Adopting transparency principles can win over consumers and investors

Adopting transparency principles can win over consumers and investors

From winning over consumers to gaining more investor approval, when companies adopt basic supply chain transparency principles they benefit from a set of mutually reinforcing outcomes.

There is emerging consensus in the business community that human rights and sustainability problems are widespread in global supply chains; that businesses have a duty and a vested interest in engaging responsibly with those supply chains; and that there are robust mechanisms to implement responsible policies, including transparency.

Indeed, transparency can be a "vital tool" to help incentivise managers, buyers, and employees to improve their reputation, operational efficiency, and compliance, says a new paper from the International Corporate Roundtable (ICAR). Additionally, investors are increasingly prioritising sustainability, making businesses that promote a culture of responsibility more likely to attract new shareholders.

ICAR has outlined four ways in which basic supply chain transparency principles can be good for business.

Reputational improvement

A company's reputation has tremendous impact on a range of elements that contribute to its bottom line, and many brands devote considerable time and financial resources to ensuring positive brand perception. Tools like the Transparency Pledge (a minimum standard developed in 2016 by a coalition of labour and human rights organisations) can have a positive impact on a company's reputation with regard to at least five stakeholder groups

  • Investors: Investors are increasingly interested in a company's human rights and sustainability policies and practices because of their potential effect mitigating reputational risks and as a sign of the overall integrity of the business' systems and operations. Many investors thus value transparency and see disclosure as a key component of a company's human rights and sustainability policies and practices. Transparency helps to enhance investor trust.
  • Consumers: The general public has an aversion to rights violations, poor working conditions, or other scandals in the supply chains of the brands whose goods they buy. This can result in the risk of lower sales and lower revenue. This dynamic stands as the primary deterrent force of transparency, and one of the most feared by business leaders. The very act of disclosing suppliers can have a strong mitigating effect on public perception when violations are found. In addition, transparency can actually help shield companies by preventing them from being erroneously blamed by consumers for violations and problematic practices among suppliers they no longer, or have never worked with.
  • Employees at retail level: One of the driving factors at the retail end of operations for most apparel companies is the cost of labour. Increased employee motivation and loyalty to the company results in higher productivity and lower turnover and training costs, which can add up to significant cost savings. Adopting general transparency policies leads to improved employee satisfaction. Employees want to work for a company that does good. Conversely, retail employees may experience lower job satisfaction and pride of ownership in the brand they represent to consumers on a daily basis if human rights violations are found in the supply chains of the products they sell. 
  • Civil society and advocates: These are important players in the supply chain transparency environment. These groups often work with companies behind closed doors, helping to identify abuses and working with companies to address them before they become a public relations challenge. Transparency is one way in which companies can proactively demonstrate to civil society actors that they are serious about human rights and sustainability practices.
  • Regulators and government officials: While a poor reputation does not necessarily translate into compliance challenges, it can lead investigators and regulators to apply additional scrutiny to supply chains associated with the company. A company's reputation will impact how government officials engage, highlight, or publicly call out violations and concerns. It also affects the degree to which the company's representatives will be invited to speak at, or participate in, various convenings and policy fora where important discussions unfold. Where they participate or speak, the company's reputation will also set the stage for how the representative's remarks are received by the participants, and the level of credibility that will be afforded to them. Being sidelined at such meetings can lead to real impacts and loss of access to influence policymaking that can shape future market access and business operating environments.

Operational efficiency

Transparency increases the efficiency and the integrity of a business supply chain, particularly if coupled with complementary sustainable sourcing and supplier relations' practices. The more a company discloses, the greater this effect. The impacts on labour standards include:

  • Improving grievance mechanisms: Many companies have implemented grievance mechanisms to tap into the on-the-ground knowledge that workers have, in order to find and fix labour violations in a timely fashion. Implementing robust grievance mechanisms to empower workers to effectively raise concerns is considered a best practice in risk management and due diligence around compliance with forced labour standards, among other issues.
  • Efficiency of sourcing relationships: Sourcing relationships can be enhanced by transparency in at least three ways. First, when coupled with positive buyer-supplier practices, transparency can encourage suppliers to comply with human rights and sustainability practices that companies may demand in codes of conduct. This is because, by being listed publicly, their reputation is at stake, so in order to retain contracts with major brands, they will seek to minimise any negative reputational impacts. Sourcing efficiency is also enhanced by preventing a critical failure point in many supply chain control regimes - namely unauthorised subcontracting of work to external operations. In addition, transparency has the potential to enhance collaboration with other businesses within an industry. Collaboration allows for the more efficient use of resources when targeting challenges in sourcing. 
  • Incentivise and reinforce systemic change towards better business practices for human rights and sustainability: When companies decide to implement business practices that promote human rights and sustainability, transparency can be a vital tool to reinforce, reify, and galvanise cultural transformations. Additional visibility empowers and incentivises managers, buyers, and other decision-makers embedded in the company's operational systems to deliver on the company's broader human rights and sustainability policies.

Improved compliance

The kind of increased efficiencies and integrity of business operations described in the preceding section can result in better human rights and sustainability outcomes. These outcomes by definition also mean lower risk of labour violations, stronger due diligence, and stronger compliance (and hence, market access) with current regulatory regimes and those on the horizon. All of these elements are interconnected, feeding back into the analysis of reputational factors.

Increased access to capital

In 2018, 26% or $12 trillion of assets under management in the US were invested in socially responsible investments (SRIs).This represents a 38% increase since 2016, illustrating growing investor interest in prioritising sustainability. This significant growth in recent years shows an emerging trend towards responsible businesses. Adopting transparency standards sends a signal to investors and potential new shareholders that a company is prioritising sustainability.