Country risks in your supply chain

We’ve recently worked with a client to define an approach to the responsible sourcing of goods from across the world. As we described in an article last year, ‘The 5 steps to more responsible procurement’, this isn’t easy to do because of the huge range of items and services that most businesses buy.   

However, before leaping in with supplier questionnaires, codes of conduct, and contractual clauses, there is a more fundamental question to ask which can help to tell you a bit more about the potential environmental, social and governance risks; where are your suppliers operating? 

Two suppliers offering the same product at the same price can carry materially different ESG exposure depending on where they are located and where they source their products from. 

Understanding that exposure early enables better procurement decisions, stronger risk mitigation and greater resilience, all without building an overly complicated ‘one size fits all’ system. 

Why country risk is a critical ESG indicator 

Assessing country risk isn’t about stereotyping or excluding geographies, but it is about understanding realities in which different jurisdictions operate. High corruption levels, poor environmental concern or enforcement and human rights breaches all increase the probability of ESG-related issues occurring within supply chains.  

Of course, it doesn’t mean that every supplier in a higher-risk country is problematic, but it might indicate where a baseline level of risk is heightened and therefore requires proportionate oversight with the rest of your responsible procurement approach. 

Key indices to consider using for assessing ESG country risk 

There is no single ‘ESG country score’. Instead, businesses typically draw on a combination of globally recognised indices to build a composite view. For our client, we identified several indicators that we felt gave us the breadth of information to build a defensible, evidence-based view of country exposure.   

Walk Free Global Slavery Index	The Global Slavery Index (GSI) provides national estimates of modern slavery for 160 countries.
Environmental Performance Index	Using 58 performance indicators across 11 issue categories, the EPI ranks 180 countries on climate change performance, environmental health, and ecosystem vitality.
Risk Watch Initiative	ESG ranking and scores provided by country covering environmental, human rights and health & safety risks. The ESG Index covers 183 countries and territories and encompasses three sub-indexes (environment, human rights and health & safety) based on 65 variables to measure ESG risk exposure.
WRI Aqueduct Country Rankings	The World Resources Institute is an independent research organisation which provides access to open data including the Aqueduct tool. This identifies and evaluates water risks around the world, including floods, droughts and stress. It provides country rankings, as well as specific geographical data points if available.
International Trade Union Confederation (ITUC)	The ITUC’s primary mission is the promotion and defence of workers’ rights and interests, through international cooperation between trade unions, global campaigning and advocacy within the major global institutions. Each year, the ITUC produces the Global Rights Index, the only comprehensive, worldwide annual study of the violation of workers’ rights.
World Bank Group	There are 6 Worldwide Governance Indicators (WGI) which describe broad patterns in perceptions of the quality of governance across countries and over time.    The WGI are based on existing data sources produced by more than 30 think tanks, international organisations, nongovernmental organisations, and private firms around the world.

How to use this information for practical procurement decisions 

We recommend the following three stage approach:

1. Understanding the risks in your existing supply chain. Clarify your supplier countries of operation and cross-reference these to credible global indices such as those above to identify areas of risk. Weight the importance of different ESG risks to your business and use a simple scoring mechanism to determine an overall risk category (e.g. high, high-medium, medium, etc.) for your supplier. You don’t need to tackle your whole supply chain at once – prioritise your key suppliers (i.e. the ones with which you have the largest spend) and those operating in countries you think may be at higher risk – this makes responsible sourcing more manageable. 

2. Establish practical ways to minimise significant risks. Suppliers should not be excluded just because they operate in a higher risk country. Many businesses operate responsibly in higher-risk environments by having strong control frameworks, and withdrawing your business may have unintended consequences, particularly social ones. The key here is to minimise the risk where necessary. For example, if a supplier is operating in a country at high risk of modern slavery then you would want to ensure that this topic is discussed with them and if you conduct supplier audits, included in those. You might also want to ask for additional paperwork (policies/processes) although a conversation is sometimes all that’s needed. 

3. Expand your assessment over time. When you’ve got to grips with your existing supply chain you can incorporate these assessments into the supplier selection process and look to integrate the process within your broader supply chain management practices – integrating with other procurement risk assessments, supplier-specific data, carbon metrics or known sector risks. 

   
   

While responsible procurement can seem overwhelming, it doesn’t need to be – start with one supplier and see where it takes you – or for a more comprehensive approach, contact us and we’ll do the analysis for you.  

Authored by Sarah Kirton.