How to Create Ethical and Integrity Environments in the Corporate Supply Chain through ESG Criterial

In an increasingly complex, competitive, and regulated business environment, ethics, transparency, and integrity emerge as enduring sustainable mechanisms, becoming essential for a corporation’s success. In this sense, integrating ESG (Environmental, Social, and Governance) practices offers a structured approach to creating and maintaining ethical and integrity-focused environments within the supply chain.

In this context, the system of organizations, people, activities, information, and resources involved in the creation and delivery of a product or service is evident, from raw materials to the end consumer, including all suppliers and intermediary partners participating in the production and distribution process.

Ethical management in the supply chain is a crucial aspect when it comes to maintaining integrity and accountability in the modern corporate world, especially as it must adhere to universal principles of justice and respect for all participants in this chain.

Maintaining these high standards and a culture of ethics and integrity in the supply chain is essential from three important perspectives: (i) the company’s reputation, as actions taken will directly impact the market, and any behavior outside the norm can damage the company’s image and reduce consumer trust; (ii) adherence to internal rules and ESG principles ensures a culture of integrity throughout the supply chain. Compliance policies promoting transparency and integrity in all operations are fundamental measures in this context; (iii) an ethical and integrity-focused environment is intrinsically linked to sustainability, which is one of the foundational pillars of ESG criterial.

There is a growing understanding that ESG practices have transformed how companies manage their supply chains, especially in Europe, where regulations and consumer expectations regarding sustainability are particularly stringent.

From an environmental (E) perspective, sustainable use of natural resources and reducing the environmental impact of operations are emphasized. While the environmental focus may seem less directly related to ethics, it has significant implications, such as (i) environmental transparency, involving the establishment of responsible practices committed to transparency, a crucial component of corporate integrity; (ii) proper management of natural resources and waste reduction that contribute to a lower environmental impact, demonstrating the company’s responsibility to communities and the planet.

Ethical environmental practices, such as selecting suppliers that already utilize sustainable policies and comply with environmental regulations, ensure integrity in the supply chain. Additionally, regular audits to verify compliance with environmental practices and identify areas for improvement are essential. In this regard, “green technologies” exemplify energy efficiency and carbon emission reduction.

Regarding social (S) aspects, supply chain impacts relate to practices affecting the well-being of workers and communities. Ensuring fair working conditions and respecting human rights is fundamental for maintaining integrity in the supply chain. In this sense, companies must ensure their suppliers provide safe and fair working conditions. Furthermore, promoting diversity and inclusion throughout the supply chain is an important aspect of ensuring an ethical environment. This reason, implementing ethical social practices, such as establishing a Supplier Code of Conduct that defines clear expectations regarding working conditions and human rights; offering training programs for suppliers on best social and human rights practices; and conducting regular monitoring and audits to ensure compliance with established social standards are crucial strategies.

Finally, concerning governance (G) aspects, supply chain impacts involve management and compliance practices that contribute to ethical and transparent company operations. Proper governance is important for maintaining integrity in all supply chain operations, which underscores the importance of transparency regarding supply practices and ensuring that all transactions are conducted ethically, ensuring compliance with applicable standards and regulations.

In Europe, companies like IKEA, UNILEVER, and NESTLÉ are examples of success in creating ethical and integrity-focused environments using ESG criteria. It is important to note that starting in 2025, European companies will need to adapt to new sustainability reporting requirements as part of the Corporate Sustainability Reporting Directive (CSRD). The CSRD, which replaces the Non-Financial Reporting Directive (NFRD), is one of the European Union’s key initiatives to increase transparency and corporate accountability regarding environmental, social, and governance (ESG) issues. The implementation of the CSRD has three special objectives: (i) to improve transparency to facilitate understanding of companies’ ESG performance and impact; (ii) to foster sustainability to encourage more sustainable and responsible business practices; (iii) to enhance investor confidence by providing more reliable and comparable information for investors and other stakeholders.

These changes also aim at important environmental sustainability efforts, with rigorous integrity standards in the supply chain, regular audits, investments in projects that improve working conditions, and ensure operations aligned with sustainability goals (sustainable sources), waste reduction policies, and the promotion of diversity and inclusion in the workplace.

However, it is important to note that on the other side of this context and the globe, there is a critical debate regarding the disclosure of greenhouse gas (GHG) emissions, particularly related to the supply chain (or scope 3), with the U.S. Securities and Exchange Commission (SEC) at the center of this discussion.

Despite the SEC outlining rules requiring companies to report their direct emissions (scope 1), indirect emissions associated with energy consumption (scope 2), as well as emissions resulting from their supply chains (scope 3), with the aim of increasing transparency and allowing investors to more accurately assess climate risks associated with their financial decisions, pressure to simplify these requirements is growing.

Critics, including representatives from industries and small businesses, argue that collecting and verifying data on scope 3 emissions is extremely challenging and costly due to three main aspects: (i) the complexity of tracking and reporting emissions throughout the supply chain, which can burden companies, especially those with complex and globally dispersed supply chains; (ii) the lack of standardization in calculation and reporting methods, which can hinder compliance and comparison between companies, jeopardizing the effectiveness of the proposed rules; (iii) the market’s reaction to potential adjustments in the SEC’s regulatory priorities that could reduce transparency regarding carbon footprints, impacting investors’ ability to make informed decisions.

Conclusion

Business experiences in creating environments of ethics and integrity in the corporate supply chain, utilizing ESG impacts, are becoming a constant in the corporate world and are fundamentally important for long-term success. Integrating an ethical and integrity-focused culture, with a focus on environmental, social, and governance practices, not only helps mitigate risks and ensure compliance but also contributes to a solid reputation and a positive impact on society and the environment.

Successful examples in Europe demonstrate that adopting ESG practices can yield significant benefits for both companies and their stakeholders. Successful integration of ESG in the supply chain requires a comprehensive and ongoing approach, including the implementation of robust policies, conducting regular audits, and proactive engagement with suppliers and partners.

As the focus on sustainability and ethics continues to grow, companies committed to robust ESG practices will be well-positioned in the market to face future challenges and seize opportunities in an increasingly aware and regulated environment, although the future landscape will at some point depend on balancing the practical needs of companies with demands for greater environmental accountability. The unfolding of these decisions will be crucial for the evolution of climate disclosure practices and for defining how environmental risks will be integrated into investment evaluations.

Article by Nerlito Sampaio Neves Junior and Luiz Cláudio Allemand, both partners at Allemand Consulting and Corporate Law