How ESG Affects Every Part of Your Supply Chain: We Use Pasta to Explain It
by Amelia Zimmerman, FiscalNote
This article follows a sample consumer good through its life cycle to explore just how complex it can be to analyze modern supply chains through an ESG lens.
ESG might contain only three letters, but within those three letters is an entire world of risk, opportunity, and change. Environmental, social, and governance considerations are present across the entire life cycle of a product — from raw materials to manufacturing and processing, all the way through to distribution, retail, and end-of-life.
Take, for example, a product you might purchase on your weekly grocery trip: a pack of ready-made gnocchi. The environmental and social risks and opportunities of this product can’t fit on the packet label. Rather, a thorough ESG evaluation encompasses its entire life cycle across all three pillars of ESG and spans multiple key industries.
This article follows a sample consumer good — pre-packaged gnocchi — through its life cycle to explore just how complex it can be to analyze modern supply chains through an ESG lens.
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From Germ to Flour: ESG in the Food and Agriculture Industry
The gnocchi you purchased from the store begins life typically in three places: wheat fields, potato fields, and poultry farms. “Traditionally, food and agriculture have gone largely unregulated because food is so essential and agriculture is so complex,” says Joey Durr, climate strategy associate at FiscalNote ESG Solutions. “The thinking was that over-regulating the industry would hamper companies’ ability to produce food — and so these industries have been relatively exempt from the increasing emissions regulations, which are already critical for several other industries.”
But we have reached a turning point. “Apart from being a core industry globally, food and agriculture is also one of the four major emitters,” says Durr, “and with public concern rising and new stories coming to light, we can expect to see more regulations and calls for transparency come into play, especially around agriculture’s environmental and social impact”
Additionally, consumer preferences are changing. For example, where milk and bread might have been the family staples of the 20th century, now you’ll often find non-dairy milk alternatives and gluten-free products in shopping carts.
It can be difficult for ESG professionals to know where to look first when assessing material risks and opportunities across food and agriculture. But several key concerns stand out for these industries.
Climate Risk
Agriculture is particularly susceptible to the physical risks of climate change — both the acute risk of severe weather events which can wipe out crops, and the chronic risk of longer-term changes in weather patterns, which may lead to some crops no longer being suitable for certain regions, and other long-term adverse impacts.
Greenhouse Gas Profile
The food system represents 26 percent of global greenhouse emissions, a staggering number when compared to other emitters such as China, which emits more greenhouse gases than the combined developed world and contributes 27 percent of global carbon dioxide. Major emissions sources for the industry include land use, crop production (including the use of high-GHG fertilizers), and methane emissions from cattle.
Labor Laws and Wages
The social and ethical risks of non-compliance with local labor and wage laws are an ongoing issue for companies in the agricultural sector in particular. “When you think about farming, you have to ask: how is that labor being done?” says Durr. “Is it ethical? Are the wages and working hours fair? Do they align with what the world cares about right now?”
Food Loss and Waste
Food loss and waste across the food supply chain are responsible for 6 percent of global greenhouse gas emissions. Beyond its carbon footprint, the social and reputational risks of a high waste profile can be damaging for brands when hunger and food insecurity are such highly visible global issues. Compliance may soon become a key concern as tighter regulation is likely coming to crack down on food waste in the industry.
Where to Start With ESG in Food and Agriculture
Environmental and social challenges across the food and agriculture industries are significant, but there is reason to be optimistic. “Many of the big industry leaders tick all the boxes,” says Sining Wu, sustainability specialist at FiscalNote ESG Solutions. “They publish annual sustainability reports; they develop their sustainability strategy and material topics; account for their Scopes 1, 2 and 3 GHG emissions along the entire value chain; and conduct climate risk assessments, to name just a few of their initiatives. There are plenty of best-practice examples out there for the rest of the industry to model.”
Additionally, there is a wealth of guidance available for sustainability professionals in this space. “All of the reporting organizations have resources for food and agriculture,” explains Wu. This includes SBTi’s FLAG (Forest, Land, and Agriculture) guidance and CDP’s scoring methodology and sector-specific questions for the Food, Beverage and Agriculture sector. “There is also a dedicated GHG Protocol guidance for Agriculture,” says Wu.
Beyond recommendations and guidelines, there are also significant technological opportunities, such as carbon credit farming or regenerative agricultural practices, which offer alternative methods of feeding a growing population without contributing to deforestation and land-degrading activities.
How ESG Experts Can Help
Qualified ESG advisors work with large companies in food and agriculture to perform market research, conduct materiality assessments, improve overall greenhouse gas inventories across Scopes 1, 2, and particularly 3, and even go beyond the “E” of ESG to help with community engagement. When backed by the right technology, advisory and objective guidance can go a long way. “The Equilibrium ESG platform simplifies supplier engagement, allowing surveys to be sent to hundreds of suppliers at the click of a button,” says Durr. “And even when vendor data is missing, our advisory team can help manage missing data. That’s where you really want expert knowledge because GHG inventory estimation is incredibly complex.”
Additionally, most private food and agriculture companies are upstream suppliers of larger brands and retailers and therefore must comply with the often strict ESG requirements of their clients. “We work with many private companies in the sector to help them report to complex frameworks that their clients require, such as GRI and SASB,” says Durr.
Cooking up Sustainable Practices in the Manufacturing Industry
To become gnocchi, our three ingredients (wheat, potato, eggs) need to be processed: wheat needs to be shelled and ground into flour; potatoes need to be cleaned, boiled, and mashed; eggs need to be cleaned and cracked. All of this happens at the factory level, and for many years, there was little oversight as to how our food and other consumer goods were made.
But in recent years, problems such as human rights abuses and natural resource scandals have intensified public and investor concern about what goes on behind factory doors. Today, several key ESG concerns stand out for manufacturers.
Environmental Footprint
The energy-intensive processes involved in many types of manufacturing have led to high greenhouse gas profiles for many factories. In the transition to a low-carbon economy, ESG leaders in manufacturing are focusing on Scope 1 and 2 emissions. “A significant pain point for the industry is decarbonization in the supply chain,” says Wu.
Pollution
“There are also air emissions — and that’s where we make a distinction between GHG and ESG,” says Wu. “GHG is just a small part of the ‘E’ in ESG. It’s important that companies assess environmental pollution holistically, taking into account air, water, waste, land, and biodiversity risk. For example, are your factories operating in high-biodiversity-risk areas? Are you complying with air pollution regulations?” The fines for noncompliance across various types of emissions can be significant, and the reputational consequences can be just as damaging.
Social Risks
Manufacturers also face key social risks such as poor working conditions and labor law violations, child labor concerns (a risk traditionally associated with sites in the developing world but also occurring in countries like the U.S., as a recent New York Times investigation highlights), healthy and safety violations, and exploitation or harm to local communities (such as over-consuming local water supplies or releasing pollution leading to health effects).
Where to Start With ESG in Manufacturing
When searching for manufacturing partners, look for suppliers that have already begun a decarbonization journey and have credible plans for addressing Scope 1 and 2 emissions. Ensure any partners you work with have a strong track record on human rights, ethics, and labor laws.
How ESG Experts Can Help
ESG advisors can work with organizations to calculate the greenhouse gas profiles of manufacturing activities, disclose this data in line with your chosen ESG frameworks and standards, and find ways to reduce your carbon footprint. They can assist in sourcing and evaluating ESG-positive suppliers, and identify other material environmental, social, and governance-related risks in your manufacturing activities.
At the Market: ESG in the Retail Industry
Before it can reach dinner plates, the gnocchi must be made available for purchase. In our modern economy, this often means sitting on supermarket shelves or in warehouses ready to be selected by shoppers. There are several key ESG concerns at the retail level — particularly transition risks such as market and reputational risks — more than the physical risks of a changing climate.
Packaging
Packaging and packaging waste are highly visible environmental concerns and ones that influence consumer behavior. New regulations will also put pressure on packaging, such as the EU’s packaging and packaging waste laws which mandate that all packaging within the EU market be recyclable or reusable by 2030.
Carbon Footprint
Retail stores, and grocery stores in particular, often have sizeable greenhouse gas footprints across Scopes 1 and 2. “This is mostly due to energy consumed in stores and refrigeration leaks,” explains Wu. Logistics and distribution also contribute to retail carbon footprints and may be subject to technology-based transition risks with the global push for electric vehicles.
Reputational Risk
Retail brands may also be particularly susceptible to the reputational risk of a transitioning economy, where a failure to act quickly on climate and ESG concerns could lead to boycotts and hurt brand reputation. Supply chains are a key concern for retailers, as are food waste and marketing claims that can lead to greenwashing accusations. Additionally, consumer behavior is increasingly influenced by product and brand sustainability.
Navigating ESG in Retail
ESG professionals should consider these material risk factors when evaluating retail partners. It’s important that your brand’s products sit on the shelves of retailers with a strong track record and a proactive approach to ESG.
How ESG Experts Can Help
FiscalNote’s ESG advisory services can help your internal sustainability teams to collect, process, and manage ESG data from your retail partners to include in Scope 3 emissions. We also work closely with retail brands to conduct materiality assessments, identify upcoming regulatory changes, evaluate risk exposure across all categories of ESG, offer thought leadership around procurement, and identify opportunities for embedding circularity within value chains.
Don’t DIY with ESG
Environmental, social, and governance concerns touch every part of a product’s life cycle. In the case of packaged gnocchi, that’s everything from field to fork. In a market that holds brands responsible for every link in their value chains, ESG assessments that are limited in scope or depth, or only consider a single stage or aspect of a product’s lifecycle, will not suffice. Ultimately, your ESG performance is only as strong as the weakest link in your supply chain.
Thorough lifecycle assessments can be an overwhelming task for time-strapped ESG teams, and that’s where advisory services can help. With deep, highly specific experience across industries and sectors, external advisors can bring the insights and up-to-date market analysis that you need to manage ESG concerns at every part of your products’ lifecycles.
Go Further With FiscalNote’s ESG Advisory
The ESG advisory team at FiscalNote provides far more than just platform help. With FiscalNote’s suite of technical ESG solutions, combined with highly customized advice from our experienced ESG consultants, you can assess your ESG performance, report against your chosen frameworks and standards, ensure your investors get the data they’re looking for, benchmark and model best practices across your industry, and begin your journey toward becoming an ESG leader.
FiscalNote’s ESG advisors act as an extension of your internal sustainability team, supporting platform needs and offering a suite of advisory services grounded in deep industry knowledge and experience. We work with clients at every stage of their ESG journey, whether they are just getting started or have been reporting for years and want to further accelerate their ESG initiatives.
“Rather than hiring one to three more people for three times the cost, with FiscalNote you get the advantage of an ESG platform that helps you simplify and manage your data, combined with the expertise of our in-house experts to help with anything from reporting to long-term strategy,” says Durr. With a platform and a team of advisors at your disposal, you can achieve your ESG goals years ahead of schedule.
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