Posted by Anya Marcelis

Five priority social risks for ESG due diligence and reporting

Regulatory pressures and stakeholder expectations are increasing the focus on social risks in supply chains as part of overall (environment, social and governance) ESG risk management and reporting requirements.

Whether you already have an established risk assessment process or are just starting out, understanding and prioritising social risks can be a daunting task. We’ve set out five of the most significant risks based on their likely relevance across many supply chains (to varying degrees) and the potential severity of impacts on people if they occur.

There are clear business benefits of addressing social risks in your supply chain

  • Drive positive impacts for workers and communities
  • Build resilience in your supply chain by supporting a healthy, stable workforce
  • Meet legislation on modern slavery, health and safety, and human rights due diligence
  • Improve your reputation with investors, consumers and other stakeholders through demonstrating a commitment to socially responsible business practices and effective risk management.
Forced Labour

‘Forced labour’ has been in the spotlight in recent years due to the intense focus on modern slavery. However, forced labour is generally hidden due to its illegality (and is therefore hard to identify in audits), so identifying it relies on using indicators of extreme vulnerability. Key sectors at risk include agriculture, construction, service providers, and some forms of manufacturing.

To identify risks of forced labour, it may therefore be helpful to look at the presence in your supply chains of factors that drive forced labour, including:

  • The nature of the employment relationship (e.g., informal/formal or temporary),
  • The form of recruitment (given significant risk of exploitation by intermediary labour recruiters),
  • The social and economic status of workers (e.g., migrants and women being at higher risk)
  • Worker isolation
  • Dependence on employer for travel or accommodation
  • Fragile governance in the country of recruitment and / or of employment.
Child Labour

‘Child labour’ is more visible than forced labour and probably more pervasive. It is defined as children (primarily under the age of 14) being employed under harmful circumstances to their physical and mental development. Despite global efforts to eradicate child labour, over 160 million children were estimated to be in child labour at the beginning of 2020 (ILO, n.d.) and this is increasing, largely due to economic disruption. In supply chains, child labour is most common in upstream production, such as agriculture (especially smallholder production of cash crops), outsourced production, or homeworking, mining (especially artisanal mining), and informal activities such as waste picking.

To identify risks of child labour, it is helpful to look at the following indicators for the countries your suppliers operate in:

  • Level of poverty
  • Formalisation / development of public (free) education system
  • Access to primary (and secondary) education, especially in rural areas

‘Discrimination’ in this context is the risk that individuals from a specific group (e.g. women, ethnic or religious minorities, people with disabilities, younger or older workers, people who identify as lesbian, gay, bisexual or transgender) receive negative treatment from co-workers or managers – or in more severe cases, may experience harassment or violence.

Although there is often a significant focus on gender-specific risks, it is important to identify discrimination risks for all potential vulnerable groups as these often intersect with other social and economic vulnerabilities. Gender-based discrimination is pervasive in all sectors and geographies, while other forms of discrimination usually depend on the presence of minority groups, prevailing cultural norms or inadequate management practices.

Uncovering discrimination can be a challenge as workers may be unwilling or afraid to talk. To identify risks of discrimination in the workplace, it is helpful to:

  • Look at the distribution of individuals from specific groups within the workforce; e.g., risks will be higher where most lower-skilled or lower-status positions are filled by workers from a specific group, or where workers from a specific group form a small minority of the workforce and are therefore more likely to be isolated.
  • Analyse grievances (by different worker characteristics such as gender or ethnicity where possible), as this may highlight either hidden issues or common concerns among members of the same specific group.
Freedom of Association

‘Freedom of association’ refers to workers’ ability to unionise or to form worker representative organisations to negotiate collectively on employment terms and conditions. The key risk is where employers either forbid or attempt to suppress independent worker organisations or trade unions or discriminate again union members. This risk can also be enhanced by the regulatory environment.

In addition to being a fundamental worker right, respecting freedom of association is important in helping businesses build worker engagement to attract and retain skilled and experienced employees. The risk of anti-union attitudes and activity by employers is present across most sectors and the majority of countries, but is highest in countries that do not allow independent trade unions, or in sectors where there is little history of worker organisations.

To identify risks related to freedom of association, it is helpful to look at:

  • Suppliers in countries with restrictive laws on independent trade unions or alternative worker representation, or with poor records of protecting union rights
  • Workplaces with limited or no methods of worker engagement, such as worker committees or adequate grievance mechanisms.
Health and Safety

We can expect ever-greater attention to health and safety in the future, as this issue has just been recognised by the ILO as the fifth fundamental principle and right at work. Alongside the expectations for business to create a safe workplace through prevention of accidents, injuries and industrial diseases, and to ensure healthy working practices, there is increasing attention to workers’ mental / psychosocial health.

While many countries have adequate legal protections on workplace health and safety, key risk relates to implementation. Occupational health and safety hazards are especially present in sectors where dangerous equipment or machinery is used, such as construction, engineering and manufacturing. The risk is particularly high where regulatory enforcement is poor, work is more informal, or where workers are generally not provided with adequate safety equipment, training or safeguards. Health and safety risks increase where excessive overtime is worked.

To identify health and safety risks, it is helpful to:

  • Capture data on number of accidents, injuries and near misses occurring at work sites in your supply chain
  • Assess suppliers’ health and safety processes and management systems.
Considering broader risks

This list is necessarily limited to common or critical social risks – there are of course many more which should be considered in any due diligence programme. Within the workplace, these include working hours and pay, while community-related risks such as land rights, and an enterprise’s impact on community health or water resources can be crucial.

Undertaking a holistic approach is essential. Beyond specific risk issues, it is therefore fundamental also to consider the quality of management and the existence – or effectiveness – of workplace or community grievance processes. Poor management processes and lack of awareness of issues or willingness to resolve them can quickly contribute to serious social risks.

Beginning your social risk assessment…

Risk assessment isn’t a ‘one-size-fits-all’ process. Risks vary significantly by country, by sector and by enterprise. A step-by–step approach can start with:

  • Mapping your supply chain
  • Identifying the risks most relevant to the people (workers, communities, etc.) in your supply chains
  • Assessing the likelihood and potential severity of these risks in the countries within your supply chains.

Our broad range of advisory and consultancy services can help you with these steps, as well as in conducting deeper dives, such as with a country or product-specific human rights impact assessment.

The Sedex Radar risk assessment tool, to which Ergon has contributed, can also support your identification and prioritisation social risks. We have also worked with Sedex to develop a useful ‘how-to’ guide to risk assessment to get you started.

This blog has been written in collaboration with Sedex. A shorter version of this blog is available on the Sedex website.