audit-supply-chain-sustainability

Audit Supply Chain Sustainability

Conduct a structured sustainability audit of suppliers using ESG criteria covering environmental practices, labor standards, and governance — to identify material risks, qualify suppliers, and establish improvement requirements aligned to ISO 14001 and SA8000 standards.

Why This Is Best Practice

Adopted by: CDP's Supply Chain Program engaged 28,000+ suppliers in 2023, representing $6.4 trillion in procurement spend. ISO 14001 (environmental management) and SA8000 (social accountability) are the primary standards referenced in supplier codes of conduct by Apple, Nike, IKEA, Walmart, and most Fortune 500 companies. The EU Corporate Sustainability Reporting Directive (CSRD, 2023) requires Scope 3 supply chain emissions disclosure for 50,000+ companies. Impact: Typical companies' supply chains represent 70–80% of their total environmental impact (Scope 3 emissions). Supplier audits identify ESG risks before they become regulatory violations, reputational incidents, or supply disruptions. McKinsey found that companies with robust supply chain sustainability programs have 67% fewer supply chain disruptions and 20% lower procurement costs over 5 years.

Steps

1. Define audit scope and ESG risk criteria

Prioritize suppliers by risk level:

• Tier 1 (direct suppliers): highest visibility and control; audit annually
• Tier 2 (Tier 1's suppliers): increasing importance under CSRD; audit or require self-declaration
• High-risk sectors: mining, agriculture, textiles, electronics manufacturing — higher labor and environmental risk
• Geographic risk: suppliers in countries with weak environmental regulations or labor protections require more intensive audit

Define the minimum ESG requirements that suppliers must meet to remain qualified.

2. Conduct environmental performance assessment

Energy and emissions (aligned with CDP/GHG Protocol):

• Does the supplier measure their greenhouse gas emissions (Scope 1 and 2 at minimum)?
• What is the trajectory? Are they reducing emissions or increasing?
• Do they use renewable energy? What percentage?
• Do they have a science-based emissions reduction target (SBTi)?

Water:

• Is the facility located in a water-stressed region (WRI Aqueduct tool)?
• Does the supplier measure water consumption and discharge quality?
• Are there water treatment systems for discharge?

Waste:

• What is the supplier's landfill diversion rate?
• Are hazardous materials handled per local regulations?
• Is there an ISO 14001 certification or equivalent EMS in place?

Verify with evidence: energy bills, emissions reports, ISO certifications, regulatory compliance records — do not accept self-declaration alone.

3. Assess labor and social standards

Labor rights (SA8000 / UN Global Compact):

• No child labor (ILO Convention C138/C182): confirm minimum age documentation
• No forced labor: workers free to leave; no debt bondage; no passport confiscation
• Working hours: no more than 48 hours/week regular + 12 hours overtime; at least 1 rest day per 7
• Wages: at or above legal minimum wage; no illegal deductions
• Freedom of association: workers' right to organize not restricted

Health and safety:

• Is there a documented H&S management system?
• What is the injury/fatality rate?
• Are PPE and emergency procedures in place and enforced?

Audit method: on-site inspection + worker interviews (conducted privately, not in front of management). SEDEX SMETA (Sedex Members Ethical Trade Audit) is the recognized standard for multi-stakeholder labor audits.

4. Review governance and compliance record

• Is the supplier compliant with all local environmental and labor regulations?
• Are there any pending investigations, violations, or fines in the last 3 years?
• Does the supplier have an anti-corruption policy and training program?
• Is there a grievance mechanism for workers and communities?
• Does the supplier have a published sustainability policy with executive accountability?

Run a third-party screening against: regulatory databases (EPA, labor department), investigative media, NGO reports (Business & Human Rights Resource Centre).

5. Score, classify, and set improvement requirements

Three-tier classification:

• Qualified: meets all minimum requirements; in good standing
• Conditional: has minor non-conformances; must remediate within 90–180 days; reaudit required
• Disqualified: critical non-conformance (child labor, serious environmental violation, forced labor); suspend procurement immediately

For conditional suppliers: issue a Corrective Action Request (CAR) with:

• Specific non-conformance
• Required corrective action
• Deadline
• Evidence required for close-out

Maintain a supplier sustainability scorecard updated annually.

6. Build supplier development programs

Beyond audit: sustainable supply chains require capability building:

• Share technical resources, training, and tools with key suppliers
• Co-invest in improvement projects (energy efficiency, water treatment, safety systems) — return on investment often justifies the cost
• Join industry coalitions (Responsible Business Alliance for electronics; Better Cotton Initiative for textiles) that provide shared auditing infrastructure

Common Mistakes

• Self-assessment only: Self-reported data is unreliable for high-risk suppliers. Third-party or on-site audits with worker interviews are required for credibility.
• Auditing only Tier 1 and ignoring Tier 2: Most labor and environmental violations occur in Tier 2 and below. The EU CSRD requires Tier 2 assessment; proactive engagement is better than regulatory compulsion.
• Treating audit as a checkbox: Audit findings without corrective action plans and follow-up reaudit have no effect on supplier performance. The audit is the beginning of a process, not the end.

When NOT to Use

• Consumer-facing sustainability claims: supply chain audits verify compliance, but third-party certification (Fairtrade, Rainforest Alliance, B Corp) is required before making public sustainability claims about products.