Why Lighter Regulation Shouldn’t Dilute Supply Chain Responsibility

Why Lighter Regulation Shouldn't Dilute Supply Chain Responsibility

The recent announcement by the US Securities and Exchange Commission (SEC) that it’s reviewing the conflict minerals provision of the Dodd-Frank Act will have come as welcome news to many companies.

Complying with Section 1502 of the 2010 Act, which requires annual reporting on the sources of tin, tantalum, tungsten and gold used from the Democratic Republic of the Congo and neighboring countries, has proved both difficult and expensive.

Hundreds of millions of dollars and millions of staff hours have been incurred by firms in an effort to determine the origins of these minerals in their supply chains, according to researchers. And yet despite this investment, most have been unable to ascertain whether their products are actually “conflict free”.

On 31 January, the SEC’s acting chairman, Michael Piwowar, announced a review of what he called “this misguided rule”, partially relaxed in 2014 following a legal challenge by the US Chamber of Commerce and National Association of Manufacturers.

Supply Chain’s Dilemma

Piwowar’s move, which is part of a wider attack on Dodd-Frank and business regulation in general by President Trump’s new administration, may eventually lead to the conflict minerals disclosure requirement being axed altogether.

One could imagine that future targets might include the provisions of the Trade Facilitation and Trade Enforcement Act 2015 that require companies to ensure that imports of goods and raw materials (including the four conflict minerals) into the US have not been produced using child or forced labor – an equally difficult task given the complexity of multi-tier global supply chains.

The central question this raises for supply chain leaders is whether a lighter regulatory environment means they can safely scale back sustainability and corporate responsibility initiatives, and in particular those that involve deep visibility and mapping of upstream suppliers.

I believe this would be a mistake. And here’s why.

How Big a Driver is Government Regulation?

SCM World’s research over the past five years shows that legal/regulatory issues are consistently among the most worrisome risks for supply chain professionals.

Our time-series data also point to a steady increase in those who judge government regulation as a reason why their boards choose to invest in social and environmental responsibility (SER). In 2011, 42% thought it motivated them. In 2016, it was 55%.

Having said that, legal requirements rank only third after customer image/brand equity (at 81%) and cost/efficiency savings (61%), which has risen more dramatically over the same period. So complying with regulations is an important reason – but by no means the most important reason – to invest in SER initiatives.Chart listing board-level motivation for investing in social and environmental responsibility, based on 1,346 survey respondents.The picture also varies quite a bit by industry. Almost three-quarters of respondents in hi-tech say regulation is a driver, while those in aerospace & defense and automotive – two other sectors impacted by the conflict minerals disclosure requirement – are well above average on this question.

By contrast, just 37% of apparel makers see regulation as an SER driver, and they’re more worried about the risk of supplier ethical standards being “exposed as unsatisfactory” than other sectors. Table listing industries where 'satisfy government regulations' is a board-level motivation for investing in social and environmental responsibility.At the same time, apparel is bullish about the business benefits of ensuring a responsible supply chain. More than half (55%) of practitioners in the sector report financial payback from their investments in ethical sourcing, in addition to it being “the right thing to do”, and 48% say the same about fair labor standards. (Across all sectors, the figures are 32% and 31% respectively.)

Traceability and Assurance

Whether traceability is enshrined in law or not, consumers and B2B customers increasingly want to know what’s in the products they buy and how they were manufactured, whether they be clothes, electronic devices or foodstuffs.

They want to do business with companies that use the planet’s resources responsibly and treat the people who work for them (directly and indirectly) with respect.

Assurance of supply, especially for scarce minerals and other raw materials, is another good reason why CSCOs and their organizations need a more comprehensive view of the sources and producers involved in their supply chains than they had in the past.

Infographic illustrating how risks and resources are closely intertwined in regards to sustainable business.A healthy, sustainable business requires proactive management of these closely intertwined factors, as illustrated in the graphic above, to limit the frequency and scale of both physical disruptions and reputational damage.

So while any changes to conflict minerals or other disclosure laws will naturally lead companies to reassess their practices and priorities, they shouldn’t deflect them from the wider mission of operating more transparent and trustworthy supply chains.

Author Geraint John

More posts by Geraint John