There is increasing pressure for companies to be held more accountable for their supply chains. The issue of forced labor in Xinjiang, China, draft legislation in Europe, Covid-19, and climate change are all conspiring to bring this into even sharper focus, demonstrating just how critical resilience and reliability, in terms of environmental protection and human rights, are for business success. Arguably, the renewable energy industry needs to take this more seriously than most.
In its “World Energy Issues Monitor 2021: Humanizing Energy” report, the World Energy Council (WEC) stated that the past year has seen energy leaders’ perceptions of risk, opportunity, and priorities for action “radically” changing. Economic consequences of Covid-19 are the biggest area of uncertainty; however, fallout from the pandemic has also exposed pre-existing problems, including social justice issues, which are now climbing up the agenda.
“Despite the widespread attention to energy matters, energy literacy is littered with false promises of green energy technology ‘silver bullets’. Technology changes alone will not do the job, and wider implications of large-scale behavior change, new workforce capabilities and fiscal sustainability are inherent in managing the pace of transition,” wrote Angela Wilkinson, WEC secretary general. Resilience concerns must move beyond physical infrastructure to include people and supply chains, she said.
Another report, the “Renewable Energy & Human Rights Benchmark: Key Findings from the Wind & Solar Sectors,” published last June by international NGO Business & Human Rights Resource Centre (BHRRC), echoed this need for a fast, sustainable, and just energy transition. Ignoring this will impede progress and damage business reputations.
As the benchmark unearthed, of the 16 renewable energy companies investigated – chosen for their size: they represent over 130 GW of operating wind and solar capacity – “most lack the essential human rights policies to avoid abuse of the communities and workers on which a just transition depends.” Overall, the results indicated that “the industry has a long way to go to demonstrate its respect for the human rights of communities and workers in their operations and supply chains.”
In February, the global non-profit environmental disclosure platform, Carbon Disclosure Project (CDP) released a report, “Transparency to Transformation: A Chain Reaction,” which found, based on data submitted by more than 8,000 supplier companies, that businesses face up to $120 billion in costs from environmental risks in their supply chains within the next five years.
It added that, on average, supply-chain greenhouse gas emissions are 11.4 times as high as operational emissions; suppliers which undertook action cut emissions by 619 million tons and saved $33.7 billion. “The sectors that report the most potential cost increase are manufacturing ($64 billion), food, beverage & agriculture ($17 billion), and power generation ($11 billion),” it wrote.
Changing consumer and investor demands are also pushing for more supply chain transparency. Ignoring these risks reputation, business success, and ultimately, the environment. As David McClintock, marketing director at business sustainability ratings agency EcoVadis, told pv magazine, “the vulnerabilities inherent in the old status quo of supply chain optimization was exposed so starkly through the Covid crisis – and other environmental and social upheavals of 2020. Supply chains built only for efficiency/minimized inventories or relied on inequalities to extract lower costs all led to supply chain breakdowns. ESG has become an essential building block of a resilient, future-ready value chain.”
McClintock added that companies which do not take proactive steps to adopt sustainable practices within their businesses will get left behind and will ultimately face regulatory and financial consequences. “This is not an ad-hoc initiative or a small piece of operations, this is the new way of business,” he said.
So, what can renewable energy companies do to address these issues? pv magazine spoke to several different actors, including three solar companies with established sustainability principles, to create a guide for supply chain best-practice focusing on workers’ rights.
#1 – Join an association
For those at the very beginning of the journey, joining an industry association would be the best place to start, according to Suzanne Leta, head of policy and Strategy at U.S.-based SunPower, and part of the executive committee of the board of directors at the Solar Energy Industries Association. “The first piece of advice I would give companies is to join a trade association working on these issues because they’re doing this type of work and developing these protocols on their behalf. If they don’t get involved and help guide those processes, they won’t be educated on the benefits, nor will they utilize them effectively. It’s their job to be ensuring a sustainable industry moving forward, and they need the input of their members.”
#2 – Establish a code of conduct
“A supplier cannot be expected to do anything if they don’t know your expectations, so you’ve got to have a supplier code of conduct,” stated Sarah Albert, director of sustainability at U.S. tracker manufacturer Nextracker. She said the code must be embedded in business agreements and must be effectively communicated to suppliers.
This set of rules structures the systems and tools companies need to assess their supply chains. They can be designed internally, for example, by embedding established business sustainability goals into supply chain strategies, or with help from organizations like the non-profit Responsible Business Alliance (RBA), which offers a set of social, environmental and ethical industry standards, drawing on the Universal Declaration of Human Rights, ILO International Labor Standards, OECD Guidelines for Multinational Enterprises, and ISO and SA standards, among others.
Jessie Cato, natural resources and human rights program manager at BHRRC, added that it is essential to develop systems to identify and monitor supply chains for human rights risks and address impacts. “Many of these salient risks are shared with other high-risk sectors with large land footprints, such as the extractive and agribusiness industries. However, the renewable energy sector appears to be lagging behind some of those industries in adopting policies and practices to prevent, mitigate, and remediate potential human rights harms,” she said. For example, none of the 16 companies the BHRRC benchmark evaluated received credit for identifying and assessing human rights risks and impacts in their mineral supply chains in line with the OECD Guidance on Responsible Mineral Sourcing. “It’s not just about the energy transition, it’s also about good and stable jobs in those communities, it’s about energy access,” Cato said.
According to an insight article by McKinsey, “Starting at the source: Sustainability in supply chains,” companies must determine how natural and human resources are used at every step of the production process, whether in the supply chain or direct operations. “Once companies know where their supply-chain issues are, they can set goals for lessening the resulting impact. Ideally, they will base their goals on scientists’ recommendations for bringing various types of sustainability impact under thresholds that will maintain or improve human well-being,” they said.
For example, the Intergovernmental Panel on Climate Change has defined global targets for reducing greenhouse-gas emissions and can help suppliers design and implement sustainability programs that support their goals. “To reinforce efforts like these, companies should monitor suppliers’ sustainability performance,” they added.
For SunPower, component sustainability and material sourcing is critical, particularly as it ties to the end of the supply chain.
“You need to know what’s in the product to understand better what can be taken back, reused, and recycled, and how to do that cost-effectively,” said Leta. The company has included these take-back policies into its customer warranties. Customers are looking for this level of proactivity, and the warranty is a key part of how we align our commitments with our contracts,” she explained.
At First Solar, suppliers must abide by both corporate policies and internationally accepted laws. “My advice would be to take a comprehensive approach and that starts with having a robust labor and human rights policy, backed by contractual language in supplier agreements.
“But just having a policy or a supplier code of conduct is not enough. It’s important to map your suppliers and conduct an assessment to identify who your high-risk suppliers are using third-party indexes on global slavery, forced labor, and other ESG aspects,” said Chief Manufacturing Operations Officer, Mike Koralewski.
#3 – Supply-chain mapping
As the Harvard Business Review wrote in 2020, “companies tend to focus on their top-tier suppliers, but the real risks come lower down.” This issue is pertinent and becoming harder to ignore, particularly with the proposed EU legislation, which, if passed, will hold companies operating in Europe more accountable for their entire supply chain. Thus, it is essential to determine every single supplier involved in the production of products, regardless of how far removed they appear.
The United Nations Global Compact and Business for Social Responsibility (BSR) agree. In a report from 2010, “Supply Chain Sustainability A Practical Guide for Continuous Improvement,” they write that “many companies struggle with whether and how to include sub-tier suppliers in the scope of their supply chain program because of the lack of direct interaction and perceived lack of influence. However … sub-tier suppliers have the most significant challenges in addressing sustainability issues. We recommend that companies be aware of where sustainability challenges are likely to arise by mapping their entire supply chain.”
According to them, the key to supply-chain mapping is identifying primary product and service categories to map, and tracing materials and information, while going back to raw materials and original suppliers. It is also important to gather information on human rights, labor, environmental, and corruption issues at every step to understand potential risks and opportunities. Tying into the first step outlined above, they recommend connecting with peer companies, suppliers, industry bodies, civil society organizations, and activists, as well as government representatives to identify issues.
“With a complete understanding of your company’s supply chain, you can begin to segment your suppliers to determine how to commit resources to improve sustainability. Segmentation allows companies to focus on the most critical elements of the supply chain. Good segmentation is a balance between acknowledging that some risk will always exist, but that specific risks need to be addressed to avoid negative impacts to your business and to society,” they said.
Nextracker’s Albert pointed out how crucial it is to work with the suppliers to close gaps and identify areas for improvement. “The aim is on capacity building and bringing the supplier up to the next level – all built on trust and transparency, rather than finger-pointing and accusing in case of any audit findings,” she said.
According to First Solar’s Koralewski, ensuring companies have a strong understanding of their direct suppliers and identifying where supply chain risks lie is key. “Then you go to the next tier and the one after that. It’s a journey. It’s not something you can just achieve in a matter of months. This is a challenge every industry faces, and the solar industry can learn from best practices implemented by our peers in the electronics sectors,” she said.
Highlighting a risk that is becoming increasingly hard to ignore, Jessie Cato of BHRRC discussed issues of land rights and consent, which are gaining traction, particularly when it comes to renewable energy companies and mining raw materials. “Quite often, renewable energy projects are located in indigenous communities that have already been on the front lines of extractive projects and were already facing changes from climate. Those communities are feeling frustration from having dealt with mining companies, and the way that they have traditionally operated is not a model that many communities are open to having anymore.”
#4 – Due diligence
According to Jessie Cato from BHRRC, due diligence is the biggest issue to confront in supply chain best practices alongside supply chain mapping. In its benchmark, BHRRC found that of the renewable energy companies reviewed, there was a “real lack of due diligence, specifically around land rights and land acquisition.” On a more positive note, they did score “really well” in anti-corruption due diligence and health and safety disclosures, although these mostly did not cascade down their supply chains or investments.
Nextracker’s Albert explained that companies can use various tools to gain supply chain transparency, from onsite to desktop audits, and software apps to obtain workers’ input.
“The market on transparency software solutions is exploding – companies can choose from many options,” she said. In the future, Nextracker will apply various forms based on the country and its accessibility, as well as with the aim to be up to date with market technologies and solutions offered.
Overall, digitalization is making it easier for companies to verify submitted supplier information, with solutions like blockchain and radio-frequency identification tags helping to overcome issues like fraud or raw material tracing.
EcoVadis’ David McClintock agrees. “Technology is a critical piece of the solution – from assessment, rating, monitoring … the use of AI to enhance scale and quality of alerting, as well as integration with external data sources,” he said.
However, as Albert pointed out, many solutions rely on data uploaded from suppliers, so Nextracker likes to have teams on the ground to work with suppliers for risk assessment and onsite audits. This approach is also adopted by First Solar. “The best verification is onsite auditing of your suppliers’ factories and seeing it for yourself,” said Koralewski.
#5 – Educate, educate, educate
Educating employees and external suppliers is often overlooked in supply chain management. “One of the most common issues is educating the right people internally, and the industry at large needs to do a better job of that because these sorts of standards and policies are often made at a high level, but the implementers work in departments like auditing, or legal, or customs, for example,” said SunPower’s Leta.
“We have taken a very proactive approach so that everyone is aware of the standards and we can continuously improve our processes to meet them. We have found consistently over time that when we take a leadership position, our customers notice,” she added. BHRRC’s Cato agreed, noting the crucial need to advocate internal and external change.
At Nextracker, Albert highlighted the importance of working with suppliers to educate them on expectations. “For me, the most important consideration is the connection to the supplier to let them understand that their sustainability is part of the procurement program, not something in addition. It’s on the same line as pricing and quality and other procurement requirements.”
“The overall idea is that you are responsible for your supply chain and the suppliers are responsible for their supply chains,” she continued. “When we train suppliers, we also expect that they pass the information to their suppliers and so on. That’s the only way you can make sure it reaches all the different tiers.”
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