This post first appeared on BusinessGreen.
Have you ever eaten horse? Not consciously perhaps but last year’s meat adulteration scandal suggests it’s more than possible. The scandal revealed just how clueless some of the biggest and most trusted UK brands were about what went in to the products they put their label on. The scandal also highlighted the difficulty of knowing exactly where materials, components and ingredients come from, something that is of growing concern to manufacturers, regulators and investors alike.
Concern over provenance and counterfeiting is obviously nothing new. Victorian shoppers had to contend with tea-less teas, coffee-less coffees, and as the legend of Sweeney Todd would have it, people pies. To reduce the scope for such shameless behaviour amongst modern producers, we have schemes like the Kimberley Process to limit the trade in conflict diamonds and the European geographical indications system that certifies the origins and quality of specialty foods such as Melton Mowbray pork pies (guaranteed horse and people free).
New scrutiny
What is new is the degree of scrutiny to which supply chains are subjected. In the consumer electronics space, conflict minerals, such as coltan from the Democratic Republic of Congo, have been the subject of NGO campaigning and, perhaps more pointedly for manufacturers, regulatory scrutiny. In the US, the Dodd Frank act requires all users of conflict minerals to disclose the source of these minerals, a move the EU is due to follow. Thanks to the growing availability of internet access and smart devices, local impacts of extraction are increasingly visible and the subject of increasingly global campaigns.
So far so familiar, but manufacturers are starting to have to worry about environmental limits on resource production in particular locations. An obvious example here are materials that require a lot of water to extract and are predominantly produced in areas that suffer from low water availability. Previously, manufacturers (and governments) assumed the market would always provide. But, as the work of McKinsey and Chatham House has shown, resource demand is pushing up against the limits of supply for some materials, meaning droughts or other extreme weather events can send prices spiking or even impact on supply to the extent that not everyone can get what they want.
Investor and public awareness of risk is increasing
Significantly, investors are waking up to the fact that familiar regulatory and policy risks could be compounded by emergent environmental scarcities and associated societal risks, such as food shortages. There is already evidence from the mining sector that the more proactive companies are in addressing their exposure to resource risks, the better their financial performance. A recent report backed by Aviva, Zurich and PensionDenmark amongst other high-profile businesses urged investors to step up efforts to research the risks to economic performance presented by environmental issues. This is already well advanced for carbon thanks to the Carbon Disclosure Project and Carbon Tracker initiatives. There are also signs that public pressure on local environmental impacts is beginning to bear, as demonstrated by Deutsche Bank’s recent announcement that it was withdrawing from the Abbot Point coal terminal project in Australia due to the inability of the project developers to satisfy UNESCO that dumping three million tonnes of dredged material wouldn’t harm the Great Barrier Reef.
Ideally, manufacturers should know what risks they might be exposed to through their supply chains, just as Asda has done with respect to water. However, our enquiries with the Circular Economy Task Force into how to scale up this kind of analysis suggests that it’s expensive, not to say impossible to get much information from suppliers that are more than two links away from you in the supply chain. A heavy-handed approach would be to legislate for mandatory disclosure of resource risks on companies’ risk registers. An alternative from the Task Force’s report would be to extend the traceability mechanisms for timber and palm oil to a wider range of resources. Such a move would help improve the quality and lower the cost of these tracing mechanisms.
The government can help by scaling up to the whole economy the sector specific analysis that it has already commissioned into where the UK economy is most exposed to resource security risks. And investors can keep companies attention on the issue by asking what resource risks they’ve identified as being relevant to them and what mitigation strategies they have in place. The experience of the horsemeat crisis shows that companies can trace materials through their supply chains when they really want to, whilst growing regulatory and supply risks mean smart businesses will be doing this sooner rather than later.
