The requirements for businesses to comply with regulations relating to environmental, social and governance (ESG) has increased enormously in the last decade. Pressure from customers and the public has also magnified. Notwithstanding LSH’s own ESG commitments, all businesses need to understand how they source and procure goods and services.
Today, both the public sector and institutional clients demand extensive due diligence to ensure that suppliers comply with regulations. This includes ESG commitments that extend beyond the principal supplier, LSH, through to its supply chain.
LSH has invested in a supplier management system to understand in detail our supplier population credentials and compliance with LSH standards, policies and commitments to ESG. It’s a large task; we have a large number of suppliers to monitor and as part of our due diligence process all suppliers must comply to LSH’s code of conduct.
Supplier due diligence will always be a work in progress, as our supplier base constantly evolves. However, we are confident that we are on the right path and that the suppliers we select are competent, compliant and share LSH’s commitment to quality that extends right into the heart of ESG.
The laws governing ESG
There are a wide range of ESG regulations that apply to supply chains, which continues to broaden. On the environmental side, the government’s pledge to reach net zero by 2050 is putting pressure on all businesses.
Government contracts worth more than £5 million now must have a carbon reduction plan. The government also asks qualifying businesses to be assessed by the Energy Savings Opportunity Scheme and the Streamlined Energy and Carbon Reporting policy – and the scope is increasing.
At LSH, our clients often ask us to answer questions about our carbon footprint and environmental commitments. Many ask us about whether we report to CDP, a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts.
Turning to social and governance, regulations such as the Modern Slavery Act have put into legislation factors that were increasing of their own accord. Businesses are taking the concept of good governance far more seriously. While businesses must have processes in place to comply with Anti Money Laundering legislation, there is also pressure to ensure suppliers commit to paying fair taxes and employment.
The risk of non-compliance
A business that doesn’t take supply chain compliance seriously is facing several risks. Not least, that customers will start to take their business elsewhere. While some businesses are happy with complying to ISO standards, for example, others will require their suppliers to comply more rigorously.
Customers increasingly require businesses to answer questions, make commitments and to adhere to what they have committed to. A business today needs to ensure that it has the team and resources to deal with both questions and the actions required to comply. Not all companies are so focused on supply chain compliance today, but soon they will have to.
This has been a sea change in company culture which LSH has embraced through investment in people, training, policy and procedures and technology.
There is also the financial risk of being fined for non-compliance. For example, LSH is regulated by the Royal Institute of Chartered Surveyors (RICS). As part of RICS’ governance structure, regulated firms are required to act properly and with ethics and integrity across their business.
How to act
The first place to start with ensuring supply chain compliance is to create a series of questions to ask suppliers. The challenge is getting the balance right – no supplier wants to fill out a 40-page questionnaire and may take business elsewhere rather than go through the process. They may not have the experts in-house or the resources to dedicate time to such a task.
On the other hand, a business needs to be thorough. If questions aren’t asked, a company could be accused of not carrying out due diligence on a supplier, which will bring risks.
Carrying out a project to ensure supply chain compliance can bring the benefit of slimming down a supplier pool. It’s very easy for a supply chain to grow and grow; managing a smaller group of select suppliers that share the same vision can be more efficient.
At LSH, we’re confident that we have the processes in place to comply with legislation and ask our suppliers to do the same. We act for a wide range of private and public sector organisations and have no doubt all their requirements will evolve as regulations increase. We are ready and committed to continue to be as transparent and communicative as possible.
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