How important is ethical sourcing?

In a world increasingly concerned with ethical practices, especially in global business, just how important is making sure you’re focused on ethical practices in your sourcing process?

Business ethics has become increasingly prevalent, particularly since the 1980s, to the point that most major global corporations in the modern day promote their commitment to ethical codes, social responsibility, and ESG principles.

A business’s reason for doing this can vary significantly but may include keeping up with changing consumer expectations, protecting their reputation, or pure altruism.

The potential consequences of climate change are of major concern and there is increasing pressure on businesses around the world to act in a responsible, ethical, and sustainable manner in order to protect the planet from climate disaster.

That pressure manifests in internal and external incentives to improve the environmental-friendliness of regular business operations. And ethical sourcing is a particularly powerful potential solution.

Also known as responsible sourcing or sustainable sourcing, the practice of choosing suppliers known for their environmental and social impact or sustainability can lead to benefits including increased compliance with laws and codes, improved reputation, and protection from a range of operational risks.

What is ethical sourcing?

Ethical sourcing is a sustainable and responsible approach to supply chain management that involves a focus on ethically sourcing products and raw materials by buying from businesses that comply with ESG-compliant practices and legal requirements.

A company may be considered unethical for a wide variety of reasons. A few of the more prominent examples include:

• The exploitation of workers (such as underpaying employees, providing poor working conditions, or using forced labor or child labor)
• Significant environmental impact (such as releasing high emissions, failing to reduce carbon footprint, committing animal abuse or contributing towards deforestation)
• Deceiving customers (such as lying about product quality, intentional mismanagement of accounts, or hidden terms & conditions)
• Unfair competition (such as spreading false information, engaging in bribery, or misusing trade secrets)

In short, ethical sourcing revolves around a company doing its due diligence to ensure a potential supplier or vendor does not engage in unethical behaviors, like the ones mentioned above.

Typically implemented as a set of standardized sourcing policies, ethical sourcing makes up a part of the operating standards of a business. It’s an applicable concept to all businesses who engage with a supply chain, no matter what country they’re based in.

Why is ethical sourcing important

The growing importance of ethical sourcing can, essentially, be traced back to the general trend towards businesses holding more responsibility for the impacts of their operating practices.

Consumers, investors, and even employees are increasingly concerned with the ethical standards that companies uphold. So failing to meet their minimum expected standards can direct affect the health of your business.

And while sourcing is only one part of operations, it can be a significant contributor to a business’s overall impact on the world. Accordingly, a business without an ethical approach to sourcing can be seen as unfavourable, even if they engage in ethical practices elsewhere.

The benefits of ethical sourcing

Beyond the moral aspect, there are a broad range of reasons why ethical sourcing should be a priority for businesses. These manifest in the form of tangible benefits of ethical sourcing, including:

Protected reputation

If a company is seen as being ethically conscious, it is more likely to attract investment as ethically motivated investors grow in number. Ensuring the moral credentials of your business can mean an advantage in overtaking competitors on a reputational basis.

Maintained sales

Consumers are increasingly aware of the conduct and social impact of businesses and are likely to move elsewhere if they feel a company has acted in an unethical manner. According to a recent survey, 90% of Americans would be prompted to boycott a brand for irresponsible corporate social responsibility (CSR). So, even if adopting ethical sourcing increases operating costs, it can still prove to be a net positive move for the bottom line.

Improved employee morale

Another reason to make use of sustainable sourcing may be to attract, retain, and boost the morale of one’s own employees, who increasingly care about working for ethical businesses, a reflection of the growing importance of sustainable practices in our society.

Legal adherence

Protection of the world’s resources is coming under further regulation and a business that makes use of renewables, for example, may do so either to remain compliant or to remain ahead of the curve in the event that further legislation is on the way.

Protection against risk

Making use of sustainable procurement also protects against operational risk. This follows from the idea that unethical suppliers inherently carry more risk than ethical ones. Choosing a supplier that acts irresponsibly with regards to the environment may risk supply chain disruption in the future if the supplier is forced to alter its business practices or is shut down entirely.

Better supplier communication

Some companies find that the very process of sourcing sustainable suppliers results in improved communication with them, which helps to build trust and improve supply chain efficiency.

How to implement ethical sourcing policies

Implementing a sustainable sourcing program can be quite a complicated endeavor. If your company is new to sustainable sourcing, it is best to begin with a strategy which allows for a strong baseline but also can become more developed over the long-term, as you continue to learn about your supply chain.

The two key stages of this strategy are refining the selection process and maintaining an ongoing auditing process.

The selection process

The first step when choosing more ethical suppliers is to outline the criteria that these suppliers will be measured against. This may initially be based upon your business’s own existing sustainability policies, or if these are not available, a good base can be the United Nations Guiding Principles for Business and Human Rights.

The criteria for your selection process may include:

• Environmental footprint
• Working conditions
• Human rights violations
• Ethical quality of the supplier’s supply chain

Then consider creating benchmarks for ethical practices in suppliers. These are minimum compliance rates that qualify potential suppliers as a good fit for your supply chain.

Communicate these standards internally and make sure these criteria are embedded in the process for sourcing, allowing for the comparison of potential suppliers based on their ethical practices.

An ongoing auditing process

The actions of potential suppliers are not static and may become more or less ethical over time. Continually auditing the suppliers you have and ensuring that they don’t fall below your ethical benchmarks is important to continue making forward progress with your overall sustainable sourcing project.

Though inherently worthwhile, the sourcing and management of ethically sound and sustainable suppliers is a tricky process to perfect. But, supplier management software can help ease your company’s shift towards more ethical sourcing practices.

Similarly, supply chain financing solutions like Taulia’s Sustainable Supplier Finance can make it easier to incentivize suppliers to adopt more ethical or sustainable practices by offering financial incentives.

To find out more about Taulia’s Sustainable Supplier Finance solutions, contact our Sales team.