As a result, visibility into supply chain actions and outcomes has catapulted to the top of many corporate wish lists — but many business leaders become frustrated when their operations and technologies don’t deliver. Still, experts say, better visibility into corporate supply chains can be achieved, but only if companies are willing to think about their sustainable supply chain initiatives in a more innovative way.

According to a September EY report on sustainable supply chains, visibility has become one of the top priorities among supply chain leaders. Of the 525 large corporations surveyed, 58% said that increased end-to-end visibility in their supply chain was among their top two priorities in both the past two years and the upcoming two years. However, despite that desire, just 37% of supply chain leaders reported achieving supply chain visibility over the past two years, indicating a large gap between the desire for more visibility and the progress many organizations are practically achieving.

Rae-Anne Alves, ESG & Sustainability Supply Chain Leader at EY Americas and co-author of the report, said that visibility is the key first step to compliance. “When companies are thinking through their supply chain and trying to make it more sustainable, they need end-to-end visibility to know is what is happening,” Alves said. “Companies are lacking the transparency that they need from their suppliers through logistics, especially in areas outside of their four walls.  Achieving this transparency will give them the visibility they need across their supply chain.”

Recent research from the Thomson Reuters’ Market Research & Competitive Insights team mirrored these findings. In interviews conducted with senior leaders of US-based companies charged with tracking ESG efforts, large numbers of companies say they have established dedicated ESG efforts but collecting data and measuring those efforts remains disconnected and lacks consistency.

The issues in raising visibility

When it comes to trying to raise the visibility of supply chain practices and outcomes, many corporate leaders have run into an unfortunate reality: the difficulty of gathering and mingling data that lives in disparate systems. One public company ESG head explained that a common supply chain review pulls data from systems as broad as risk management and operations software, human resources software, and procurement and supplier-oriented software.

Combining all of these types of data into one truth remains difficult. “I don’t even know how they collect their data,” said the supply chain head of another public company. “Every vendor has their own process.”

This problem is only increasing as companies are beginning to scale up the types of data that they collect, EY’s Alves added. To take a firmer grasp on their supply chain, many companies are looking to catalog not only emissions from scope 1 (directly owned by the company) and scope 2 (indirect use of energy the company purchases), but increasingly scope 3 emissions that result both up and down the company’s value chain as well. Indeed, the more a company’s data collection scope expands, the more complex the visibility question becomes. Many supply chain-centric software providers have arisen in recent years to try and compile and display all of these data sources, however, currently, there is not a leader that has captured a substantial share of the market.

Some companies have been able to achieve more supply chain visibility, becoming sustainable supply chain “trailblazers” with an “extreme focus on transparency”

“It’s unclear yet whether there will be a provider that is able to deliver the end-to-end capability needed for a digitally network-connected supply chain,” explained Gaurav Malhotra, Partner and Americas Supply Chain Technology Leader at EY. “There are many factors that have to come together, versus just a singular platform from a control tower or visibility standpoint to enable the orchestration.”

Instead, many companies have tried to apply other technological fixes to the issue, often without much success. “Almost everything is run on Excel. It’s truly terrible,” a public company’s supply chain head told Thomson Reuters Institute. “We have very few tools for environmental stuff. Everything is reported through Excel, everything is measured in Excel, everything is rolled up in Excel and it’s extremely inefficient because we have all these different teams.”

Supplying more visibility

Still, some companies have been able to achieve more supply chain visibility. EY’s report designated certain companies as sustainable supply chain “trailblazers” and noted that one of the traits they have in common is an “extreme focus on transparency” through which “[t]hey can significantly or moderately peer into Tier 2 and 3 supply networks.”

EY’s Malhotra said these leaders often undertake two simultaneous shifts to aid this transparency. One involves automating individual supply chain functions so that they can run more efficiently and be consistently reliable. The second involves integrating those individual functions and making sure their output data is portable to enable the needed effective real-time communication, both internally and with external supply chain ecosystem partners.

Currently, he explained, most supply chain networks are “not digitally integrated in their true sense” because they operate in multiple stages. Data is processed by one organization that controls their section of the supply chain ecosystem, then it is transmitted to be able to be consumed or processed by other organizations. While Malhotra concedes that it takes “time and effort to ultimately get to a mostly autonomous state,” he believes combining, integrating, and automating these steps will be the future of supply chain management.

“What we have found is that some leading companies have moved towards an integrated process and singular platform that allows the right level of visibility, orchestration and actioning with their supply chain network partners,” Malhotra said. “Enabling trust, effective execution and accountability with the overall network in play, resulting in a highly efficient, highly integrated, differentiated and reliable supply chain.”

Leading companies are also pushing for data standardization among common supply chain suppliers, Alves added. Many sustainability frameworks are available, and increased regulatory attention continues to add more complexity. Increased standardization can make supply chain data more actionable, and auditable, potentially lowering a company’s risk profile. When asked about top supply chain priorities for the coming year, the ESG head of one public company was clear: “We want to make sure that we have auditable processes in place, that the data is sound.”

However, Alves added that for sustainable supply chain measurement and reporting businesses are “definitely not there yet.” As both public and regulatory attention in the space continue, expect that visualization into supply chain processes and data will become even more important, and leading organizations will continue to invest resources and personnel to get their supply chain data house in order.

In this week’s podcast available on the Thomson Reuters Institute channel, we speak to Suzanne Offerman, Senior Product Manager at Thomson Reuters, about how this current environment in which companies that import and export goods must operate has become an ever-evolving puzzle to solve with shifting paradigms that some might say are moving at speeds not previously experienced before.

Of the companies surveyed in the Global Trade Report, many reported more significant concerns arising around retaliatory taxes and fees for those companies in the United State and the United Kingdom. In fact, more than 60% of US companies and about 40% UK and European Union companies surveyed said tariffs were greatly impacting their businesses. At the same time, companies doing business in Asia saw supply chain risk as a significant concern.

Given changing sanctions regimes and regulations, companies exporting from Asia must exercise caution in selecting with whom they do business. Indeed, companies utilizing Asian vendors in their supply chain are now required to know more than before about the identity and labor practices of their suppliers.

Talent & trade

To keep pace with the new and evolving landscape, companies are looking for new and additional trade management professionals to increase their available pool of expertise, skills, and technology prowess. In regard to talent, Offerman says in the podcast that the role and requirements of a trade manager are quite different now than they were when she started in the industry.

You can access the latest Thomson Reuters Institute Insights podcast, featuring a discussion about the recent Global Trade Report 2022: Turbulence Tempered with Technology, here.

In the podcast and in the Global Trade Report, Offerman points out that there is a list of must-have skills for today’s global trade managers. “The technical know-how of an engineer, the legal sense of an attorney, the carefulness of an accountant, the organizational skills of a project manager, the business acumen of an executive, the cultural awareness of a diplomat, and the communication skills of a leader that says a lot — and that’s one that’s supposed to be one person,” she explains, adding that this description underscores the importance of this role and how global businesses are coming to rely on trade managers to mitigate and manage more of the day-to-day operations of trade.

As the podcast explains, this situation has left global businesses challenged as to where to find the right talent and skillset to fill these roles. Businesses have looked at consulting firms, colleges, and even competitors to find the right professionals, but that has proven daunting.

Offerman explains that historically, someone got into global trade management by coming up the ranks within a company’s supply chain, working at a warehouse and then being promoted while receiving hands-on training throughout their employment. Now, universities are offering undergrad and graduate global trade classes (or eLearning classes for working professionals), alongside the study of such subjects as trade law, for example.

The technology solution

In regard to technology, the Report showed that more than 80% of the companies surveyed said they need technology to solve many of the issues they face today — a fact made all the more clear by recent events. “Because of the severe disruptions in supply chains and international trade, companies realized they couldn’t get their goods just from sourcing from one country,” Offerman says, adding companies learned they needed to move production to another country in the region or closer to their own home base. Thus, companies were pressured to come up with point solutions for specific regions.

However, Offerman says in the podcast, this may not be the best solution, and she urged companies to move to a holistic approach by using technologies that cover the entire supply chain, not just specific problem areas or regions.

Indeed, the need for the right technology goes far beyond increasing efficiencies — it’s needed to keep pace with governments that are increasingly leveraging more technology in order to gather more information and collect taxes and tariffs. “Companies cannot focus on only one aspect, talent, or technology but must be intentional at all aspects of trade in this way,” Offerman notes. “It is talent plus technology that get you to the finish line.”

In fact, as the podcast demonstrates, one will drive the other. To compete for the necessary talent, the technology that companies need to utilize will be a factor in attracting the very type of trade management professional with the skills they need. No one wants to work on outdated software or equipment, of course, especially when it can impact their quality of work. Therefore, any investment companies make in trade solution software that keeps them in compliance will also ease additional work processes and drive further efficiencies.

Trade compliance rules and work will not get less busy, Offerman explains in the podcast, it’s that businesses will grow and evolve along with the regulatory space. And that means that companies must enable their top professionals with the right technology in order to stay compliant and competitive.

Episode transcript. 

The continuation of the human species to thrive with clean air, land, and water in which to produce enough oxygen and food and ways to earn a living on the Earth is the main reason, of course. Indeed, the environment is the habitat that enables the survival of all living things.

Understanding all of the various pieces of the S can boiled down to various components, from product liability factors to workforce issues, community matters, and human rights.

Clarifying human rights

The link between business and human rights — defined in a 2017 NYU Stern Center for Business white paper as “the operational effects of a company on the labor and other human rights of the people and communities it touches” — is well established. In another white paper published by an ESG Working Group (on which the Thomson Reuters Foundation was a member), this foundation was underscored.

In fact, a multilateral approach to the link between business and human rights dates back a decade with the adoption of the United Nation’s Guiding Principles on Business and Human Rights in 2011, UN member states adopting the UN Sustainability Goals in 2015; and the establishment of the Corporate Human Rights Benchmark, which is a collaboration among investors and civil society organizations to create a public and performance benchmark of corporate human rights.

Since then, many countries and states have passed “transparency regulation”, such as the UK Modern Slavery of 2015, Australia’s Modern Slavery Act of 2018, and California’s Transparency in Supply Chain Act, to ensure that companies are not engaging in labor exploitation and forced labor within their own organization and that of their suppliers and vendors.

Part of the need for increased visibility of the social side of ESG is to bust the myth that it is not quantifiable. Matt Friedman, CEO of the Mekong Club, which is private sector-based membership organization dedicated to bringing about sustainable practices in the fight against modern slavery, encourages this myth-busting, suggesting two ways to quantify the social aspect of ESG, including:

• Conducting supply chain audits — Supply chains account for up to 40% of corporate ESG impacts, according to the ESG Working Group white paper that included analysis of 1,600 MSCI World Index companies. Friedman suggests companies give questionnaires to be collected during the procurement process from suppliers and vendors. These questionnaires can be analyzed and audited in order to identify potential incidents of modern slavery.
• Establishing grievance mechanisms — One of the newest ways companies are using technology is to use an app in creating their grievance mechanisms. For example, Friedman says that Mekong uses an app that allows auditors to ask workers on the factory floor (using a mobile device and headphones in their native language) a series of questions about potential exploitation, such as if there is indebtedness associated with the job, and whether or not there’s a modern slavery violation taking place.

Knowing where to start with DEI

When it comes to diversity, equity & inclusion (DEI) issues as part of the social metric disclosure, the first step is determining what parts of the S are material to each company’s various stakeholders, including shareholders, customers, employees, and residents of communities in which the company operates.

A common area for the S for any company is the internal representation at higher levels of those individuals with underrepresented identities or backgrounds. Indeed, at the start of the social journey for any company, it is important to understand the current status of representation of each level for each underrepresented identity, based on gender, LGBTQ+ status, race or ethnicity, disability, and veteran status, among others. In addition, knowing the timing around promotion and advancement and median pay for each underrepresented identity relative to the median timing and pay of comparable professionals are important to determine fair promotion and proper pay equity.

Capturing how companies improve social mobility and progress for employees and contractors is another area that impacts the S, but it can differ quite a bit depending on what is used as key performance indicators to measure impact. Luckily, there are companies tackling this challenge. Just Capital, for example, details corporate performance on a range of social, pay, and diversity issues, offering easy-to-use data and insights, according to the ESG Working Group’s white paper.

Too often social performance considerations have been dismissed as either immaterial or a lesser priority. However, numerous research efforts over the last decade suggest the opposite, including Stanford’s Social Innovation Review, a 2014 report that shows positive correlations between good environmental and social performance and overall financial returns within its equity portfolio for private and public companies; and McKinsey & Co.’s years-long research into ethnic and gender diversity that shows an increasing correlation between being in the top quartile for diversity and financial outperformance.

Further, regulators around the world are paying attention to the interplay between social considerations and financial risks. For example, the European Union (EU) introduced the concept of double materiality, stipulating that companies disclose the financial risks posed by social and environmental issues.

Luckily, many global companies, their suppliers, and vendors are not waiting around. “Factories in Asia see the writing on the wall,” Friedman says. “I had one factory person basically say that we understand that ESG is big for large companies.” So, to gain a competitive edge, many suppliers and vendors are gathering the necessary data in anticipation that the supply chain questionnaires are coming.

Join us on October 26 & 27 for Trust Conference, the Thomson Reuters Foundation’s annual event, dedicated to tackling critical issues at the intersection of socio-economic inclusion, sustainability, media freedom, and human rights.

While climate change has spent the last few decades as “tomorrow’s problem”, it seems like tomorrow has arrived, especially for supply chains that are reliant on agricultural components. Agrarian commodities such as bananas and coffee have been under threat for years now, though not directly because of rising temperatures. Rather, these and other multi-billion-dollar crops are facing fungus strains that are devastating entire regions. While pathogens will always be a threat to agriculture (similarly to humans) these fungal strains are being enhanced by climate change, accelerating their spread.

Outside of exotic fungal pathogens, climate change is exacerbating threats as old as farming itself. A poor spring chili harvest caused by extended droughts in northern Mexico has led to a significant shortage of sriracha sauce and other related products. Simultaneously, the Great Salt Lake in Utah is becoming dangerously low, potentially resulting in catastrophic damage to the nearby agricultural industry which consumes three-quarters of its flow. Indeed, as human water consumption needs increase and temperatures climb, such water shortages will become a growing concern and will result in the expansion of ecological disruption of the GSC.

Further, tempering the risks of climate change to the supply side is not easy. Whereas a microchip factory could theoretically be built anywhere, large-scale agronomic farms are far more reliant on latitude, soil composition, water availability, and climate stability. While theoretically arable land is plentiful, ESG concerns may prevent companies from exploiting it (after all, such past expansions into rainforests and jungles has been a contributor to ongoing climate change). And as these products tend to come with a relatively short shelf life, different stages of the production cycle may have to be moved closer to the supply origination.

The altogether result is a giant headache for GSC companies looking to find resiliency or, as previously mentioned, excise from their chain those suppliers that harbor unacceptable ESG risks.

Exploring new solutions

There are, however, possible solutions. Genetic engineering, while entailing low approval levels on the consumer side as well as challenging intellectual property rights and ESG issues itself, could enable crops to better withstand changing climates and help push back against parasites and diseases.

A more expensive but potentially more beneficial option is vertical agriculture — effectively, large scale indoor growing operations stacked one on top of one another for extreme efficiency —which has so far failed to find its footing. However, with increasing interest, technological development, and a boom in demand for sustainable architecture, vertical agriculture could be moving towards a tipping point in the near future.

Of course, these are merely ways of changing how we growth the things which we already demand, but another alternative is changing the very products consumed. Meat production has proven to have a significant impact on the climate and tough climate-change control measures (as well as ESG pressure from consumers and regulators) may make alternatives to meat a larger share of the future market, especially in growing economies.

Alternate proteins that have similar tastes and textures to beef, pork, eggs, and more have the potential to become key diversification tools. Similar “lab-grown” products, while in the early stages of development, may prove even more useful, especially for an industry such as cosmetics, which is looking to distance itself from both animal and industrial byproducts

Like vertical agriculture, synthesized food products could also be re-established in geographic areas that have less ESG risk. This ability to move parts of the global supply chain which were previously locked in by geography is increasingly vital, even if the talk of “reshoring” that has become popular since the pandemic remains only a theoretical discussion.

Relocating the agricultural supply chain enables firms to sidestep many climate-change concerns previously mentioned. Deteriorating water sources can be exchanged for far more stable sources; disease spread can be curtained by isolating the growing environment from outside contamination; and agricultural goods from regions over which companies have little influence can be relocated to more favorable geography. As the agricultural supply chain is increasingly pressured by climate change, these benefits will only increase.

The ability to recognize possible solutions is very different from the ability to implement them. Rising interest rates make the immense amounts of capital needed even more difficult to secure for companies. Furthermore, the advanced skills GSC firms need are not easy to find among the current talent pool, and they also don’t come cheap. Finally, firms will need to adopt advanced technology and improve their ability to manage its implementation and use.

All of these challenges will have to be achieved in a time of growing regulatory complexity within a global economy that is fracturing further along geopolitical lines.

In the coming weeks, we will examine the best ways that GSC companies can address these problems and others as Thomson Reuters Institute releases the findings of its first Global Trade Survey

Couple this with catastrophic climate events and political upheaval, and you have multinational companies scrambling to devise strategies to minimize the impact of these disruptions.

To further examine this situation, Thomson Reuters’ first annual Corporate Global Trade Survey Report takes a look at the real-world factors affecting global trade executives and managers today. For the report, we surveyed more than 200 global trade professionals around the world to find how the current trade environment is affecting their business, what specific challenges they face, and how they are using technology to meet these challenges.

Responses to the survey were separated into four regions — the United States, the European Union and the United Kingdom, Latin-America, and the Asia-Pacific region — with more than half of survey respondents being upper-level executives at the director level or higher.

Technology is one of the common denominators in all of the issues facing global trade managers — so much so that 81% of respondents agreed that the solution to rapidly changing customs environments lay in adopting more capable global trade technologies.

What aspects of global trade concern these executives the most? Among the top responses cited, were:

• • • • regulatory changes;
      • new agencies, rules, and policies;
      • tariffs and sanctions;
      • supply-chain snarls;
      • rapid technological change;
      • risk management; and
      • the need for skilled talent.

Themes of the Global Trade Report

In addition to specific data from each major trade region, the report explores three major themes that are currently affecting multinational corporations involved in global trade:

1. 1. 1. Political upheaval and the accompanying supply-chain uncertainty are forcing companies to pay much closer attention to the integrity and resiliency of existing supply chains and the availability of resources.
      2. Both governments and companies are adopting more sophisticated digital systems and processes to streamline and simplify tax and trade operations; however, more than half of the companies surveyed said they were behind the curve technologically and are still working to catch up.
      3. Because jobs in trade management are becoming increasingly technical and involve a great deal of specialized knowledge, companies are finding it difficult to find people with the right skills to fill key roles and be effective in the business of global trade.

The expanding role of trade technology

Technology is one of the common denominators in all of the issues facing global trade managers. Indeed, 81% of the survey’s respondents agreed that the solution to rapidly changing customs environments lay in adopting more capable global trade technologies that can provide better security, largely automate trade compliance and customs operations, and contain tools to help companies analyze and optimize their supply chains.

The study found that the highest priorities for companies investing in global trade technology currently include:

• • • better visibility into the supply chain;
    • ability to conduct due diligence for transactions, suppliers, and customers;
    • leveraging predictive analytics;
    • Using blockchain technology in the supply chain;
    • ability to use data to produce insights into opportunities;
    • modeling capabilities to simulate trade-lane options and optimize performance; and
    • utilizing artificial intelligence (AI) to automate product classifications.

Despite a general desire to invest in more powerful technologies, however, finding the right people with the right technical skills, knowledge, and experience to work in key global trade positions is becoming an industry-wide challenge.

The report explores this widening skills gap and the measures being taken to counteract it, including identifying where companies are finding the most capable recruits, and what industry-wide actions can or should be taken to nurture a more reliable talent pipeline.

To find out more, download the Thomson Reuters Corporate Global Trade Survey Report here.

Effectively flanked, GSC companies can no longer ignore ESG problems as they once have.

While the growing importance of environmental, social & governance (ESG) issues in the global supply chain has been long heralded, their ascent has been typically slow and often given lower priority over the core concerns of cost, timeliness, and ease of implementation. There are, however, signs that greater importance is being placed on these subjects today and that the sources of this importance may not accept delays. While business fundamentals are likely to always be the chief consideration, supply chain companies are increasingly facing an “all or nothing” approach to their operations, in which buyers and regulators alike force firms to deliver on all fronts.

Activist investors, those who heavily invest in a company in order to empower themselves to make changes, launched more campaigns in the first quarter of 2022 than in any since at least 2014. First time and smaller-cap focused funds also accounted for a higher proportion of activity than in prior years. These investors have had stunning victories over the last year against energy giants Exxon and Shell, seating multiple directors to push the oil & gas companies toward a carbon-neutral future. Such investors are increasingly pressuring companies to take stands and make hard decisions that those companies may otherwise prefer to avoid, be it traditional ESG concerns like global warming or the growing prevalence of social issues.

Retail investors, increasingly millennials and Gen Z consumers — some of whom are inheriting money from their more fiscally and politically conservative elders — also have displayed a greater appetite for ESG-minded companies, thus pressuring those companies to deliver or face an exodus of disappointed shareholders. While retail investing in stocks has declined over the last few months, the long-run forces that led to its rise (increasing accessibility, growing wealth and financial awareness among younger investors, the fear of missing out [FOMO], among others) are unlikely to abate so easily.

The end results of all of this is that, whether the managers of major companies share these ESG concerns or not, they have a growing disincentive to be associated with ESG failures in the supply chain. These companies will then move to distribute the risk to the supply chain providers in the form of certain provisions, such as contractual obligations, supplier codes of conduct, compliance with law provisions, and other legal requirements.

Pressure from governments

Ultimately, supply chain firms may have little choice regardless of the will of their clients. The passage of legislation in the US such as the Uyghur Forced Labor Prevention Act (with similar legislation being considered in Canada, the United Kingdom, Europe, and Australia) is forcing companies to tackle ESG concerns in their supply chain regardless of buyer-side pressures.

The US government’s investments of tens of millions of dollars (and a 2023 request for $70 million to pay for another 300 full-time positions in various regulatory agencies) indicates that regulators are serious about these concerns and intend to enforce these rules.

Such regulations, mandating immediate compliance, put GSC companies in a tough spot, as they will likely be forced to explore their own supply chains to a deeper degree than they had previously. Companies that have little transparency beyond the fourth or fifth layer of their supply chain could find themselves playing a twisted version of Minesweeper with very real dollars on the line should they find an infraction hiding within their chain. As such, there will likely be only increasing pressure on the supply chain coming from the buyer-side to fully map out what is an increasingly complex supply ecosystem.

Further, once firms begin to reach deep into their supply chains, they will find they have increasingly little power to influence their own suppliers unless firms can form wide-ranging, similarly goaled partnerships. Large companies such as Intel have found that suppliers residing multiple-layers deep into the supply chain — especially if they are separated by distance, nationality, and other factors — are extremely difficult to influence.

The kind of global partnerships that can overcome these barriers take time, effort, coordination, and some deal of luck to build. In short, they are not the kind of things that can be implemented in the few months between a law being passed and the full force of its consequences coming into effect.

So, what are GSC firms to do? The easy answer is to be ahead of the game and start charting their supply ecosystem now, while there is still time to do so. The harder answer is that firms may need to begin looking to build alternatives to the current hubs of risk they find within their supply chains. Of course, such endeavors are incredibly expensive, time consuming, and risky; and under normal circumstances, they would be the most unlikely courses of action.

Yet, there may be little choice. In the coming decades, GSC companies will have their hands full as they find climate change increasingly disruptive to their agricultural supply chain. This threat of climate change and the pressure it puts on GSC companies from the supply-side, however, may also provide the solution to this supply chain ecosystem problem they are facing.

In the next part of this series, we’ll examine how climate change has become a threat and a solution for GSC companies

The traditional way for large companies (including retailers) to ensure their vendors are following desired ESG requirements is by implementing a supplier code of conduct (sometimes called a vendor code of conduct). These codes typically set out the minimum requirements regarding fair and safe labor and environmental practices, among other concerns, that manufacturers, suppliers, and other vendors must meet in order to sell goods to or otherwise do business with the company.

The codes typically sit on company websites and are sometimes incorporated by reference into the contracts in which they enter into purchase goods and services. Non-compliance may subject a vendor to penalties, including loss of the chance to do business with that company. While the codes can showcase a company’s commitment to ESG, it is not known for certain how effective they are in fostering ESG values throughout the supply chain.

Beyond supplier codes of conduct

ESG-related requirements can also be directly embedded in supply chain contracts. This can be seen in the increasing use of representations and covenants in supply contracts to supplement the contract’s compliance with law provisions. A breach of the representation or covenant is a breach of the contract itself that subjects the breaching party to contractual liability in addition to whatever public or private remedies are provided by law.

Examples of ESG-related provisions include:

• • • Conflict minerals clauses — These include provisions that require the seller of goods to represent that the goods do not contain conflict minerals, the presence of which could trigger reporting obligations under the conflict minerals rules promulgated under the Dodd-Frank Act well as Office of Foreign Assets Control sanctions, under Executive Order 13671. The rules aim to reduce a significant source of funding (trading of conflict minerals) for armed groups that are committing human rights abuses and contributing to conflict in high-risk areas, such as the Democratic Republic of the Congo.
    • Forced labor clauses — These include covenants used by US importers of goods to prohibit their foreign manufacturers or suppliers from using any form of forced labor in the production of the imported goods, including in their own supply chains. These clauses help to ensure compliance with Section 307 of the Tariff Act of 1930 (19 U.S.C. 1307), which prohibits importing goods into the US that are made with forced labor, including convict labor and forced or indentured child labor.

Climate-conscious clauses

Detailed climate-conscious clauses in purchase contracts, such as clauses requiring a supplier to reduce their greenhouse gas (GHG) emissions, are still not commonplace, but this may be changing. Paving the way is the increasing standardization of the terminology used in these contracts, especially regarding GHG emissions.

For example, it is widely accepted practice to group a company’s emissions for reporting purposes according to the three categories defined by the Greenhouse Gas Protocol, a corporate accounting and reporting standard that helps companies and other organizations to identify, calculate, and report their GHG emissions. These three categories include a company’s self-generated emissions (Scope 1); indirect emissions from the company’s purchased energy (Scope 2); and all other emissions that a company is indirectly responsible for across its value chain, such as emissions from the manufacture of purchased goods or emissions from the customer acquiring the goods (Scope 3). Clearly, Scope 3 is the most expansive and difficult to measure.

Another driver for the increased use of climate-conscious clauses in supply chain contracts may be the proposed climate risk disclosure rules for public companies issued by the Securities and Exchange Commission (SEC). These proposed rules also could impact privately held companies that are not directly subject to the SEC’s proposed rules but are part of public company supply chains. For example, public companies may have the incentive to use their negotiating leverage to impose climate-related obligations on their smaller partners in order to help public companies fulfill their SEC disclosure obligations and inform their investors.

The Chancery Lane Project

Further help in navigating climate-conscious contract clauses, however, may be on the way. For example, UK-based The Chancery Lane Project has worked in collaboration with lawyers and sustainability professionals across multiple disciplines and jurisdictions to create a suite of open-access contract clauses (more than 100 so far) that can be adapted to drive climate action and align contractual drafting for the transition to net zero.

The clauses can be used, for example, to incentivize reductions in Scope 3 emissions and promote positive sustainability behaviors. The clauses are based on the law of England and Wales, but the organization has begun work to adapt them for use in other jurisdictions, including the US.

The sanctions have meant that many of these banks and businesses have had to expend considerable resources on getting to know their customers better so they can keep doing business with unsanctioned parties in Russia; while other financial institutions have opted to “de-risk” and avoid the country entirely, exiting account relationships and disentangling themselves from funds transfers tied to Russia.

In a new white paper, The fog of sanctions: Global banks & businesses face unprecedented challenges in applying measures against Russia, the TRRI team examines the evolving sanctions environment in several countries, including the United States, the United Kingdom, and members of the European Union. In addition to examining what each country is doing by itself and in concert with others, this paper also looks at the troubling lack of clarity and cooperation among allies in properly applying sanctions against Russia on a global basis that would arguably have the most impact. (Besides Russia, Belarus and Russian-occupied areas of Ukraine also have been targeted for sanctions.)

You can access a full copy of the white paper, The fog of sanctions: Global banks & businesses face unprecedented challenges in applying measures against Russia, here.

Indeed, Western sanctions against Russia following its invasion of Ukraine are some of the most complex economic punishments ever meted out by the United States, EU, UK and other nations. While the US Treasury Department has been pushing out reams of guidance, other governments have offered little clarity, leaving an information vacuum and major compliance challenges. As the paper explains, varying expectations among nations and a widespread dearth of guidance are making compliance with the unprecedented complexity of Russia sanctions difficult and costly. Not surprisingly, legal, regulatory, and reputational risks faced by banks and businesses have skyrocketed.

Meanwhile, US bank regulators have publicly stated that their examiners will be looking into compliance with sanctions, with the US Treasury Department continuing to offer guidance aimed at helping financial institutions avoid compliance pitfalls. Further, the EU and UK have issued broad sanctions and prohibitions on corporate services, while drawing criticisms that they have failed to provide clarity regarding regulatory expectations.

The paper also looks at the ways in which many countries are addressing gaps in their anti-money laundering and countering the financing of terrorism efforts that have been exposed by the sanctions. The invasion and resulting sanctions have as well raised scrutiny of private fund managers such as hedge and private equity funds.

Varying expectations among nations and a widespread dearth of guidance are making compliance with the unprecedented complexity of Russia sanctions difficult and costly.

With some Russian oligarchs known to be prominent investors in such funds — and some oligarchs subject to sanctions for their ties to Russian President Vladimir Putin — the need to know who is investing in a fund and what it means for compliance are challenges that virtually all private funds face.

Other complex and steep challenges with which governments and global banks are dealing because of the Russian sanctions are also detailed in the paper. These challenges — beyond the application and execution of the sanctions themselves — include everything from the rise of so-called reputation launderers that are working with Russian oligarchs to help them evade the sanctions or obscure their assets, and the problem of asset flight as more global players (both Russian and not) move their assets out of the oversight of regulatory agencies or sanction officers.

Another significant complication is that many financial services firms within the international finance and trade sectors are finding it difficult to hire financial crime compliance professionals to help meet added demands. In fact, the state of financial services firms’ compliance teams remains in worrisome condition as compliance teams find themselves lacking the resources and the talent to fully address the burdens that the new sanctions regime has place upon them.

Indeed, compliance professionals who find themselves short of desperately needed funding may wish to share this reality, and this paper, with their boards as they push for additional resources.

These multilateral sanctions campaign took less than a month to develop and has been more complex and profound than similar campaigns that have been implemented against countries such as Syria, Iran, North Korea, or Venezuela. These restrictions seem to have been put in place in a well-coordinated manner, particularly in regard to the vast number of export restrictions on technology goods and services, as recently documented by the Atlantic Council.

As the war continues, almost every week a tightening of the international sanctions regime is announced as new measures and restrictions are introduced. The International Working Group on Russian Sanctions, for example, has outlined a variety of measures and provided guidance and research on how to improve their effectiveness and deterrence. It is not a surprise then — in a move that confirms the US government’s understanding of the effectiveness of the current measures — that on April 20, it included in its sanctions campaign penalties against facilitators of those seeking to evade sanctions. With these new sanctions, the US government is targeting those financial and operational support networks that have been put in place with the purpose of circumventing any primary blocking mechanism by Western countries. Just two weeks later, the EU Commission said it too would introduce similar legislation to target facilitator networks.

While these new sanctions against facilitators are still defined as a primary blocking mechanism, they nevertheless have a much more dynamic deterrence component: it is expected that the US Treasury will expand the number of entities whenever it is made aware of or has information that such facilitator networks exist.

Indeed, there are literally thousands of companies that have been formed with the purpose to circumvent sanctions and restrictive measures. For example, more than 10 years ago, Thomson Reuters conducted a research study on the sanctions program against Syrian war criminals and found that 24 Syrian sanctioned entities were connected to more than 1,000 entities across five jurisdictions, with a vast number of those entities being located in Cyprus.

The use of shell companies (due to their ease of formation) in certain jurisdictions and tax havens around the world is by far the most common technique and method of sanctions evasion, and one reason why the US has moved to target facilitator networks.

The Russian sanctions campaign is much larger in scope than anything that has been put in place before; hence, the potential for facilitator networks to be active is very large. In addition, because the Treasury’s Office of Foreign Assets Control (OFAC) considers entities blocked that are owned individually or in aggregate by a blocked person (50% rule), beneficial ownership information, particularly when gathered from jurisdictions outside of the US, can play a critical role.

As a result of the current sanctions environment and the elevated importance of efforts to combat corruption and money laundering since the beginning of 2021, market participants (companies and financial institutions) are in a reactive mode. They need to take ample measures to comply with new mandates and need to ensure that their compliance frameworks are robust enough to meet future regulations that are certain to come. This includes the discovery and reporting of sanctions evasion activities to corresponding financial intelligence units and law enforcement.

Market participants have a couple of possibilities for adapting their compliance and risk management programs to this new reality.

Implementing a data-driven compliance program

Three components can be used to minimize facilitator network sanctions evasions and thus ensure compliance. The first is the availability of continuously updated sanctions and blocked entity lists; the second is the enhancement of such lists with an adverse media capability; and the third is the additional use of global beneficial ownership information.

One of the challenges for compliance executives has been that the above-mentioned sources tend to be used in isolation — for example, using various heterogeneous data sources that are not connected to each other. The use of these three components separately may provide some insight, but since names need to be run individually, often through a manual process, such use is time- and resource-consuming as well as ineffective. For larger organizations that need to screen thousands of customers, it can be difficult to obtain a singular view on any one entity.

In contrast, being able to use these three data components in combination allows for the generation of unparalleled insight; and, at the same time, provides significant time-savings on the actual conducting of due diligence, which is often a cumbersome and time-consuming process. The combination of these data sources will also ensure that information previously hidden is uncovered and can be assessed through either sanctions or adverse media information.

For example, when Russian oligarch Alisher Usmanov was sanctioned by US and European authorities, it was difficult to freeze his vast fortune because his business conglomerate is held by dozens of offshore entities, as reported by the Organized Crime and Corruption Reporting Project. Usmanov alone owns a 49% stake in his main steel company, Metalloinvest. His yacht Dilbar, for example, is owned by Navis Marine Ltd. in the Cayman Islands, which in turn is owned by the Cyprus-based firm Almenor Holdings Ltd, which again in turn is owned by Swiss-based Pomerol Capital.

Screening these names only against a sanctions list would not reveal any significant findings. But when combined with additional sources such as an adverse media capability or a beneficial ownership registry, Usmanov’s evasion network would be uncovered much easier. In this case, research and investigative media organizations provide this insight. (The owner of the yacht Dilbar was ultimately discovered to be Usmanov’s sister, Gulbakhor Ismailova. The yacht was sanctioned by EU and UK authorities in April of this year, from the moment this information became public knowledge.)

Sanctions that target facilitator networks therefore rely to a large extent on external market participants and investigators, who have the resources to conduct due diligence and who are able to share this information with lawmakers. Also, market participants can play their part to increase the effectiveness of sanctions against facilitators by submitting designated Suspicious Activity Reports (SARs) to authorities.

It will be to everyone’s benefit when this information is shared and acted upon, making the current sanctions campaign against facilitator networks more effective.

The key to surviving these challenges, (some old and some new) may lie in the lessons learned over the last couple of years.

To better understand the challenges that the global supply chain is facing, we spoke to Brian Wenck, CEO of Flat World Global Solutions, a global supply chain (GSC) logistics and technology company, to get a viewpoint from someone on the inside.

Before the pandemic, the global supply chain was primarily optimized to provide efficiency in line with the demands of just-in-time manufacturing; but during the course of the pandemic, this approach has been hamstrung by disruption. The pandemic caused port delays, transport aircraft shortages, and halts in component manufacturing which have resulted in extreme uncertainty in delivery times, which in turn caused further disruptions. GSC companies like Flat World have had to rapidly adapt from providing not only efficient transportation, but flexible resilience as well.

“We have clients who, because of the pandemic, couldn’t move the raw materials needed when they were needed, and when they did move it, they couldn’t manufacture due to labor issues — so, they got backlogged,” Wenck says, adding that to fix this, the company needed to figure out how to bring in the product and process it within two weeks. “Well, that’s not a ship, that’s a plane, and this is going to take up more cargo space then most planes can handle,” he explains.

For example, the Antonov is the largest cargo plane in the world, and Flat World needed this plane multiple times to do this job, Wenck says, adding that led to lots of questions. “What is its availability? How much is this going to cost?”

Normally, the client would probably pay somewhere between $100,000 and $200,000 to have all of this product brought in over a three-month period, he explains. “Now, it has to happen in two weeks, and we had to talk to them about $1.2 million dollars in transportation costs.”

Navigating the learning period

The early days of the pandemic were a crucible for creating the capabilities on which the global supply chain is now reliant for survival. This is because 2020 benefited from both decreased demand and a greater tolerance for disruption, factors which gave firms the opportunity to learn.

Within this learning period, GSC companies have mastered a variety of new transportation methods, overcome initial coordination problems, and now regularly provide these extraordinary measures with greatly reduced costs. Imagine for a moment what the current situation would look like if these companies didn’t have 2020 as a learning environment. The current situation would almost certainly be far worse as greater shipping costs and shortages would supercharge inflation globally.

The stressful part, however, is that this is unlikely to be the only major crisis for the supply chain industry within the next few years.

One crisis that is slowly but inevitably looming strikes at the foundation of modern logistics. A combination of factors including long-run macroeconomics, low population growth, generational shifts in working preferences, and the pandemic have resulted in an ongoing shortage of truckdrivers in the United States as well as other highly developed economies such as the United Kingdom and Japan.

Simply put, older drivers are retiring, and the industry cannot entice enough young drivers to replace them. Even as driver pay and signing bonuses reach unprecedented levels (with Walmart offering drivers a starting annual salary of $100,000), the shortage remains acute and is only getting worse. In many cases, supply chain disruptions are being caused not because operations at a port are keeping cargo ships from being unloaded, but because there are no drivers to transport the crates to their final destinations. As shortages of drivers in other countries show, such disruptions can severely hamper not just the supply chain but even the operations of the entire economy.

The early days of the pandemic were a crucible for creating the capabilities on which the global supply chain is now reliant for survival.

The obvious solution to this driver shortage — self-driving trucks which could supplement or even outright replace drivers — seems tantalizingly close given the progress major car manufacturers have been making in this area. Despite that apparent progress however, the technology is simply not at the point where it can be implemented on a large scale, and even some of the sunniest predictions make this option a non-factor until the latter end of the decade. Yet, automation and artificial intelligence may still be solution — rather than replacing drivers, however, their greatest aid may be in enhancing the flexibility of the system itself.

For example, Flat World already is using artificial intelligence’s predictive capabilities to model future demand, Wenck says. By using both historical and real time data, the company could look at multiple routes and select the ones least likely to foresee disruption given not just current conditions, but those likely to form based on the directional volume of the market.

In other words, rather than act as a replacement for drivers, GSCs can utilizing AI’s clerical and analytical skills as a force multiplier. This type of solution could buy time for the arrival of larger types of automation, allowing GSCs to manage the driver shortage crisis before its worst effects are realized. It’s also a demonstration of how the type of flexibility born from the pandemic is likely to be highly relevant in future crises.

Yet, some crises are easier to predict than others. Numerous potential pitfalls lie beneath the umbrella of environmental, social, and governance (ESG) issues, some of them forecastable, others less so. (Indeed, our interview with Wenck took place just before the current events in Ukraine, but we did discuss how theoretical conflicts and long-term concerns could impact the supply chain.) Wenck’s conclusion was that the supply chain was going to have to act like water, finding its level as the terrain changed around it.

While the future impacts of the lingering COVID-19 pandemic and labor supply shortages are somewhat predictable, the future of ESG is certainly less so. In such a world, fluidity reigns as king.