Mandating Sustainable Governance of the Supply Chain – Complementing Old Carrots with New Sticks?

Joseph Sarkis
Jun, 2024
#Environment and climate change
#EU / Western Europe
#Sustainability standards
#Corporate responsibility and lead firms
#North America
In the wake of the COVID-19 crisis, supply chain challenges have received renewed attention and have become a major concern from both resilience (Golan et al., 2020) and sustainability (Sarkis, 2021) perspectives. For example – based on its Green Deal – the European Union (EU) is considering the circular economy as a tool for Post-COVID recovery, which in turn requires closed-loop supply chains to be effective. In the United States (US), the Biden Administration has issued an executive order on America’s supply chains, which is meant to instruct a 100-day evaluation of supply chains and resilience in sensitive industries. Additionally, and importantly, organizations are facing emergent regulations with ‘teeth’ and penalties for poor due diligence in their supply chains; a shift away from self-regulatory approaches and norms. What does this mean for sustainable chain governance?

Firms in supply chains increasingly face pressure from consumers and civil society organized in non-governmental organizations (NGOs) to become more socially and environmentally sustainable. For firms, this implies market and reputational risks that may damage their long-term profitability. The response to these pressures was typically of the neo-liberal (Larner, 2000) mode through industry self-regulation and voluntary and market-based standards (Czarnezki and Fiedler, 2016).

Voluntary governance mechanisms for sustainable supply chains, including certifications and standards, are mushrooming around the world. They have developed to cover a wide range of issues, and they are often overlapping and sometimes at odds with each other (Reinecke et al., 2012). Typically, they entail only minimal penalties for negative environmental and social practices. Moreover, they can generate inconsistent – or poor – results (Filip, 2020), for example by creating new challenges for small producers in the agriculture sector, making smallholders potentially less competitive. As a result, problems in social and environmental sustainability of supply chains remain. Firms tend to search for the least expensive sources and locations and trade-off economic exigencies with environmental or social performance. It is this context where more ‘teeth’ are needed.

In fact, recent and not-so-recent legislation and regulation has started to introduce new institutional approaches for governing supply chains based on binding regulations. For instance, the EU has passed regulations and laws on product stewardship and hazardous material content for certain materials and products. For example, the Waste Electrical and Electronic Equipment (WEEE) regulation (2012) has caused greater proper collection of electronic waste from the supply chain at the end-of-life of products. The Global E-Waste statistics show that overall European electronic collection and recycling rates are at 42.5% (Forti et al., 2020). In contrast, in the US, in the absence of federal WEEE regulations, only 9.4% is collect and recycled.

With Section 1502 of the Dodd-Frank Act (2012), the US has tried its hands on managing the supply chain with information-based regulations requiring companies to report – without penalty as long as they report – on conflict minerals (Kim and Davis, 2016; Schwartz, 2016). While this has led to improved reporting, the lack of transparency and accuracy remains – with some rollbacks in the legislation occurring in the US (Woody, 2019). At the same time, this kind of approach has diffused to the EU and other regions. These regulations can support sustainability in supply chains through information-based mechanisms, but actual changes in sourcing is still up to the reporting organization.

More recently, we can also witness a trend towards due diligence laws in supply chains. For instance, the new German Lieferkettensgesetz Sorgfaltspflichtengesetz was passed on March 3, 2021 by the Federal Cabinet and is expected to come into effect in 2023. The regulation empowers national agencies to assess whether an organization is meeting its obligations. Punitive fines or denial of public contracts can be administered to those found guilty of bad supply chain practices. NGOs and trade unions would also be allowed to initiate legal action in civil courts on behalf of victims.

Still, some believe the new legal initiative does not go far enough (Human Rights Watch, 2021). A major criticism is the neglect of environmental standards in this law (Wehrmann, 2021). That is, the current law considers only human rights violations, but not necessarily other potential violations although human rights violations may encompass environmental and corruption activities. At the same time, this German due diligence law is one of the most coercive regulations in existence. It may trigger similar actions elsewhere, as several other European countries as well as the European Commission are now discussing similar approaches.

Yet, regulations that aim to make supply chains more sustainable face issues of coverage and feasibility. Many barriers and boundaries (Sarkis, 2012; see Figure 1) are associated with managing sustainable supply chains. Figure 1 shows flows that are constrained and managed by various boundaries. There are nine boundaries listed and each can be very strict and well defined or porous and ill-defined depending on the context. For example, organizational boundaries can be very clearly delineated, while cultural boundaries may cover multiple regions even crossing or have multiple cultural boundaries within political and geographical locations.

Each boundary dimension will play a role in the diffusion of standards and regulations such as balancing cultural norms, temporal concerns and varying legal and political frameworks. There might be, for example, some disagreements on what is and what not a violation is. There might also be concerns about knowing, seeing and timing. Since it is not possible to address all these in one short series of observations, we point out a couple directions to start the discussion.
Arguably, the neo-liberal approach, especially in terms of traditional cost-benefit and market policies (Filip 2020), is limited when it comes to fully addressing the multitude of issues facing multi-tier supply chain standards management. We have been investigating sustainability standards diffusion along supply chains for a number of years (Grimm et al., 2014; 2016; 2018) and found coordination and information sharing amongst the supply chain partners and other stakeholders such as customers and regulators to be critical. To achieve this, effective supply chain mapping and visibility (or transparency) are necessary but are typically severely constrained (Mubarak et al., 2021).

One possible solution for regulators, certifiers, and supply chain partners is refinement and further development of inter-organizational technology, especially multi-tier and network systems-technologies such as distribute ledger or blockchain technology. By no means is this the ultimate solution, but it can aid with visibility and mapping to help monitor and improve supply chain performance. Clearer measures, metrics, and consistency in definitions for sustainability and business dimensions – as supply chain partners may not have the same conceptions – will be required.

Overall, we can expect that the newly introduced coercive measures and government involvement will be a game changer in the supply chain domain. It is likely that when responsibility for ethical and sustainable practices goes beyond the organizational walls and when institutional fields shift, new tools and perspectives are needed. New sticks are replacing or complementing old carrots in multi-tier supply chain sustainability governance. I am not recommending that we should fully dispose of voluntary standards and industry self-regulation. But the great reliance on these neo-liberal mechanisms for making sure the supply chain is acting in a sustainable and ethical way has had its limitations. Balancing and mixing these actions with regulatory mechanisms that are coercive is needed and is occurring. Companies and their supply chains need to prepare.

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