On the second day of the DIGITIMES Asia-hosted Supply Chain Summit, experts shed light on ESG compliance challenges on the global supply chain. Harvard Business School professor Willy Shih and Cathy Lee, VP of Risk Advisory Services at Deloitte Touche Tohmatsu urged industries to pay serious attention to the implications of new regulatory compliance requirements regarding the environment, social, and governance (ESG) issues on their supply chain operations.
"In some sense, we have turned the page on what was a golden era of globalization," said Shih, emphasizing that the carbon footprint is going to take on a much more prominent role in supply chain design going forward.
Companies are facing pressures to cut carbon footprints in multiple facets, and global supply chains tend to start thinking about regionalization. "The tradability is decreasing… It's really a question of, to what extent do I need to manufacture locally for consumption of local market?" said Shih.
The European Union Carbon Border Adjustment Mechanism is going to implement in 2023 on high carbon-emission products such as zinc, aluminum, and other primary metals. The carbon tax will be implemented on related products which are produced in regions with higher carbon emissions to reduce the risk of "carbon leakage."
The Marine Pollution Agreement is another factor that will become effective in 2023. As 5,700 container ships in operation now, many of them are older, smaller ships of 8,000 TEUs or smaller, it is estimated that 70% of these are not going to be compliant with the requirement for carbon emission reduction improvement goals requested by the International Maritime Organization (IMO) after one year. Non-compliant ships are to be grounded or scrapped. And those who want to comply will have to use alternative fuels that have lower carbon emissions but would be more expensive. Ocean shipping will be included in the emission trading scheme, and many other container lines have already announced surcharges because they have to pay for their carbon emissions
Low-emission fuels and zero-emission fuels such as hydrogen or ammonia have not been proven to have commercially viable supplies yet, said Shih. But with natural gas and other energy prices surging through the roof after the Russia-Ukraine war, the longer the shipping distance, the heftier the cost will be. That will make supply chain managers have second thoughts about making all of their products in Asia and have them ship all the way across the Pacific Ocean when inflation and energy cost is likely to encroach on their profits.
Lee pointed out that COP27 will be held in November this year, and participating countries are likely to set more goals for delivery. As COP26 has set 2030 as a mid-term checkpoint for net-zero carbon emission, decarbonization will be the top priority of governments and enterprises in the decade.
But carbon emissions and carbon footprints are not the only issues that managers should care about, the social and governance side of ESG - human rights, workers' rights, sustainability, and resilience concerns will also be the priorities that supply chain managers should take into account, said Cathy Lee.
She cited examples such as power and water shortage, contractor labor issues, and malicious cyber infiltration to show how such issues can cost companies billions of dollars in financial losses or face termination of orders and businesses with customers. The lesson learned from the 2021 snow storm in Texas - which caused power cuts to four million households, 14 million people without access to water, major disruptions in semiconductor, petrochemical, and agricultural supply chains, and caused US$50 billion in losses - is the necessity of regular resilience checks on utility and infrastructures.
"While companies invest in digital transformation to take stock of their carbon data and improve their operational efficiency, they should also enforce due diligence to manage supply chain partner activities and empower responsible organizations to ensure compliance," said Lee.
Harvard Business School professor Willy Shih
Deloitte Touche Tohmatsu risk advisory service vice president Cathy Lee
Photos: DIGITIMES Asia, September 2022