Corporate Social Responsibility is again high on the political agenda: Since December 6, all EU member states are obliged to have implemented the EU Directive on Non-Financial Reporting (2014/95/EU), which mandates businesses to incorporate social and environmental aspects in their yearly reports. Looking at the German G20 agenda for 2017, you will see social and environmental standards in Global Supply Chains high on the list. The draft-law, prepared by the Federal Ministry of Justice and Consumer Protection, has passed most of the legislative process and will return to the Bundestag in the next few weeks to be written into law. The law generally sticks very close to the EU Directive, in most parts being a 1:1 adaptation. While the industry is happy, having lobbied for its limited scope, NGOs and opposition parties are somewhat critical, but consider it a step in the right direction. Two aspects of the law were especially controversial: How many and which kind of companies would actually be targeted by the law – corporations that are listed on stock-exchange, insurers and financial institutions that have more than 500 employees – and in how far would those companies have to report on what happens along their supply chain. As it stands, German businesses will now have to monitor and report on social and environmental risks which occur in processes that are not within their immediate reach. However, most of the German “Mittelstand”, export-oriented SMEs, will not be affected.
While Global Supply Chains (GSCs) are by no means a “new” thing, public and political attention has changed over the past few years. Long a hall-mark of business studies, politics and other academia have dealt with GSCs from a development perspective, looking to generate economic opportunity in both developed and developing countries. Now, social and environmental conditions are under scrutiny, and companies from developed nations are often made responsible for it. What effect does this have for political consultancy?
The significance of Global Supply Chains
Global supply chains (GSCs) are by now the most common ways of organizing investment, production and trade in the global economy. The term refers to the cross-border organization of the activities required to produce goods or services and bring them to consumers through inputs and various phases of development, production and delivery. In every country that is integrated into the world economy, they create employment and opportunities for economic and social development. In Germany, almost half of all businesses have some ties to foreign companies and make use of GSCs. In some industries, such as machinery or chemicals, two out of three businesses have gone global1.
The rise of global supply chains over the past decades has produced a new nexus of trade, finance and know-how, becoming increasingly influential in determining future trade and investment patterns, as well as growth opportunities. There is consensus now that policy needs to respond to this reality and promote an environment that fosters participation in GSCs, and also facilitates upgrading opportunities over time. Virtually all major international organizations and global policy forums such as the World Bank, OECD, WTO, G7 and G20 now engage in efforts organize and regulate GSCs.
International Policy Response to GSCs
The policy-relevance of GSCs has become evident in recent G7 and G20 meetings, and is one major element of Germany’s agenda for their 2017 presidency. To quote:
“Sustainable global supply chains can help to further global economic and social development. The inclusion of internationally active companies and adherence to fundamental labour, social and environmental standards play an important role in this respect. The G20 will address this topic intensively for the first time next year.“2
Angela Merkel reiterated that “what we did in G7 2015 will be continued at G20 in 2017”. And 2015 saw some significant action on supply chains, when the G7 passed an “Action for Fair Production” which focused on the social challenges in global production, acknowledging the responsibility of industrialized states and its multinational companies for grievances along the whole supply chain. The German government followed the declaration up with a conference (co-hosted by the BMZ and the Consumer Goods Forum) on the topic earlier this year. In 2017, the Ministry for Economic Affairs and Energy (BMWi) has joined the BMZ and Ministry of Labour and Social Affairs (BMAS) to advance this cause and cooperate with colleagues from the other G20 countries. The G20 venue, which includes large producing countries of GSCs like China and India, could prove to be more effective than the smaller G7, which only includes consuming countries.
While Germany certainly is a champion of pushing sustainability in GSCs, the G20 has not been inactive thus far. G20 action on GSCs started back in 2013, when the G20 leaders noted the “importance of better understanding the rapid expansion of global value chains and impacts of participation […] for growth”, asking the OECD for extensive policy research on the matter.
This year, the Chinese presidency has worked on a broad agenda to improve conditions for global business and trade. The Huangzhou summit championed structural reform, innovation-driven growth, inclusive and interconnected development, and robust international trade and investment. The summit also delivered the G20 Blueprint on Innovative Growth, which highlights the structural reform agenda and innovation-driven growth as fundamental components in achieving strong, sustainable and balanced growth, especially in the digital economy and Industry 4.0. Coupled with the G20 Action Plan on the 2030 Agenda for Sustainable Development, the Chinese presidency gave a huge impulse towards a more sustainable organization of Global Supply Chains.
The G20 heavily relies on expertise by the OECD, and also the IMF and World Bank. Cooperation with the OECD, also evident in tax policy, is very likely to intensify, as the OECD has decades-long experience in dealing with GSCs. The OECD, especially through its Development Assistance Committee (DAC), has produced extensive knowledge on global agricultural supply chains, as well as more recently extractive resources and mining. Apart from the OECD Guidelines for Multinational Enterprises, it has published documents on “Responsible Agricultural Supply Chains” (2016) and a “Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas” (2016, 3rd edition), as well as a “Due Diligence Guidance for Meaningful Stakeholder Engagement in the Extractives Sector” (2016). Those documents, along with similar papers from the UN, are set to be blueprints for CSR reporting and action in the next years.
The changing look on GSCs
Problems in social and environmental sustainability that prevail in developing countries have long been neglected due to their perceived distance to the consumer. However, as chains have integrated vertically with less and less intermediaries, those problems have come to the attention of the consumer and media in the developed states.
Public attention towards GSCs is not so much focused on the upsides of GSC participation, but rather on the social and environmental risks. Those concerns are embedded in wider fears about job losses and foreign competition, and the belief that local production would be preferable. Hence, there is broad demand for improved Corporate Social Responsibility strategies. The EU moved forward with their Directive on Non-Financial Reporting, which is about to be implemented in Germany (see above).
While a significant part of the policy production does indeed occur in international arenas, the importance of domestic policy-making must not be underestimated: labour market policies, social policies and competition policies as well as policies for investment in education, technology and infrastructure are critical to improve GSCs.
The situation in Germany
GSCs are especially important in Germany, which is heavily reliant on manufacturing and export, mostly performed by the SMEs (the so-called Mittelstand). German politics, especially the CDU/CSU faction, is extremely sensible policies affecting this sector, and most are doomed to fail if they are hurting SMEs. For that reason, the CSR-law sticks close to the EU-directive in that it only applies to companies with 500 or more employees. While the Greens and NGOs had pushed for a threshold of 250, business associations had lobbied to keep that number at 500. In effect, only around 300 companies fall under the CSR-law. The same goes for the G20 efforts: the BDI, which heads the Business 20 (B20) in 2017, will lead efforts to limit the effects of the sustainability agenda on German exporter’s competitiveness.
Independently of federal policy-making, German businesses have turned their attention to GSCs, particularly in terms of risk-management. In a recent conference by the Association Supply Chain Management, Procurement and Logistics (BME), one focus was on mitigation of supply chain risks, both on the macro level (i.e. financial shocks, environmental hazards) and micro level (i.e. local conflicts on site or between members of the chain). The arguments presented at the conference echoed the environmental and social concerns brought forwards by CSR-advocates. There seems to be consensus among politicians and both environmental and business lobbyists that improved supply chain transparency and risk-management is beneficial for everyone. Gerd Billen, State Secretary in the Ministry of Justice and Consumer Protection, commented on the new CSR law that a stronger focus on the whole supply chain would benefit consumers, investors and businesses alike. Social and environmental risks along the chain are not just an ethical problem, but do also translate into business risk.
The most crucial turn of public attention in Germany was the catastrophe in the Rana Plaza textile factory in Bangladesh. Since then, significant political resources have been expended to alleviate the situation, if only in the eyes of the consumer. The German Textile Partnership, Minister Gerd Müller’s pet project, is considered a blueprint for multi-stakeholder-initiatives that aim to improve sustainability in GSCs. It brings together the largest participants in the German textile retail market, relevant associations and NGOs. The Ministry for Economic Cooperation and Development is currently exploring possibilities of a similar project in the Extractive Resources and Mining industry – highly relevant for technology companies that rely on rare earths and other precious metals from developing countries.
What unifies both international and domestic policy-making is a turn to multi-stakeholder approaches. The G20 has elevated this approach to a governing principle, saying that “communication and collaboration among all stakeholders will help promote the smooth implementation of [new policies] while balancing respective interests. G20 members are encouraged to strengthen communication and collaboration to help address challenges common to all members”.
A policy idea that is coupled with those processes is “Smart Regulation”: the concept that legislation would rely on good practices that are established from within the industry – a market-based form of policy production. This way, politicians and bureaucracy generate legitimacy for their legislative projects. For the public, it is a rather unsuspicious form of cooperation between the industry and politics (at least, less suspicious that lobbyism behind closed doors). From an industry-perspective, it provides opportunities to really get business-interests across and establish sustainability practices in the supply chain that are actually worth the effort. Most international policy guidelines are following this approach, encouraging voluntary company commitments and best practices being established from within the industry.
What is in it for companies and consultancy?
Wrapping this up, let us review what is relevant for political consultancy and can serve as opportunities to actually make an impact. First, we can note that bureaucracy and politicians are willing as never before to actually engage with companies. The “smart regulation” approach, which is gaining ground, is explicitly designed for co-regulation of the legislature with businesses. So it is of considerable benefit for companies to always be up-to-date on current policy preferences in the relevant ministries. It is advisable, as PWC points out, to consider both current and possible future regulations and voluntary standards, employing a proactive CSR strategy to mitigate negative business effects in the future.
Policy-making processes that are concerned with global processes, and supply chains, now incorporate extensive spaces for consultation, i.e. in the form of workshops, call for opinions. In some aspects, politics might even prefer not to pass legislation, but to encourage voluntary company commitments as a substation for hard regulation. Consultancies are best advised to closely monitor the development and current trends in domestic and transnational regulation of Supply Chains.
Considering all this, it’s obvious that business interests can best be heard and represented if companies cooperate and try to speak with one voice. Engaging in business associations and other for a will ultimately lead to better policy outcomes – for the state, businesses and the consumer.