The private sector is increasingly under pressure to address human and labor rights issues worldwide, not only in their operations but also in their supply chains. However, companies’ visibility of their supply chain is limited, very often to a selected few direct suppliers which limits the capacity stakeholders, including the companies themselves, to take action and address those risks and impacts.
We present in this working paper (see download link at the top of the article) a methodology to assess the human and social capital risks (in particular the human and labor rights issues) in the supply chain of a company in order to go beyond these limitations. This approach is based on the combination of companies spending data, economic data (extended input output database) and human right statistics (UNICEF, World Bank, ILO, etc). Real data on labor/human risks is extremely difficult to collect for a large company, specially beyond its tier 1, which justifies the use of a model and a mix of primary and secondary data. The integration of those sources of data, which has not been done in the past so extensively, allowed us to screen for human and social risks and impact in companies supply chain. Additionally, we applied a valuation of the impact using a societal perspective (i.e. cost to society) which helped in the prioritization of the issues, as it allows to directly compare very different topics such as forced labour, gender equality and safety to name a few.
In summary, the presented approach goes beyond current practices and innovates on three aspects:
Cross topics comprehensive view: The range of human rights topics addressed is very wide, avoiding a view in silo that is often seen those days (e.g. gender equality, child labour, etc).
Value chain scope: The scope of the analysis is wider than just direct operations or direct suppliers, covering the full supply chain of any company.
Quantitative indicators: Indicators are developed for quantitative risk assessment, including the option to express them through economic costs to society and business costs.
Applying the approach to the case of Novartis allowed us to deploy the approach and identify the labor rights risks across the company supply chain. The labour rights issues covered included:
The figure below shows the economic impact (in USD/FY) for the society of a selection of the indicators covered in our analysis, aggregated at the highest level.
The overall social impact in the supply chain of Novartis is net positive, but the likely potential negative impact of various labour rights issues is limiting greatly the potential to generate positive impact. This view of the social impact of a company's supply chain is very innovative and challenge the typical "economic impact analysis" that companies do looking at GDP, wages and taxes that typically only claim positive impact (actually output). Moving from output to impact provides a very different view of the reality and more interesting insights to really address social impact.
This working paper presents more in depth results for employment, wages and child labour. It analyses as well the list of added value for any multi national using the approach:
Awareness raising: understand whether potential risks exist in the supply chain, how big they could be and where they are located (country and sector).
High level prioritization of Human Rights topics for the sustainability strategy according to their relative societal impact, assessed from an economic and societal impact perspective.
Prioritization of action per country/sector for planning of audits and corrective actions (setting policies/corporate commitment, etc.) Results provide a breakdown per country and per sector, for each of the human rights topics addressed. It can be broken down per origin of purchase (spend category) and per end sector where the issue occurs.
Engagement with suppliers (mainly tier 1) by sharing the heat-maps of likely risks and improving them with supplier data to better identify risks and put in place corrective actions.
Integration of Human rights risks into business risks assessments.
Communication (annual report) and engagement of stakeholders (internal/external)
This approach provides a concrete way to identify potential human rights risks and impact in the supply chain of companies at a level of details and precision that was not possible until now. Companies will use more and more data and analytics to inform their strategy and we hope to see companies adopting such approach to better understand human rights risks in their supply chain and create a positive impact for a fairer and better world.
This approach could become a valuable tool in helping Novartis pinpoint those specific hotspots of human rights risk in our supply chain —although granularity is everything and this approach will need to be combined with (and could inform) other existing approaches to address human risks such as audits, contractual relationships, partnerships with” other stakeholders, etc. Frank Seier, Senior Advisor Human Rights (and former Head of Human Rights), Novartis