COVID-19 demonstrates the need to address ESG risks in supply chains

Current crisis highlights need for ESG to be a short-term consideration as well as a long-term one, argue Felicitas Weber and Sonal Mahida

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The widespread impact of the coronavirus pandemic is revealing a significant vulnerability in corporate supply chains — the potential for disruptions and delays born of employer-controlled working and living conditions that contribute to the spread of the virus. The investment community is now at an inflection point on how to value and assess the treatment of human capital in corporate supply chains going forward. 

Once deemed reputational and regulatory risks, sub-standard labour conditions are now also manifesting as operational ones. Understanding how labour vulnerabilities and working conditions in lower-tier supply chains can impact operations will become core to investor assessments of supply chain management and business continuity. 

Coronavirus amplifies supply chain risks driven by working conditions

COVID-19 is a crisis with global but uneven repercussions, driven by varying access to preventative measures and resources as well as differing levels of risk exposure. Business models with complex supply chains relying on cheap, unorganised workers in conditions with close proximity and repeated or extended interactions with others are vulnerable to disruptions in workforce continuity. 

Workers in economically vulnerable conditions, such as migrant farmworkers, some of whom are in situations of forced labour, are especially at risk. The majority lack the ability to self-isolate, quarantine and access medical care or new information on the virus. Access to healthcare is limited by the scarcity of providers, not knowing the local language and how to access the healthcare system, as well as concerns that hospital visits could impact their immigration status. For others, healthcare is unaffordable.   

"Migrant workers only need to be given 40 square feet per person—less than 6 x 7ft — according to US federal guidelines, at a time when the Centers for Disease Control and Prevention recommends six feet for social distancing"

The fallout from COVID-19 includes reduced access to preventative services and income, thereby exacerbating workers’ susceptibility to the virus as well as to exploitative working conditions.The retail industry is cancelling orders in response to the coronavirus, leaving garment factories unable to pay workers for completed work. Nearly 25 million workers may lose their jobs globally in a worst-case scenario, according to ILO estimates. In the US, medical clinics serving communities of migrant farmworkers have closed due to the virus, leaving high-risk workers without any healthcare options.

With US produce growers currently warning of “devastating” impacts from COVID-19-related travel and immigration bans that impact 10% of farmworkers, any additional workforce reductions due to COVID-19 infections may validate investor concerns about the supply chain viability of dependent sectors.

Minimising outbreaks among migrant farmworkers in the US is complicated by prevalent pre-conditions such as diabetes as well as poor living and working conditions. For example, exposure to pesticides weakens workers immune systems. Unsanitary and dense living conditions compound these risks. US Department of Labor investigations in 2018 found that employer-provided housing for migrant farmworkers can be unhygienic, infested and lacking clean drinking water. The close housing quarters provided by employers can allow infectious diseases to spread. Migrant workers only need to be given 40 square feet per person—less than 6 x 7ft — according to US federal guidelines, at a time when the Centers for Disease Control and Prevention recommends six feet for social distancing. Right now, farmers report having no place or space for quarantine and isolation of infected workers once they are impacted by the virus.

Cramped living conditions for workers in corporate supply chains in other sectors have already led to an increase in COVID-19 infections, and have the potential to shut down entire factories.  In the coming weeks, more closures and disruptions from COVID-19 are likely. Countries have banned large gatherings, but still have migrant workers living in cramped conditions, including those building facilities for the next World Cup. Again, the density of employer-provided housing and transportation further increase the risk of spreading coronavirus and disrupting business continuity.

Current working conditions incentivise actions that heighten the spread of an infectious virus like COVID-19. Having little or no job security, time off, or sick pay drives workers to continue to work regardless of potential negative health impacts. This labour vulnerability is also a current risk for companies’ dependent on ‘gig workers’ – those who are ostensibly ‘self-employed’ and without normal worker protections.   

Corporations are uninformed about sub-tier supply chains and regulation compliance is low

The absence of deep corporate intelligence of worker conditions increases the potential for COVID-19 to create supply chain disruptions. Many large global companies only have a surface-level understanding of where their supply chains are located, associated risks, and how to address them – especially in lower tiers. 

One recent report identified forced labour in the supply chains of 83 companies. Despite corporate policies prohibiting forced labour, companies that produce automotive, electronics, household appliances and apparel have allegedly had cases of forced labour of ethnic minorities in factories in China. 

Companies are failing to meet current regulations on forced labour and human rights.  California’s Transparency in Supply Chains Act and the UK’s Modern Slavery Act require firms to account for human rights impacts, including in supply chains. The majority of large global companies must report under the UK Act, yet the compliance rate of over 13,000 companies is as low as 23%. Regulatory action shows no sign of slowing. The October 2019 US Customs and Border Protection ban on imports produced with forced labour effected the supply of items including garments, rubber gloves and minerals. France and the Netherlands have already enacted legislation forcing companies to undertake human rights due diligence, and other European countries will likely follow suit.

Future-proofing supply chains means taking care of human capital

The magnitude of reputational and operations risks will likely increase, with investigative journalism and labour groups exposing exploitative working conditions, and as companies cut ties with non-compliant suppliers, or stop sourcing from certain countries or regions altogether.[1] Alongside operational delays and disruptions, companies face financial liabilities. Cal-Comp, a supplier to companies such as HP, is said to have repaid workers about $10m in recruitment fees,[2] and Apple’s suppliers paid back more than $30m in such fees.[3]

Companies open themselves up to operational disruptions when the preservation of a key asset is overlooked. The livelihood and health and safety of supply chain workers should be regarded in the same manner. ‘Black swan’ events – which are becoming increasingly frequent despite the term – magnify the weaknesses and fragility of today’s complex supply chains.

Strong corporate risk management requires proactively addressing the factors underlying foreseen disruptions. Investor assessments of business continuity will need to account for the role and risks related to human capital and labour going forward. For example, investors wishing to understand if a company supply chain extends worker protections to farmers during such crises can look at how many of its farmworkers are unionised, since most unionised farmworkers in the US receive healthcare at no cost.

The increased investor focus on risk management likely to arise after the coronavirus will need to include ESG issues and consider the short-term in dire situations. Low-probability, high-impact events demonstrate that ESG is not purely a long-term risk. Anything can happen from quarter-to-quarter. 

Felicitas Weber is Project Lead for the KnowTheChain initiative at the Business & Human Rights Resource Centre.

Sonal Mahida is the Founder of responsible investment advisor Verability 

[1] The authors do not support the ‘cut and run’ approach but acknowledge this is the approach a number of companies are taking.