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ESG (Environmental, Social, and Governance) has become a crucial metric for investors, shareholders, and consumers concerned with sustainable corporate practices. However, within this framework, labor risks emerge as a significant challenge for organizations seeking to align their operations with ESG principles. This text explores labor risks in this context, presenting arguments, data, and relevant examples.

The Crucial Role of Social in ESG

ESG’s social criteria focus on managing relationships with employees, communities, and ethical supply chains. According to the World Economic Forum, 85% of business leaders believe that social factors, including labor issues, are crucial for the long-term success of their companies.

With the global adoption of ESG, countries are gradually implementing practices and setting goals for companies operating within their borders. As a result, organizational business practices have undergone significant changes.

While companies with ESG practices are ranking well with elevated brand status, major corporations face criticism for unfavorable labor practices in their factories due to pressure for rapid production, resulting in significant damage to the company’s reputation, especially within the supply chain.

With the growth of outsourcing paralleling the emergence of ESG, companies may be focusing inwardly and neglecting a significant portion that has grown to represent often more than 50% of their organization.

Labor Risks in the ESG Context

Companies neglecting diversity and inclusion face reputation risks and resistance from consumers and investors. This is another crucial point for ESG. According to McKinsey, companies with greater ethnic and cultural diversity in leadership positions have a 33% greater chance of outperforming the competition.

In the implementation of third-party risk management projects, there is an increased demand for processes that involve analyzing whether a supplier meets diversity criteria. Regardless of the industry—be it global industries, pharmaceuticals, chemicals, technology, food, etc.—if a company today aims to grow and be well-regarded, it is essential to align with internal ESG issues and quickly steer its supplier chain toward the same goal.

Labor Practices in the Supply Chain

Companies are responsible not only for their direct operations but also for ethical practices throughout the supply chain. Sedex Global’s research reveals that 57% of companies consider supply chain management the greatest challenge for labor compliance.

This challenge arises because it’s not simple to change the culture of one’s own organization, let alone having to change the culture of 100 or 1,000 suppliers with different standards, histories, and entirely different realities—it’s a real challenge! This is why supplier risk management is so importante.

To promote transparency and achieve ESG goals, several actions are taken: Transparency is fundamental to ESG, allowing companies to be accountable for their practices and demonstrate a commitment to continuous improvement. According to the Global Reporting Initiative, companies adopting transparent practices are 73% more likely to attract sustainable investments.

For a company to remain attractive to investors, the market, and consumers, the practices it chooses to adopt are crucial in determining its future. If an organization contracts suppliers that can tarnish its image in certain ESG criteria, the losses can be enormous, especially if listed on the stock exchange—the fall is even more significant.

However, those who invest in ESG, even within their supplier chain, experience a different outcome: “The World Economic Forum estimates that promoting diversity can increase revenue by up to 12%.”

Finally, Audits like HSE Management and Regular Assessments: Audits and regular assessments are essential to monitor and continually improve labor practices, ensuring compliance with ESG standards. Companies conducting regular audits are 40% less likely to face legal actions related to labor practices (Bureau of Labor Statistics).

While ESG represents a valuable approach to guide companies toward sustainability, labor risks must be addressed seriously. The effective integration of practices promoting diversity, inclusion, and good working conditions not only reduces risks but also strengthens the company’s reputation and positions it in the sustainable market.

How we can help you

Established in 2003, we have been in the Third-Party Risk Management market for OVER THAN 20 years, providing security for over 200 clients and monitoring around 500,000 third-party EMPLOYEES. With our proprietary system and a unique working methodology, Bernhoeft engages in receiving documentation from suppliers, analyzing it, and generating indicators for our clients. Feel free to reach out to us using the contact information below, and we will be happy to assist you!