In 2021, U.S. consumers spent $21. 8 billion on Valentine’s Day gifts for partners, friends, and even pets. Even with supply chain disruptions from COVID-19 easing, for boards of companies that process, manufacture, package and/or distribute the sweet treats and bouquets that accompany the holiday understanding the Environmental, Social, and Governance (ESG) topics in their supply chain may help avoid future heartache.
According to the KPMG 2021 CEO Outlook, 80 percent of U.S. CEOs said protecting their partner ecosystem and supply chain is just as important as building their own organization's cyber defenses. For boards and audit committees, which provide essential oversight of an organization’s activities and reporting, that includes monitoring their organization’s progress on ESG engagement and managing risks and opportunities to drive the creation of long-term value.
ESG is at the heart of many board agendas. Investors and other stakeholders are increasingly interested in companies’ environmental impact throughout their supply chain. Notably, the SEC is expected to release a landmark climate rule in 2022, with some activists calling for the regulator to require climate disclosures related to suppliers.
ESG engagement focuses on developing a sustainable and ethical supply chain, which builds operational resilience. Extreme weather events, for example, pose significant risks to a supply chain, including flood, fire, and wind. An ESG lens on supply chains can help companies better navigate these disruptions. Likewise, lax oversight of labor rights and raw material usage may result in enforcement actions that generate operational and reputation challenges. Consumer goods companies kept the Grinch out of holiday supply chains last year, but consumers spend 28% of their holiday dollar volume at Valentine’s Day - second only to Christmas/Chanukah - so ongoing vigilance is needed.
Regulators are expected to continue their intense focus on ESG performance in 2022. It is critical for boards to embed ESG, including climate risk, into their strategy and for audit committees to stay abreast of legal and regulatory developments especially the SEC’s rulemaking activities related to climate risk, and clarify their oversight responsibilities. As Valentine’s Day approaches, boards and audit committees should consider some key issues:
Roses are red, empty vases make consumers blue…
Shoppers rushing to pick up a bouquet before a Valentine’s Day dinner may spend just a few minutes at the florist, but they benefit from the industry’s spending a full year of logistical planning in anticipation. During the pandemic, that sourcing time has stretched due to lockdowns in China, backlogs at ports, a shortage of truck drivers in the U.S., and a variety of other issues.
Boards of companies responsible for the more than 800 million cut flowers that enter the U.S. via air in the weeks leading up to Valentine’s Day should consider environmental and labor risks in their supply chain, especially among the air freight and logistics companies used to transport their delicate cargo. Audit committees responsible for oversight of reporting should assess vendor compliance with sustainability reporting topics and associated metrics, including their gross global scope 1 emissions, air emissions and total greenhouse gas footprint across transport modes.
… Candy is sweet, but a commitment to sustainability disclosures strategy is even sweeter!
Candy sales increased year-over-year in late 2021, with winter holiday candy sales increasing 20% from 2020. But the pandemic has been bittersweet for candy manufacturers, whose complex ingredient sourcing and shipping supply chains continue to be challenged by extreme weather events, high commodity prices, labor shortages, and freight and logistics issues. For the companies that produce Valentine’s Day chocolates, environmental issues like deforestation have been prioritized for more than a decade. More and more, extreme weather events and are also top of mind. For instance, Louisiana, a major producer of sugarcane, saw a portion of this year’s crop destroyed by Hurricane Ida in summer 2021.
For audit committees at many of the largest processed foods companies, SASB metrics around the environmental and social impacts of the ingredient supply chain can be used as a guide for operations and reporting. Among the accounting metrics identified are: the percentage of food ingredients sourced that are certified to third-party environmental and/or social standards, the rate of nonconformance for suppliers’ social and environmental sustainability audits, and percentage of ingredients sourced from regions with High or Extremely High Baseline Water Stress.
ESG engagement has the potential to truly strengthen supply chains to deliver operational agility while building trust with stakeholders. Boards and audit committees can keep Valentine’s Day sustainably sweet for consumer goods businesses, consumers, and investors by making sure companies prove they are enacting measurable change.