ESG: a key factor affecting the resilience of auto supply chains

On July 7, 2023, Ms. Dai Yibo, Vice President of GoldenBee Consulting, was invited to attend the 13th China Auto Forum with the theme "New Era, New Mission, New Driving Force, Helping Build a Modern Industrial System". In a sub-forum, she delivered a keynote speech titled "Building ESG Resilience in China's Automotive Supply Chain".

Ms. Dai proposed in her speech that the supply chain is a breakthrough for the construction of the ESG ecosystem in the Chinese automotive industry. This is determined by the attributes of the industry, with important relevance to the layout of the global auto value chain. ESG issues of the supply chain are not only about sustainable development, but a business choice.

She pointed out that although the ESG resilience building in the supply chain of Chinese auto companies is still in the early stages, it is indeed a good opportunity to form a systematic management framework. In this regard, four key actionable measures have been proposed - governance, assessment, strategy, indicators and targets.

Due to the complexity of automotive products, the construction of the supply chain ESG management framework requires cross-departmental internal collaboration and team participation, including product design, business development, logistics, as well as marketing and sales.

Different from traditional internal institutional management, from the perspective of ESG and sustainable development, the openness and transparency of policy systems are more important. Therefore, it is recommended that companies make relevant stakeholders aware of the systems that are suitable for disclosure.

Compliance is an important aspect in the ESG management of the supply chain, and compliance risks need to be given special consideration, with a focus on risk assessment. However, due to the numerous levels of suppliers and supply chain, it is not possible for companies to have the time, energy, or even sufficient funds to manage all suppliers, so selective identification is necessary. The selective identification may need to consider the location of suppliers and the industry of raw materials, as even suppliers of the same type of product may have different ESG risks and selective rights due to their geographical location.

When it comes to specific ESG risk types, environmental risks such as water scarcity, deforestation, and greenhouse gas emissions need to be considered, as well as social risks such as occupational health and safety, child labor, forced labor, and women's rights.

Regarding specific strategies, it is necessary to achieve collaborative management with Tier-1 suppliers. Automobile companies are no longer unfamiliar with the use of blockchain technology. With the help of information technology, more ESG/sustainable development issues can be incorporated, tracking the environmental performance of raw materials from the source in the production process, in order to have a deeper understanding of risks and comply with relevant regulatory requirements. The requirements of laws and regulations are not only to supervise Tier-1 suppliers, but the upstream suppliers and the entire lifecycle of the supply chain.

Companies are advised to consider accelerating the professionalization and efficiency of management by participating in industry initiatives and applying industry guidelines and standards. In addition, the EU's CSDDD (Corporate Sustainability Due Diligence Directive) explicitly states that the final step of responsible management is information disclosure. Foreign OEMs and intermediate suppliers also disclose management reports on the supply chain and special reports on conflict minerals. It is recommended that companies strengthen information transparency by reporting and adding sections on their websites.

Supply chain management is not a once-for-all effort, which requires a spiral-like rise, improvement, and enhancement. Whether it is the process or the outcome of work, it needs to be quantifiable and measurable. Not only should quantitative results be emphasized, but companies also need to consider compliance requirements, industry average levels, customer demands, and even their own competitive advantages in order to set goals. If goals can be ambitious, it will instill more confidence in stakeholders, customers, and investors.

Finally, Ms. Dai Yibo emphasized that Chinese automakers need to enhance the ESG resilience of their supply chains by transitioning from traditional procurement to sustainable procurement, integrating existing supplier management with ESG management. In addition to price, quality, and delivery time, it is necessary to pay attention to the sustainable ESG attributes of products. This includes not only managing the raw materials, components, and final deliverables of procurement, but also considering the production process of these deliverables, which involves the supplier's own management and operation. This includes how to consider environmental and social issues in the production process. It is necessary to integrate sustainability and ESG elements into various aspects of supply chain management, including policy evaluation, access assessment, daily auditing, and management.

Enhancing the ESG resilience of supply chain is not something that can be solved by a single audit, factory inspection, or certificate. It requires a systematic solution to better address increasingly stringent regulatory requirements in the long term and enhance competitive advantage.