A First Solar installation in Las Vegas. First Solar is among the clean energy companies to encounter human rights abuses along their supply chains through human rights due diligence. (Image: U.S. Department of the Interior/Flickr)
Forward-thinking companies are implementing supply chain sustainability initiatives that include environmental and social pledges. But many are also grappling with how to comply with new and evolving regulations as they work to mitigate the risks they face, including those tied to human rights.
For example, multiple countries are collaborating to reduce their greenhouse gas emissions to meet the goals set by the Paris Climate Accord and the European Green Deal. They’re also working at the national level to institute laws, such as Germany’s Supply Chain Due Diligence Act (LkSG), that mitigate broad-based environmental, social and governance (ESG) risks and corporate compliance mandates.
As businesses continue to navigate the complex regulatory landscape, they will need the right programs and technology solutions to address one mandate without neglecting another. By taking a risk-informed approach to sustainable procurement — particularly when it comes to low-carbon technologies — leaders can help protect the planet and ethically treat people that produce the products and services that companies procure.
As global temperatures rise, the race to net-zero heats up
Global companies that have tens of thousands of suppliers and third parties operating as part of their extended enterprise are exposed to escalated ESG and human rights risks. They often adopt third-party risk management solutions that can facilitate risk assessments, due diligence checks, supplier audits, and continuous monitoring.
Digitally-enabled companies that can identify, assess, and continuously monitor their risk exposures across their extended enterprise are far better prepared to mitigate them.
Yet, despite their best efforts and intentions, many companies still encounter third-party and supplier risks, including those in the renewable energy market.
Take, for example, the recent experience of U.S.-based solar panel manufacturer First Solar. While auditing suppliers, four sub-contractors in Malaysia were found to have violated worker rights and First Solar’s standards by charging workers recruitment fees in their home countries and withholding their passports and pay, effectively detaining them in Malaysia. First Solar discovered these violations through due diligence, took action to resolve the issue, and voluntarily disclosed the findings in its annual sustainability report in August of this year.
The system worked as designed. Ultimately, rather than sever ties with the sub-contractors, First Solar worked with them to remediate their labor practice issues — enabling First Solar to drive positive social change, support the local workforce, and retain a critical part of its supply base.
Other companies aren’t so lucky.
Since June 2022, U.S. Customs and Border Protection (CBP) has seized $1.81 billion in goods at U.S. ports, including solar panels and materials used to make them, for violating the Uyghur Forced Labor Prevention Act (UFLPA).
Hundreds of U.S. companies were unable to show sufficient due diligence to rebut the UFLPA’s presumption that what they’re importing was created through forced labor. Although nearly 40 percent of seized shipments have since been released, the lapse in third-party due diligence created operational delays, affected revenues, and increased pricing for solar panel modules by 30 to 40 percent.
Why this can be so difficult for companies
Demand for clean energy technologies continues to outstrip U.S. domestic production capacity, compelling many procurement teams to source from suppliers in countries with poor human rights records and opaque supply chains. But, as the UFLPA holds, plausible deniability will no longer pass muster.
China’s infamous human rights record, including the Uyghur genocide, casts a long shadow over the global solar panel supply chain. Companies that have left China to either build domestic production capacity or source from other countries (e.g., Malaysia and Vietnam) remain at risk, because China controls at least 80 percent of global manufacturing at each stage of the solar panel supply chain. This means that solar panels shipped to the U.S. and categorized as manufactured in Malaysia are still predominantly built in China. Malaysia is the country of origin most often cited in CBP statistics for violations of the Uyghur Forced Labor Prevention Act.
Therefore, until the domestic production of solar panels, wind turbines and rechargeable batteries begins to approach domestic demand, companies building or acquiring renewable-energy technologies will remain exposed to the risks of modern slavery and other worker abuses in their supply chains.
How to advance on climate without retreating on human rights
Broad ESG regulatory compliance is not an implementation project, it’s a journey. As business leaders turn to technology to improve supplier visibility and third-party risk management, there are five considerations they should keep top of mind.
Clearly define what you're doing. Establish a well-defined charter that sets the purpose, business objectives and scope around current risk profiles, how third parties are used and managed, and which ESG regulations, standards, and frameworks must be adhered to.
Chart a roadmap. Create a roadmap of your company’s ESG programming to provide a clear starting point and outline the implementation phases for your risk priorities, with continuous checkpoints and insights.
Get buy-in, internally and externally. Secure cross-organizational alignment within your company, and then clearly communicate ESG expectations with your third parties to ensure governance and compliance requirements are understood and met.
Identify the changes you plan to make — and how you'll make them. Create blueprints of functionality, technologies, and integrations needed for each risk domain to help inform and give definition to the business processes needed to make it happen.
Set your priorities, and start investing in them. When considering technology investments, business leaders should think big, start small, and grow fast. Companies need modern business solutions for modern business problems.
- Think big: Take a comprehensive view of your ESG strategy first and select a system or software platform that can support the majority of them with consistency.
- Start small: Implement one or two of the most critical programs you've identified, because ESG risks and regulations will change, along with compliance requirements.
- Grow fast: Expand quickly through a series of implementations that incrementally expand risk domains as needed.
With the right programs and tools, companies can conduct more thorough due diligence that vets and assesses suppliers and third parties for inherent risks. These business solutions can ultimately help companies reach their climate and emissions goals and requirements while preserving the human rights and dignity of the people who ultimately fuel their supply chains.
Dean Alms is the Chief Product Officer for Aravo, overseeing Product Strategy, Product Management, Product Marketing, and Product Design. He recently joined Aravo to build an organization that would expand the product portfolio and market reach of industry-leading apps in third-party risk management. Dean holds a BSBA degree from Boston University. He is active in the community and former board president of the Bay Area Chapter of JDRF (Juvenile Diabetes Research Foundation).