Supply chain ESG risk is surging amid rising human rights violations

• ELEVATE’s bi-annual risk report compiles data from 20,000 global supplier audits annually.

• Nearly half of all sourcing countries now considered ‘high risk’ of supply chain ESG violations.

• Countries like the UK, Germany, Portugal, and Italy are now ranked as high risk from the most critical forms of supply chain ESG violations, showing high risk for critical supply chain labour indices.

• US states such as Texas, Florida and New York now have a higher degree of exposure to forced labour risk than Pakistan, India, Thailand, and Indonesia.

The Supply Chain Environmental, Social and Governance (ESG) Risk Ratings report has found that Western sourcing markets have shifted away from their lower risk classification, with forced labour identified as a key contributor to an increasing risk. Countries like the UK and USA are seeing higher risk for critical violations – in part due to a rise in the exploitation of foreign migrant workers.

The report, published by sustainability specialists ELEVATE, an LRQA company, is grounded in 20,000 global supplier audits conducted annually, with 45+ million data points derived from on-the-ground site visits collated in ELEVATE’s data analytics solution, EiQ.

The data demonstrates that nearly half of sourcing countries are now considered ‘high risk’. This means the country is more likely to experience risk events that stand in violation of supply chain ESG governance frameworks, including local and international law. These could range from finding evidence of environmental degradation to the use of child labour.

The United States exhibited a decrease in every key labour index, maintaining a ‘high risk’ classification in the forced labour index in particular. States such as Texas, Florida and New York now have a higher degree of exposure to forced labour risk than Pakistan, India, Thailand and Indonesia.

For supply chain ESG violations associated with several of the most critical forms of ESG violations – forced labour, child labour, freedom of association, and wage related violations – the United Kingdom, Germany, Portugal, and Italy are now ranked as ‘high risk’ as well. The UK saw its Forced Labour Index decrease by 58% over the last year, which coincided with the country welcoming refugees, particularly from Ukraine, who can be more susceptible to forced labour.

Kevin Franklin, Managing Director – Advisory at ELEVATE, an LRQA company, commented:

“The current geopolitical, economic, and legislative climate has made it increasingly difficult for businesses across the globe to be confident about ESG risk in their supply chains. Even historically lower risk Western markets have started to slip. It is now clear that simply homeshoring or nearshoring manufacturing in countries previously thought to be ‘safe’ from egregious ESG risks is not enough."

“Systematic and proactive supply chain risk assessment, monitoring and management should be applied in all sourcing locations to avoid negative business impacts and trade disruption.”

Adding to the increased risk of sourcing is a decline in audit transparency. Countries such as Vietnam, Thailand, Indonesia, India, China and even Italy have all become less transparent since the pandemic, with auditors being unable to access accurate information and make conclusions from site visits. The decline in transparency relative to pre-pandemic levels has complicated the ability companies to govern higher risk levels, with suppliers in 50 sourcing geographies less transparent than in the previous year.

JP Stevenson, Director, Customer Success, ESG Analytics at LRQA , commented:

“Transparency is key for supply chain audits. Deception and sharing of falsified data not only render risk assessments ineffective but also means that serious violations can go unidentified."

“To build resilient supply chains, being able to see, manage and mitigate risk exposure is essential. Through responsible sourcing programs and insightful data, businesses can partner with suppliers that can meet the sourcing requirements that include critical ESG performance.”