Commentary Firms like Amazon want to be ESG-friendly but have unaccounted long supply chains

For example, in 2020, MSCI, the largest ESG ratings agency, upgraded Amazon's ESG rating from BB to BBB, reflecting its strength in areas such as corporate governance and data security, despite its consumer liability risk.

These gaps are also concerns for ratings of companies such as 3M, ExxonMobil and Tesla.

OTHER COUNTRIES ARE ADDING PRESSURE

Currently there is no unified reporting standard, so different companies may cherry-pick certain ESG performance measures to report to boost their sustainability and social ratings.

To improve consistency, the next step would be for ESG rating agencies to redesign their methodology to take into account what may be environmentally harmful and unethical operations across the entire global supply chain.

ESG rating agencies could, for example, create incentives for companies to collect and disclose their supply chain partners' activities, such as Scope 3 emissions.

In June 2021, the German Parliament passed the Supply Chain Due Diligence Act, which will become effective in 2023. Under this new law, large companies based in Germany will be responsible for social and environmental issues arising from their global supply chain networks.

This includes prohibitions on child labour and forced labour, and attention to occupational health and safety throughout the entire supply chain. Those who violate the law face a fine of up to 2 per cent of their annual revenues.

The European Union's new Sustainable Finance Disclosure Regulation, which went into effect in March 2021, adds pressure in a different way.

It requires funds to report details on how they integrate ESG characteristics into their investment decisions. That has led some money managers to drop the phrase "ESG integrated" from some of their assets, Bloomberg reported.

Without similar laws in the US, we believe ESG rating agencies could fill an important gap. To be sure, surveying a company's entire supply chain's ESG performance is far more complex.

Yet by tying all the ESG dimensions to a company's supply chain end-to-end operations, rating agencies can nudge corporate leaders to be responsible for actions across their supply chains that would otherwise be kept in the dark.

Tinglong Dai is a professor of operations management and business analytics at John Hopkins University, and Christopher S Tang is a professor of supply chain management at University of California, Los Angeles. This commentary first appeared on The Conversation.

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