LRQA’s 2022 Risk Outlook: A Closer Look at This Year’s Supply Chain Geography ESG Trends
LRQA (formerly ELEVATE Ltd) has released the first iteration of its Supply Chain ESG Geography Risk Ratings for 2022. The geography risk ratings cover more than 100 countries and territories and more than 90 subnational regions, for 38 issues. The geography risk scores present insight into supply chain Environmental, Social, and Governance (ESG) risks and trends at the national and subnational level for 2022 and spotlight emerging risk and regions.
The Geography Risk Ratings form part of LRQA’s (formerly ELEVATE Ltd) Supply Chain ESG Risk Ratings, which also include Product Risk Ratings and Supplier Risk Ratings, covering 265 products as well as controversy intelligence and risk scores for over 160,000 suppliers via the Sentinel service. Sentinel is LRQA’s (formerly ELEVATE Ltd) machine learning algorithm that scans for adverse media instances related to suppliers.
LRQA (formerly ELEVATE Ltd) is showing you which countries are outlooked as highest risk, which countries showed significant score changes since 2021, and key industry trends for 2022.
Rating System and Methodology
LRQA’s (formerly ELEVATE Ltd) Supply Chain ESG Ratings use a scoring system from 0-10 and are classified as the following categories:
The scores cover a total of 38 indices, including an Overall Supply Chain Index, five pillar level indices, 31 issue specific sub-indices and one confidence index. The Geography Risk Ratings produce the scorecards using data from on-the-ground audits, and leverages public domain data from multilateral organizations and NGOs to complement risk information where audits are less likely to evidence specific violations – e.g. forced labor – or in low sample countries. LRQA (formerly ELEVATE Ltd) also leverages web data points (i.e. news or public records) to complement the risk information coming from the audits and the public domain data.
Bottom 5 countries in 2022 (highest risk)
Pakistan
Pakistan maintained a “High Risk” rating in 2022 from 2021 and in fact, decreased in score from the previous year. The country saw its weakest points in the Healthy and Safety and Business Ethics indices, scoring “Extreme Risk” in both, contributing to its overall High Risk Supply Chain score. Pakistan has one of the lowest Health and Safety scores compared to other countries in its region and exports a number of products categorized as Extreme Risk, including cotton, sugarcane and various medical supplies. Products are classified as Extreme Risk when there are suspected instances of forced labor in its production.
Myanmar
Myanmar saw a marginal increase in its score from 2021 but remained in the High Risk category this year due to its performance in indices such as Business Ethics, its lowest index score. The country was struck by significant events in 2021 such as Covid-19 and the February 1 military coup, which later resulted in mass protests throughout the country. The nationwide crisis and subsequent shutdowns severely impacted local factories and the supply chain, potentially contributing to the country’s low scores.
Philippines
Philippines, another High Risk country, showed lower scores in the areas of Environment and Health and Safety. The country did, however, exhibit improvements from the previous year, upgrading its status from an Extreme Risk country in 2021 to a High Risk country in 2022 for its Overall Supply Chain Risk Score.
According to the US Department of Labor, children in the Philippines have been subjected to the worst forms of child labor, including sexual exploitation and dangerous tasks in agriculture and mining, specifically reported by the DoL in 2020. The government since made pledges to improve the child labor issues but it is unclear how much progress has been made.
Bangladesh
Bangladesh performed low in several indices including Environment, Health and Safety and Business Ethics. The country also reported several adverse hits in the media, as many Bangladeshi factory workers took to the streets in 2021 to protest unpaid wages, according to various media outlets. While many other Asian countries showed improvements in wages paid toward the end of 2021, Bangladesh nosedived in the opposite direction, showing a sharp decrease in the percentage of workers paid correctly.
Indonesia
Indonesia showed its lowest score in the Health and Safety Index, which may have been due to the country seeing its peak from Covid-19 in 2021. A large number of Indonesia’s adverse media hits in EiQ’s Sentinel were related to Covid outbreaks at various factories. Indonesia’s Overall Supply Chain score decreased from 2021 and the country remained in the High Risk category. Indonesia’s main export is palm oil, an Extreme Risk product as it relates to instances of forced labor.
Biggest risers from 2021 to 2022
Poland
Poland showed a significant increase in its Overall Supply Chain rating, nearly doubling its score from the previous year and raising its status from a High Risk country to Medium Risk in 2022. Poland more than doubled its score in every single index from 2021, with its biggest increases in the Labor and Health and Safety indices. The country also saw significant increases in its waste management and environment policies.
Tunisia
Tunisia also improved its status from a High Risk country in 2021 to a Medium Risk country in 2022. The country previously suffered in indices like Environment and Health and Safety but has seen significant improvement in both categories over the past year. Tunisia most notably saw a sharp increase in Employee Protection and Machine Safety, bringing up its overall Health and Safety score. It also showed improvements in its wastewater management and slightly decreased in employees’ weekly hours worked.
Egypt
Egypt remains a High Risk country from 2021 to this year but did show improvements across all indices, most significantly in the Business Ethics and Environment indices. Egypt’s improvement in business ethics is likely from a rise in code awareness and clear policies for employees, contributing to overall more sustainable business. The country also made strides in its emissions management, improving its environmental risk.
Biggest fallers from 2021 to 2022
Germany
Germany dropped from a Low Risk country to Medium Risk this year, experiencing a significant deterioration in its Overall Risk score. The decrease was mainly driven by a drop in its Business Ethics and Labor indices. Germany’s High Risk scores in Business Ethics were related to low transparency rates and business integrity issues, specifically showing a drop in code awareness among employees. Germany enacted a due diligence law in 2021 that will go into effect in 2023, holding German companies accountable for further due diligence in their supply chains and ensuring human rights are being honored.
Malaysia
Malaysia dropped from a Medium Risk country in 2021, to a High Risk country in 2022. This drop was mostly due to significant decreases in Management Systems, Business Ethics, and Health and Safety indices. The United States Customs and Border Protection (CBP) issued a number of Withhold Release Orders (WROs) on various Malaysian factories in 2021 for instances of suspected forced labor. Malaysia showed the largest drop in its Overall Supply Chain score among the key Asian supply chain countries.
Thailand
Thailand trailed behind Malaysia for largest drop in Overall Supply Chain score. It maintained its status as a High Risk country from the previous year but saw a drop in nearly every index across the board. The country’s largest fall was in the Business Ethics index, likely attributed to overall lack of awareness of codes and policies among employees. The country also bore the brunt of Covid-19 in 2021, with many outbreaks reported in several Thai factories. Thailand also reported a large number of foreign migrant workers, making up 40% of its employees. The workers range from countries like Myanmar, Cambodia, and Laos, with the highest number of migrant workers coming from Myanmar.
Key industry trends
LRQA’s (formerly ELEVATE Ltd) Geography Risk outlook for 2022 showed a number of interesting trends in the global supply chain and indications of how Covid-19 and other major events have proven to continue having significant impact on the ever-changing ESG risk landscape.
- Based on Overall Supply Chain Risk scores, LRQA (formerly ELEVATE Ltd) estimated 47 high risk countries, 42 medium risk and 14 low risk countries.
- This year’s best performing regions are Southeast Asia and Central America, with the worst performing being North America in terms of year-on-year change.
- Malaysia and Italy are among the key supply chain countries that have seen their scores dropping the most in the past 1 to 3 years.
- In terms of transparency, Covid-19 and the subsequent supply chain disruption have cleared years of trust building between suppliers and buyers. In fact, transparency rates have dropped in the past 18 months for key Asian supply chain countries. Transparency is one of the most vital factors to consider when onboarding new suppliers to ensure business integrity and lessen long-term risk and supplier turnover.
What this means for your supply chain
LRQA’s (formerly ELEVATE Ltd) Geography Risk Ratings provide significant value to investors and corporates, detailed below.
For Corporates
- Provide unique insight into the operating context of the supply chain and associated inherent risk levels.
- Support the development of responsible sourcing strategies that prioritize issues and utilize targeted risk management tools (e.g. specialized assessment and worker surveys) to cater to the needs of a dynamic and agile global supply chain.
- Understand ESG risks in new or potential sourcing geographies as a part of the due diligence process.
For Investors
- Access to an expert view on ESG supply chain factors and understand potential risks in current portfolio.
- Inform investment strategies through a comprehensive and unbiased ESG lens and help achieve ESG commitment.
- Gain visibility and transparency over ESG issues for potential investments.
How are Risk Scores calculated?
Every year, LRQA (formerly ELEVATE Ltd) leverages its aggregate data coming from the workplace (factories, farms, logistics centers) and integrates Machine Learning-powered Big Data and public domain indices to build comprehensive and predictive risk assessments for the global supply chain.
LRQA’s (formerly ELEVATE Ltd) EiQ comprises this data to produce score cards for countries, regions, and products within the global supply chain. These ratings provide insight into the inherent risks of these regions and products as it relates to their sourcing and risk for human rights violations.
The 2022 risk scores identify new and emerging supply chain risk by geography and sector to meet the needs of sourcing professionals, CSR leaders managing sustainability and social responsibility program effectiveness, as well as investor relations, risk and compliance teams. The 2022 risk scores evaluate five categories including labor standards, environment, business ethics, management systems, and health and safety.
For more information and a deeper look at what this means for your supply chain, join LRQA’s (formerly ELEVATE Ltd) webinar on March 23 with Dr. Kevin Franklin (Chief Product Officer), Dingxiaozi Ding (Director, Product and Analytics) and Dr. Vignesh Venkataraman (Senior Product Architect).
Please contact us for a video overview of our EiQ platform.
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