It was, I suppose, inevitable that the great ESG tumult of corporate moral righteousness would finally result in the triumph of the bureaucrats. To be clear, I support some of the objectives of the ESG lobby, especially around a) radical climate change action and b) improving the social bit of the acronym by encouraging better workforce relations. But it’s also clear that the politically correct corporate lobby would soon move into overdrive, especially when it comes to supply chain issues. What started in the world of fashion will soon spread to virtually every corporate arena. The social justice warriors, in particular, are getting very cute to the idea that they can score some easy PR wins by embarrassing major (and minor) corporates about who supplies them with important inputs and products. I’m probably being over cynical here because when attention focuses say on Uighur forced labour I also tend to take notice but we must also be alive to what I call reasonable ontological ignorance and uncertainty. That sounds a snobby term but it simply speaks to what a business can reasonably know about a very diverse supply chain, largely because in many cases a business will rely on the knowledge imparted to it by its suppliers with whom its built up decades of good working relationships. Until recently that was probably as good as it would get.

I also have the slightly old-fashioned view that businesses job is not to endlessly vet every single practice at every single supplier – its task is to make a profit, reward shareholders and make sure it provides great service to its customers and , crucially in my book, properly looks after its workforce. I’d also much rather said businesses worried about their relationships with local communities than spend inordinate amounts of time digging around every nook and cranny of its supply chain. But clearly the times they are a changing and that view is now outdated, probably because many end consumers increasingly care about this stuff. And, lets be honest, because the regulations are changing radically. My suspicion is that it will be just a matter of a few years before a whole smorgasbord of regs and laws come in that will require very detailed due diligence of said supply chain to tick various ESG boxes. And that will bring in its wake a bonanza for the bureaucrats and form fillers. Big corporates in particular will have to abide by this new world order, and it will be time-consuming, painful and expensive. And I suspect that boards will be on the front foot at insisting on greater disclosure.

Looking on the bright side, it will also bring in its wake a landgrab for supply chain consultants. Hurrah. Just as ESG is leading to a rush for index firms, consultants and carbon marketplace providers so will supply chain demands. That at least is the subject of an excellent note out this week from equity analysts at Morgan Stanley. The key insight for me is the following section of the report:

“Pressure has been building for an EU framework for supply chain due diligence and this is expected to form part of a proposal by the EU Commission for a
Sustainable Corporate Governance legislation in Q2. A key element of this legislation would be to establish a cross-sectoral duty on businesses to carry out
due diligence on human rights and environmental impacts in their operations and supply chains, among other measures. EU Parliament is supportive of this
measure, having put forward its own proposal that would require all firms that want access to the EU internal market to comply with environmental and human rights due diligence obligations. However, due diligence currently is not standard practice, with only 1 in 3 companies in the EU currently performing due diligence measures (EU Commission study, Feb 2020) “.

This all seems to be of a pattern where the EU becomes the global regulation leading force, dragging the rest of the planet towards a fairer, more sustainable world where, obviously coincidentally, most of the specialist service provision is provided by EU firms, EU consultants, EU research institutes and EU paper chasers. Hurrah. On the bright side I suppose this push will produce some real progress, especially when it comes to the messy supply chains that involve horrifying labour practises, exploitation, terrible working conditions and outrageous environmental degradation. But I worry about whether this supply chain analysis can ever really reveal the full tentacles of global supply chains. What happens if countries don’t let the inspectors in ? what happens if countries find themselves unfairly tainted with the exploitation brush ? As I said this ontological uncertainty is very real. And one might also observe that in our rush to industrialise and modernise, we in the West engaged in some fairly egregious practises which we can now conveniently forget about whilst we then lecture developing countries on their obligations. My point here is not to rubbish supply chain provenance – it will serve a valuable purpose – but to ask whether it can really achieve its stated objectives fairly and diligently.

Anyway, away from my worries the Morgan Stanley report pinpoints the likely beneficiaries of this new world ethical order, in particular focusing on three businesses: Bureau Veritas, Intertek & SGS

On Intertek, the report looks at its Assurance business which “has been growing faster and with higher margins than peers. While still relatively small as a portion of the overall group (c10-15% of sales), investments in platform SAAS supply chain assurance and brand risk mitigation services such as InLight and OnTrack are beginning to have disproportionate impacts on the group’s operational gearing and EBITA margin potential”. As for Bureau Veritas, it already “has the largest certification business of any of the TIC companies at >10% of group EBITA. Furthermore, this is inflated by routine inspection work it provides which is not sold as bundled ‘end-to-end supply chain assurance’ in the way that Intertek packages its solutions. The company was also brought in to help Boohoo in the wake of media pressure surrounding its supply chains in Leicester”. Both businesses have long benefitted from the revolution in product testing, and supply chain provenance should open up a whole new world of (high margin) opportunity.