Boards urged to tackle climate change hazards in supply chains
- As the COP28 countdown begins, boards are being urged to require their supply chains to decarbonise and accelerate the transition to Net Zero.
- Climate change-related disasters, greenwashing, legislative and regulatory changes, and labour rights scandals within the supply chain underline the urgent need for businesses to enhance their supply chain risk and resilience strategies.
As the world gears up for next week’s 2023 United Nations Climate Change Conference (COP28) in Dubai, a new report on supply chain due diligence is sounding the alarm for business leaders and boards to take immediate and comprehensive action on climate change, as well as other environmental, social and governance (ESG) risks within their supply chains.
That is the key message of a timely report published today by the Chartered Institute of Internal Auditors (Chartered IIA). The report titled “Supply Chain ESG Risks: Harnessing the Potential of Internal Audit” examines the critical need for organisations to align their supply chain operations with their own social values and environmental targets. With regulators, customers and investors increasingly demanding greater supply chain transparency and accountability, the report underlines the important role of internal audit when providing assurance and supporting due diligence activities.
The report makes several recommendations, including:
- With the renewed focus on the climate change crisis, now is the time for boards, audit committees and internal audit functions to start having conversations about the work they are doing to ensure their supply chains are working to decarbonise as part of the journey to Net Zero.
- As the climate crisis exacerbates the risk of supply chain failures, boards and audit committees should harness the potential of their internal audit functions to assess the effectiveness of any business continuity and crisis management plans. This can include stress testing the organisation’s ability to cope with supply chain disruption caused by climate-related extreme weather events, such as tornados, hurricanes, floods, wildfires and droughts.
- With new laws and regulations requiring businesses to take their supply chain environmental and social responsibilities more seriously, boards and audit committees can leverage their internal audit function to independently evaluate the organisation’s legal and regulatory compliance in this area.
- Undertaking thorough and comprehensive due diligence when engaging and selecting suppliers has become vital for operations that are facing environmental, social and governance (ESG) risks. The report emphasises the importance of the board and senior management working with their internal audit function, to get independent assurance that due diligence processes across the supply chain are effective.
- Organisations and internal auditors should be leveraging innovative methods such as data analytics, AI, and other technologies to enhance their capabilities when evaluating ESG risks within the supply chain.
Anne Kiem OBE, chief executive of the Chartered Institute of Internal Auditors emphasised: “The climate crisis is already having a significant impact on supply chains and boards need to ensure they have robust risk management and business resilience strategies in place to cope with this. At the same time, businesses need to focus on ensuring supply chains are decarbonising and not sabotaging their transition to Net Zero. Internal audit has a key role to play by providing the board and senior management with independent assurance that climate hazards in the supply chain are being addressed effectively.”
Richard Chambers, senior internal audit advisor at AuditBoard, said: “Accelerating climate change means the risk of havoc caused by supply chain disruption is growing by the day. Meanwhile, business leaders are also being called upon to ensure their supply chains are more environmentally and socially responsible. By harnessing the power of internal audit organisations can enhance their ability to identify, mitigate, and manage climate-related and other ESG supply chain risks effectively.”
As climate change continues to intensify, businesses are facing an increasing number of challenges when managing their supply chains effectively. From a drought impacting the Panama Canal and disrupting global trade routes to extreme weather in Europe and North Africa leaving UK supermarket shelves empty, the effects of climate change are already having a tangible impact on supply chains. Recent supply chain scandals such as the fast-fashion retailer Boohoo recently breaking promises to make its clothes fairly and ethically, have highlighted the severe reputational consequences that some organisations may face if they don’t take their supply chain ESG risks seriously enough.
Stronger legislative requirements and public scrutiny mean greenwashing can no longer mask the need for real action. This latest report unveils a stark reality: the need for a genuine commitment to ethical and sustainable practices within supply chains.
Internal audit can help boards avoid these hazards by providing early warning signals of potential ESG-related supply chain risks and enable proactive measures to address them before they escalate into major crises. With the ability to examine all parts of an organisation that are involved in the supply chain, internal auditors are in a unique and strong position to help drive meaningful action on supply chain risks. However, the Chartered IIA is concerned that board members and business leaders aren’t always using their internal audit functions to their full advantage, even though it is potentially one of the most powerful tools they have in their arsenal..
As organisations face growing pressure to embrace a more socially responsible and sustainable supply chain, the call to action is clear; it’s time for business leaders to genuinely commit to a transparent and sustainable supply chain.
