Industry
Banking
Banking on purpose-led ecosystems
Solution
Sustainability Services
Ecosystem-led Approach to Power Your Sustainability Strategy
Highlights
- Financial institutions are taking supply chain ESG risks seriously because of Scope 3 emissions, regulatory requirements, and liabilities that could arise from environmental pollution and labour disputes.
- Lack of proper understanding of ESG risks and quality data has come in the way of financial institutions’ strategies to manage supply chain ESG risks.
- The risks can be managed with proper planning, right policies for onboarding suppliers, customized management approaches, and technology-driven solution.
On this page
Supply chain accounts for substantial Scope 3 emissions
For financial institutions focused on environmental, social, and governance (ESG) considerations, supply chain risks remain top of mind.
This is because suppliers account for a substantial portion of their Scope 3 emissions. Moreover, financial institutions are liable for risks in their supply chain stemming from environmental pollution, labor disputes, and corruption, among others.
Scope 3 reporting has not yet picked up momentum, and only a few firms measure and report emissions under this category. However, global regulatory agencies are expected to mandate disclosure of supply chain emissions very soon. In fact, the process has already begun—the new climate and sustainability reporting standards of the International Financial Reporting Standards (IFRS), effective from 2024, mandate organizations to disclose Scope 3 greenhouse gas emissions. This makes it imperative for financial institutions to ensure their suppliers are ESG compliant.
Financial institutions face loss, damage to reputation
Financial institutions can face severe reputational and financial loss if their suppliers are not compliant with sustainability and ESG standards.
The main challenge stems from poor emission, labor, and governance compliance of suppliers.
Financial institutions also run the risk of losing customers if they undermine the impact a supply chain with poor sustainability record can have on their overall stakeholder perception.
Data is a big challenge in managing Scope 3 emissions
The foremost challenge for financial institutions in managing Scope 3 emission risks revolves around data.
In measuring and evaluating the sustainability practices of supply chain, BFSI firms often struggle with the following:
- Limited data availability
- Poor data quality
- Absence of granular data
- Lack of automated extraction tools
Financial institutions’ ESG program could, for instance, be hampered by the non-availability of data on:
- Emissions of fleets deployed by cash management and ATM vendors
- Hiring processes and antecedents of resources hired by tele-callers and debt-recovery agents
- Physical condition of yards where repossessed vehicles are parked
- Waste management processes of IT service vendors
Additionally, financial institutions have limited understanding of their own ESG risks and those faced by their suppliers. There are a wide variety of suppliers, and each type of supplier comes with a different ESG risk, which is a major impediment to effective supply chain management.
Further, financial institutions from developed countries that partner with supply chain firms in developing countries find it especially challenging as compliance requirements in some of those countries are often less stringent.
Manage the risks with planning, tech-based solutions
Proper planning and customized management approaches for different types of suppliers and vendors will help alleviate the risks.
Financial institutions should consider the following aspects to efficiently manage the ESG risks emanating from supply chains:
Planning: Financial institutions should onboard only ESG-compliant suppliers and mitigate the risks they pose through appropriate corrective actions. Their policies for onboarding and managing suppliers should cover the following aspects:
- Environmental concerns, applicable legislations, and investor requirements
- Accurate assessment of ESG risks of suppliers
- Jurisdictional regulations applicable to suppliers
- Vendor compliance with sustainability norms such as responsible sourcing of materials
- Measurable sustainability targets for suppliers to encourage them to improve sustainability practices
- A reporting standard accepted by all stakeholders
- Codes of conduct and thresholds covering, for example, the use of energy and water, waste management, health, and safety, among others. They must also offer incentives to suppliers that comply with ESG requirements.
- Supply chain risk mitigation initiatives
Focus on suppliers: Financial institutions should look at supply chain management approaches that are customized to the type of vendors and suppliers, such as IT service vendors, telecom service providers, data service providers, ATM service vendors, clearing house vendors, print material providers, and so on. The monitoring will differ basis the type of support provided. Financial institutions must evaluate past and present practices covering ESG aspects such as:
- Emission standards
- Energy and water usage
- Waste management
- Labor standards and human rights
- Industrial incidents
- Gender equality
- Code of conduct
Technology-based solutions: Systems such as ISO 14001:2015 can help identify and manage environmental risks, and continuously improve sustainability performance. Financial institutions must adopt an integrated software platform that facilitates collection, validation, and analysis of ESG data, enabling both internal reporting and regulatory disclosures. The platform must have the capability to access external databases, including ESG information of suppliers on emissions and human rights violations, among others, to help financial institutions build transparent and sustainable supply chains.
For suppliers, solutions are available to measure their carbon footprint, including direct and indirect emissions. Financial institutions, supported by their suppliers, must deploy technology to identify risks and mitigate them in real time. For example, using geospatial technology innovations can help track assets of suppliers and identify climate-related physical risks.
Managing ESG risks emanating from supply chains has become an essential requirement for financial institutions and there are efficient ways to achieve this. Is your firm prepared?
