company’s reputation due to supply-chain incidents has affected the company’s long-term success. A well thought-out ESG gameplan can alleviate these risks.

We continue to promote and enhance ESG standards amongst stakeholders, including in our supply chains, with the hope that this mirrors the industry’s shift in response to evolving investor expectations. Our aim is to reach a net-zero carbon footprint by 2050.

What are the challenges in managing ESG standards in supply chains in the APAC region?

Yew Meng Lim

Yew Meng Lim: There are several key challenges. One of the most important is around transparency. The complexity of supply chains means it’s difficult to fully appreciate the risks, and it’s difficult to monitor and benchmark ESG standards. Geographical distance, cultural diversity and language barriers further complicate this process.

Part of the problem is that many APAC countries have prioritised developing their economies, rather than enforcing strong standards in supply chains. Negative environmental and social impacts around industrial supply chains have often been downplayed. Meanwhile, smaller firms in particular lack awareness and understanding of ESG issues.

Added to this, we should keep in mind that regulations are fragmented across the region. Because ESG regulations vary so much, there is a lack of consistent standards. The diversity in approaches to regulation creates challenges in maintaining uniform compliance across supply chains.

Finally, we mustn’t forget that climate change is itself a risk to supply chains. The APAC region’s vulnerability to more frequent and intense periods of severe weather introduce additional risks to supply chains, affecting their stability and sustainability.

How do you attempt to address these risks?

YML: The first step is to try and enhance visibility. We do this in our own supply chains by employing rigorous vetting processes and establishing clear ESG compliance requirements for our suppliers. To help with this, we’ve adopted a data-centric approach, leveraging the advancements in digital tools to enhance our supply-chain ESG risk management.

We also use our influence to advocate for sustainable business practices by arguing that sustainable economic development should go alongside better respect for ESG standards. We try to raise awareness about ESG by conducting educational initiatives and capacity-building programmes for our suppliers. The aim is to foster a common understanding of ESG standards and how they must be applied.

In terms of navigating the regulatory landscapes, we again try to use our influence by actively participating in policy discussions to advocate for more harmonised ESG regulations across the region.

Also, we believe that better understanding the risks around climate change will help to protect our supply chains. Therefore, we carry our climate risk assessments into our ESG strategy to prepare for climate-related events and mitigate their impact.

How do you expect the conversation between investors and companies on supply-chain ESG risks to evolve over the next several years?

SI: Communication is vital. Periodic and open communication helps us to exchange information and align overall business approaches, so that investors and corporates can carry out a swift and decisive response to the dynamic changes in operating environment.

Internally, we also look to develop our own ESG capabilities through internal staff training and setting up dedicated teams. We adopted best practice in emissions reductions in line with climate science recommendations, such as those from the Science Based Targets initiative and Internal Carbon Pricing, to mitigate our environmental impacts. This proactive approach aligns with investor expectations around managing risks and creating positive social and environmental impacts.

Externally, we engage a third party to validate our environmental impacts transparency and action, and achieved recognition by being included in the CDP A list for 2022. We also adopt Task Force on Climate-related Financial Disclosures to provide information of what companies are doing to mitigate the risks of climate change. AGC Asia Pacific is the founding partner of the World Green Building Council’s Asia Pacific Network, and we also promote and support global sustainability programmes such as Advancing Net Zero, Better Places for People and Circularity Accelerator.