Skeletons in the closet? Communicating supply chains in the activist world

1 Jun 2023

Corporate reputations are increasingly exposed to threats that emerge from businesses’ supply chains coming under the public spotlight. Viktor Koleda, Associate at DRD Partnership, looks at how the use of strategic communications can help corporates pivot from fighting shy of discussing their supply chains towards taking ownership and gaining credibility.

Issues hidden within supply chains can be a hole below the waterline for the reputation of a business. As scandals have shown time and again in recent years, stakeholders’ expectations regarding sustainability at every stage of production are at an all-time high. Failing to disclose, articulate and address impacts and conditions across supply chains opens businesses up to a multitude of potential risks: investors revolting against the board or bringing lawsuits forward; customers choosing to spend their money elsewhere; politicians and regulators showing their teeth and enforcing new standards of transparency. The heat is rising from all sides.

Despite this, our economy fundamentally relies on the use of supply chains that are obscure or problematic. From luxury goods to petrochemicals and transition minerals, we are reliant on global supply chains, many parts of which do not meet the high standards of environmental and social scrutiny that we are getting accustomed to. Such misalignment between ambitions and reality creates critical reputational risks for businesses and introduces a highly challenging environment to communicate in. How can businesses navigate this?

‘Eyes wide shut’

Simply avoiding looking into what happens across the supply chain is no longer an option. If we were to draw a single conclusion from each time corporate supply chains were in the headlines in recent years, it is clear that the public is the least sympathetic to businesses that know something smells fishy, but choose to bury their heads in the sand.

By failing to take proactive steps to understand and communicate what happens in their upstream production, management leaves the window wide open to a range of actors who do this for a living. Investigative journalists, regulatory authorities and NGOs are always on the lookout for targets.

There will also be others who may demand clarity about a company’s supply chain (sustainable investors), or share their knowledge with the world (whistleblowers). Defending against accusations that come from within the company is even more challenging than responding to external criticisms.

Businesses should not underestimate the risk of contagious loss of stakeholder confidence across an entire industry. In the aftermath of the Boohoo scandal, every fast fashion retailer with slim margins found itself defending against assumptions that their business models rely on cheap labour and poor working conditions. Unless a business proactively demonstrates otherwise, stakeholders are likely to think it is guilty by association.

Robust, proactive communications is the only way to ensure that the ripples from competitors’ crises do not turn into an existential risk.

Rising up to the task

Shareholder resolutions often take an uncompromising position about portfolios that carry ESG risks and share one word in common: “divest”. From an ESG investor point of view, capital should be shifting away from “the bad”, and unpalatable facts should be entirely excluded from holdings: out of sight, out of mind.

The task at hand is to help stakeholders recognise the cost that divestment would have on the communities that you operate in, as well as to communicate your vision for how the supply chain will be transformed over time.

Whether stepping away is the most productive way to enact change and make a positive impact is a never-ending debate, but for some corporates this may simply not be an available option. An EV business, for instance, may have no immediate solution to its dependence on lithium and cobalt. At the same time, it is uniquely placed to leverage the influence and power that comes with being at the end of a supply chain. Arguably, this position carries a duty to invest in local communities, improve and safeguard workers’ conditions and ensure that any long-term environmental harm is mitigated. By demonstrating how they are fulfilling this duty, businesses can reaffirm their license to operate and secure the long-term support of stakeholders.

Gradual investment into sustainability across supply chains creates value. 70% of supply chain executives polled by EY in 2022 have seen or expect to see a boost in growth from ESG initiatives. However, getting the markets – which price sustainability at a premium – to recognise that value, and converting it into a competitive advantage requires a winning communications strategy.

It takes hard work and a nuanced narrative to convey a simple message: change doesn’t happen in an instant and no one has all the answers.

Robust, proactive communications is the only way to ensure that the ripples from competitors’ crises do not turn into an existential risk.

Viktor Koleda, Associate, DRD Partnership

Leading, not backing away

While the sweeping of supply chain impacts under the rug creates substantial risks, leadership in throwing light on these impacts can bring dividends.

Since supply chains are inevitably interconnected, issues tend to replicate themselves across sectors. Companies stand to win a lot by spearheading public debate, bringing peers alongside them and exploring how structural issues in their industry can be resolved. From a cynical point of view, sector-wide initiatives help to absorb reputational backlash from audiences that are fundamentally antagonistic and highly sensitive to ESG considerations. More importantly, joint efforts to gradually make supply chains more sustainable – within the boundaries of competition law – have the potential to achieve the broadest impact.

On a sector-wide level, simple mechanisms can go a long way in the process of gaining legitimacy. When Panorama highlighted widespread sexual abuse on Kenyan tea plantations in February 2023, the most powerful element of the corporate response was the introduction of whistle-blower lines that connect the top of the supply chain to the end producer. In this way, the sector has taken on a degree of direct responsibility for how the workers are treated.

Regulators, policymakers, customers and shareholders will often think about supply chains in abstract terms. By setting up industry-wide platforms, opening new channels of communications and using them strategically, corporates can help key stakeholder groups understand the practical realities of their upstream productions. Getting to that understanding is an essential step towards securing broad buy-in and support for productive plans for transforming supply chains and positioning your company as a legitimate driver of that change.