Covid-19 and ESG demand greater supply chain risk transparency

Supply chain risk management must go deeper to cope with more frequent and severe shocks, as the pandemic highlights that many companies do not fully understand the risk. Covid-19 is putting supply chains under immense strain, adding to existing pressures from natural catastrophes and political risks. The pandemic, for example, has caused severe delays in shipping. A shortage of containers and container vessel capacity, coupled with Covid-19 measures, have led to congestion at major ports and delays to shipments from Asia. If economic demand rises quickly following vaccination programmes in the US and Europe, there are concerns that supply chains will not be able to keep up with sudden jumps in demands for some raw materials and components. According to Sierra Signorelli, chief executive of commercial insurance at Zurich Insurance Group, this is one example of how supply chain and business interruption shocks are becoming more frequent and severe. “This is not only as a result of the recent Covid pandemic, but also due to acute climate change, macroeconomic financial crisis, trade disputes, cyberattacks, terrorism and suppliers’ bankruptcy, to name just a few. This could easily result in a significant loss of profit to companies,” she said. The experience of Covid-19 and increasing environmental, social and governance (ESG) requirements will see corporates take a deeper, more local and forward-looking view of supply chains and suppliers, according to John Bree, chief evangelist and chief risk officer at Supply Wisdom. Covid-19 and the subsequent disruption have demonstrated the need for companies to consider a broader range of risks further down the supply chain and across a greater range of supply tiers, he told CRE. “The pandemic showed that many companies do not understand the true supply chain. They need a more detailed analysis of the entire supply chain. Traditionally, companies carry out third-party assessments annually but the data is already stale by the time the audit is completed. Thinking ahead, companies should be working towards continuous or real-time risk intelligence, anticipating problems rather than waiting to respond,” said Mr Bree. “Companies typically focus on financial and cyber risks in supply chains, and their resilience to disasters. Now they realise there are other operational factors, such as litigation, sanctions, infrastructure or labour issues, that go well beyond financial and cyber risks,” he added. Post-pandemic, companies must take a broader view of supply chain risk and consider a wider range of potential threats than in the past, continued Mr Bee. “A lot of companies focus on suppliers but do not think about risks related to their location. However, the pandemic has shown that different areas have different levels of maturity of critical infrastructure and healthcare. The reliability of power and communications services is even more important with home working, yet many parts of the world suffer regular outages and brown-outs, and those working at home will not likely have backup,” he said. According to Ms Signorelli, businesses must consider the full spectrum of risks along their supply chain. These issues include geopolitical, operational, cyber and natural hazards risks. “To ensure reliable supply chains, businesses need to focus on improving intelligence on the resilience of their entire production process by considering all these risk scenarios. Ultimately, the most critical areas in the supply chain to focus on are those that rely on limited suppliers or locations,” she said. Covid-19 is already spurring a review of supply chains. Research by Euler Hermes last year found four out of ten companies are changing overseas suppliers and moving parts of their production. About 62% are considering looking for new suppliers, while about 30% said they favour nearshoring. Almost all (94%) of more than 1,100 companies surveyed reported a Covid-19-induced disruption to their supply chains. “We are going to see a re-evaluation of outsourcing and offshoring, and this is already beginning to happen. Countries and companies will not want to be dependent on others for critical infrastructure and services,” said Mr Bree. “Companies will most likely now look to diversify suppliers. There is a realisation that companies need to diversify supply chains from different parts of the globe and not have all their suppliers concentrated in just one or two places. We will increasingly see wider distribution of service and sourcing,” he said. Legislation to increase supply chain transparency and resilience is also on the cards. In Late February, US President Joe Biden signed an executive order that will result in a review of supply chains, initially for pharmaceuticals, critical minerals, semiconductors and large-capacity batteries. It will be followed by a broader review of preparedness in the energy, agricultural, transportation, health and biotech sectors. ESG requirements are likely to drive greater supply chain transparency in a number of areas such as climate change, sustainability, social injustice and diversity. A growing number of countries have already introduced reporting requirements to address human rights issues within supply chains, such as with modern-day slavery. The EC is consulting on whether to introduce mandatory due diligence across the EU to ensure companies address the adverse impacts of human rights, health and environmental issues in their supply chain. According to Euler Hermes, some 32% of companies are already increasing ESG due diligence on suppliers, to mitigate supply chain disruption. “ESG issues are an increasingly important factor in supply chains and are likely to become a potential future source of disruption,” said Mr Bree. There are big changes afoot in supply chain risk management, according to Mr Bree. “Companies need to be on top of their supply chains and understand the changing environment. This is not a one-year-only solution. Companies will want to step back and take a deep breath to better understand and validate risks, and develop the ability to forecast risk to the supply chains and mitigate it at the earliest possible stage,” he said. According to Ms Signorelli, data is critical to managing supply chain and associated risks from both a business and insurance perspective. “Insurability depends on the transparency of risk,” she said. “From an underwriting point of view, we can only build risk transfer solutions and support our customers if we understand their risk. “Insurers can only provide insurance if the data is provided to them to assess and underwrite the risk. Businesses, on the other hand, depend on reliable data to understand and mitigate risks in their value chain. In manufacturing, a large share of the production value is often produced by third-party supplies. However, many supply chains still rely on outdated information and processes,” Ms Signorelli continued. “Consequently, improving the data and analysis on supply chains is an opportunity for businesses to build interconnected digital supply networks that can anticipate and respond to future shocks in the supply chain and minimise their impact,” she added. And events such as Covid-19 or extreme weather have boosted demand for supply chain management services, according to Ms Signorelli. Zurich collaborates with riskmethods, a global leader in supply chain risk management, to use AI-based technology to go through millions of data sources and help its customers identify, assess, mitigate and transfer supply chain risks.

Covid-19 and ESG demand greater supply chain risk transparency

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