Vanguard Magazine

teCH WAtCH 40 AUGUST/SEPTEMBER 2019 www.vanguardcanada.com suPPLy CHAiNs and ESGs By NiCoLe VerKiNdt T here is a world I have been discovering as of late – a world that is much wider than the Canadian "Indus- trial Technological Benefits" world, but one that has absolutely incred- ibly interesting crossovers, particularly for the publicly traded, international defence contractors that often work in Canada. This "world" that I'm referring to is called "ESG," which stands for environmental, social and governance standards. The ESG market has been evolving and growing rapidly over the past 20 years. The bulk of the global investment dollars in pub- licly traded companies are made through at least 30,000 global Asset Management Firms that invest at least $100 trillion USD on behalf of investors. Blackrock is the larg- est, with over $6 trillion under management. Of that $100 trillion invested, a report from the U.S. SIF Foundation suggests that by the beginning of 2018, at least $11.6 trillion in assets were chosen according to ESG stan- dards. In other words, senior level boards, management and investor relations teams at large, international and publicly traded com- panies all care about ESGs in order to drive their stock price. I believe this is the ultimate leverage for companies to make changes within their supply chains. Changes that are not too dissimilar from the way global offsets and Canada's ITB's have tended to be managed across the international defence industry. As hitting ESG targets throughout supply chains becomes more and more criti- cal for companies, they will start to hit vari- ous offset objectives as well. So, let's break down each individual pil- lar of ESGs. Asset managers, analysts and ratings agencies look at a number of local and global factors when assessing a com- pany's integration of ESG risks and op- portunities. Environmental Factors When it comes to the environment, the focus could be on climate change, waste, pollution, natural conservation or a poor record with animal welfare. Cruelty-free should be the norm. Going eco-friendly and green is the way of the future. Solid procurement strategies take sustainabil- ity seriously for long term returns and growth prospects. Is a company working on reducing greenhouse gas emissions? Is its product or service at risk of becom- ing obsolete due to limited raw materials? Does it know where it stands today, and does it have a plan for the future? Personally, I like climate change strate- gies that including sourcing from more innovative cleantech businesses where pos- sible. I believe that when companies see "environmental" as a way to save money by reducing energy consumption, we will see sustainable, long term changes. There are also examples of defence contractors that end up offering energy related prod- ucts to their government clientele. Just look at Lockheed Martin's Energy divi- sion, which boasts services that range from energy management, storage, nuclear and bio-energy (converting waste to energy). Social Factors Social capital can drive value. When hu- man resources are diverse, companies are better equipped to innovate and attract more customers. Companies that are bet- ter to work for also make more money – they attract talented people and improve productivity and efficiency. Social issues can include anything from child labour, slavery, occupational hazards, the effects a company has on local communities, and consumer protection. Lawsuits cost mon- ey and so does bad press. Making sure that a company and its sup- pliers don't infringe on human rights is central to mitigating risk. And it's not just your "tier 1's" that put you at risk: it's be- coming increasingly important to under- stand the lower tiers of your supply chains and who is operating there. The same goes for companies operating in regions or countries with oppressive policies. Cor- porate social responsibility also extends to doing more than the bare minimum. Ac- tively improving the communities produc- ing and using a company's products and services reflects favorably on a company. Governance Factors Corporate governance concerns revolve around transparency and organizational culture. Corruption and collusion are labels best avoided. An investor is typically think- ing about the company's accounting, gen- der pay equity, stakeholder relations, and how they may handle conflicts of interest. All of these factors then get pushed down the supply chain: a company must know how their suppliers stand up against this framework. Overall, incidents like the 2013 Savar building collapse had ramifications all the

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