Rethinking Resilience: ESG, DEI, and the Future of Supply Chains

Environmental, Social, and Governance (ESG) issues encompass a broad range of opportunities and challenges for companies operating in the increasingly complex global supply chain. Even as supply chains become more interconnected, stakeholders across industries are increasingly requiring sustainable outcomes by socially responsible teams – and transparency around the business decisions to adopt those goals and create those teams.

Social responsibility – the "S" in ESG – is where a company's ESG efforts would incorporate concerns about diversity, equity, and inclusion (DEI). Companies often think about DEI as internal (e.g., Are we hiring diversely? Are we promoting diversely?), but every business has inputs through suppliers and vendors. Vendor selection is another area where companies can realize their DEI objectives.

There is an important synergy between resilient supply chains and diverse supply chains in the DEI sense of diverse. Operational resilience (i.e., how a supply chain recovers from a disruption) can be improved by having alternative – "diverse" or multiple – suppliers.[1] Governments and companies have long recognized the risks involved in relying on sole sources of supply, and the COVID-19 pandemic emphasized the importance of this economic reality. Today, even where engaging multiple suppliers to ensure that a company has alternative supply sources increases costs, those costs are widely accepted as, in effect, insurance: a robust set of alternative vendors helps insure against supply chain shocks. At the same time, engaging alternative suppliers creates an opportunity to make progress on the "S" side of ESG, by making those suppliers diverse in the DEI sense.

There is also a growing consensus that advancing DEI goals strengthens supply chains from within[2] and fosters innovation critical to U.S. competitiveness in the supply chain context.[3]

This piece looks at how companies can embed DEI goals into their efforts to manage supply chains to improve resiliency and what this means for the future of supply chain management.

Background: Supply Chain Resilience, Diverse Supply Chains, and Supply Chain DEI

What is supply chain resilience?

Business resilience generally refers to how well companies respond to disruption – more specifically, the ability to withstand industry uncertainty and market volatility regardless of the cause.[4] For supply chains, resilience can be an indicator of a company's strength and longevity; some definitions capture a company's adaptive capability to move to an improved state after being disrupted by external events.[5] Taking an example from transportation, port resilience has been described as a "catch-all term" for "the ability of a seaport to withstand and bounce back from a serious threat to its ability to process freight in an efficient, cost-effective manner."[6] In other words, when faced with unexpected economic or climate disruptions, "resilient" companies can withstand proverbial or literal tidal waves.

Focusing here on two distinct perspectives on supply chain resilience: resilience through alternative ("diverse") supply chains (i.e., not putting all your eggs in one basket) and resilience in the DEI sense, which, beyond just the ability to bounce back in an operational sense, encompasses a continuing commitment to expecting suppliers to achieve DEI goals even in the face of operational challenges and uncertainties.[7]

What are diverse supply chains?

In the context of supply chain resilience, the term "diverse" can refer to multiple or alternative suppliers of critical components, so if one supplier is disrupted, others are available. In the context of DEI, however, "diverse" is not just a synonym for "multiple" or "alternative." DEI strategists at the Stanford VMware Women's Leadership Innovation Lab explain:

You may feel more comfortable using umbrella terms like "diversity" instead of talking about specific identities, and you may also feel unsure of the right thing to say. The thing is, terms are more than "categories" — they reflect who people are, so as you learn how people see themselves, you'll also learn to see them more clearly. And because people evolve, how they define themselves and their groups may also evolve.[8]

Companies with ESG goals for supply chains are recognizing these distinctions and at the same time capitalizing on their ability to influence suppliers to become more diverse in the DEI sense. These efforts have recently been referred to as supply chain DEI.

What is supply chain DEI?

Supply chain DEI refers to a company's efforts to work with suppliers and stakeholders with different backgrounds and from different underrecognized groups.[9] In other words, supply chain DEI is the implementation of inclusive values and concepts in the process of vendor selection.

In practice, supply chain DEI means that companies can realize DEI objectives in many areas, including diversifying their corporate operational footprint, spend, suppliers, and stakeholders:

• Diverse operational footprint. DEI objectives can be realized through a company's corporate footprint established by its internal teams and their shared standards. An example would be ensuring that a company's hiring practices are open and inclusive and do not discourage applications from or the hiring of members of underrecognized communities.
• Diverse spend. Companies can promote ethical practices throughout the supply chain by rewarding suppliers that support DEI initiatives with more business while moving spending away from suppliers that fail to meet DEI goals.
• Diverse suppliers. Engaging with a range of suppliers enables companies to expand product sourcing across extended networks while also presenting an opportunity to select alternative suppliers that are diverse in the DEI sense.[10]
• Diverse stakeholders. Companies have historically been very focused on investors' views of their operations and performance. Broadening perspectives to include additional stakeholders – such as employees, customers, and the communities in which companies operate – can also help a company realize DEI goals.

A Fundamental Synergy: Doing Right and Doing Good

The important synergy between resilience and diversity in supply chains rests atop another synergistic effect. Industry observers have noted a synergy between "doing right" in terms of regulatory compliance[11] and "doing good" in terms of business decisions to make supply chains more environmentally and socially responsible. An increasing number of companies are undertaking ESG initiatives and, while not undeniably established, there is significant evidence that firms that effectively prioritize ESG goals are more profitable than those that do not.[12] Intuitively, this makes sense: to excel at ESG performance requires a more intense focus on and attention to business processes – that is, the activities that lead to profits – than does a "business as usual" operation. This creates a happy synergy between "doing good" and "doing well," as companies already expending funds to meet environmental regulations come to see that ESG-based actions can also be profitable.[13] This leads companies to expand these efforts beyond their strict compliance-related spend.[14]

In recent years, companies have also become more interested in implementing supply chain DEI, because, as with environmental compliance, adopting DEI initiatives could also contribute to profitability.[15] However, unlike environmental compliance obligations, there are far fewer mandatory compliance obligations related to social responsibility for supply chains.[16]

The Promise and Challenge of Supply Chain DEI

Supply chain DEI brings both promises and challenges for companies working to incorporate DEI into their ESG strategies.

Market commentators have observed that "diverse and inclusive supply chains are more competitive, able to unlock innovation, provide access to new markets and deliver socioeconomic impact in local operating markets."[17] However, companies attempting to incorporate DEI into ESG strategies face several challenges. Some of these revolve around internalizing DEI-based concepts of resilience and diversity into organizational culture; these concepts have more nuanced meanings in the DEI context. Using the term "diverse" to simply mean multiple or different suppliers is intuitive in the context of supplier diversity because, assessing supply chain diversification – How many suppliers? Where are they located? Are they large entities or small? – is a far less nuanced exercise than assessing suppliers' own workforce diversification. People-based analytics[18] – necessary to assess diversity performance in the DEI sense – requires more accurate definitions than the coarser "catch-all" terms that suffice when describing supply chains. That is, determining if a supplier (i.e. its team, values, etc.) is diverse in the DEI sense requires extra effort – for example, requiring suppliers to be certified as minority-owned or women-owned or to report on intra-supplier metrics about the diversity of its workforce. These actions are not inherently difficult, but a company must consciously prioritize supply-chain DEI goals to take action in the first place.

Other challenges center on the practical impacts of systemic social inequities, such as limited pools of diverse suppliers. These involve issues that are typically addressed by governments through regulation[19] or guidance for the private sector, as well as through support programs designed to facilitate the growth of small and medium-sized businesses within the pool of suppliers.[20] In the private sector, corporate programs aim to increase the pipeline of diverse individuals in various specialties, from secondary school tutoring and support and college scholarships to college and grad-level paid internships and mentoring.

Finally, the more comprehensive a company's supply chain DEI goals, the more complex implementation becomes. One apt description suggested that fully integrating DEI into supply chain strategies effectively required companies to address the United Nations Sustainable Development Goals, a set of global objectives addressing social, economic, and environmental challenges that include diversity and inclusion as essential tenets, "not only one by one, but by combining and embedding them into their strategies across all focus areas."[21]

Emerging Issues and Opportunities

The COVID-19 pandemic and the war in Ukraine cast rippling supply chain effects across a range of industries,[22] including effects on the availability of critical minerals and the global lithium-ion battery supply chain.[23] Considering the severe impacts on supply chain resilience of global supply shocks and the resulting market volatility, governments must address how to effectively support sectors of the economy that experienced shortages and that continue to face economic challenges. In the U.S., the Biden-Harris Administration has taken steps to address supply chain vulnerabilities for several critical sectors of the economy.

In February 2021, the Biden-Harris Administration issued Executive Order 14017, "America's Supply Chains" (the "EO").[24] The EO directed federal agencies to complete one-year assessments of critical supply chains; those agency reports were released on February 24, 2022.[25] The EO also directed four 100-day reviews of key supply chains: semiconductor manufacturing, high-capacity batteries, critical minerals, and pharmaceuticals.[26] The 100-day reviews were incorporated into one overarching report, "Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-based Growth, 100-Day Reviews under Executive Order 14017"; the report was published on June 8, 2021.[27]

The report summarizes the findings of these comprehensive reviews which addressed a range of supply chain vulnerabilities, including several supply chain diversification issues.[28] In doing so, the report repeatedly notes the importance of supply chain diversity in the DEI sense. For example:

• In its overall executive summary, the report notes that "[i]nequality in income, race, and geography is keeping millions of potential workers, researchers, and entrepreneurs from contributing fully to growth and innovation. Today, children with the talents to become inventors are less likely to become patent holders if they are low-income, women, African American, Latino, or from disadvantaged regions. The Administration's approach must provide access and pathways for these 'lost Einsteins' — workers, researchers, and businesses-owners in the growing industries of the 21st century."[29]
• The report recommends that "[t]he Small Business Administration (SBA) should support the diversification of critical suppliers through a targeted effort to better coordinate SBA's range of investment and technical assistance programs for small businesses and disadvantaged firms in the four targeted industries and firms seeking to enter those industries."[30]
• For the semiconductor industry, the report states that the government should help "[b]uild a diverse and accessible talent pipeline for jobs in the semiconductor industry through significant investments to grow and diversify the STEM talent pipeline"[31] and "support SMEs and disadvantaged firms along the supply chain to enhance innovation."[32] The report also recommends that Congress support education and training programs "that connect underrepresented students to STEM and in-demand sectors."[33]
• In the context of the high-capacity battery industry, the report states that "[as] the domestic supply chain is developed and workers are trained, attention is needed to ensure equitable development of workforce opportunities, including for people of color and others who have been historically underserved, marginalized, and adversely affected by persistent poverty and inequality,"[34] and that, "[r]egardless of whether investments occur domestically or internationally, investments in both mining and processing must adhere to the highest environmental and social standards."[35]
• Also in the context of high-capacity batteries, the report states that "[p]olicy support for the battery supply chain must include a focus on advancing equity for historically underserved and marginalized communities including people of color, Tribal communities, and those who have been adversely affected by persistent poverty and inequality. This includes conducting rigorous community consultation in the siting and permitting of all industrial sites and facilities and ensuring equity in access to the new clean energy jobs that will be created to meet growing demand. These efforts, which will include implementation of the Justice 40 Initiative, will ensure a more equitable and durable supply chain that works for all Americans."[36]
• Finally, in the context of pharmaceuticals, the report states that the government should "explore the creation and expansion of a virtual strategic stockpile of [active pharmaceutical ingredients], other critical materials, and finished doses focusing on the most critical medications to have on hand for the American public and relying to the extent possible on domestic suppliers, especially small and small disadvantaged businesses."[37]

On balance, while the overall focus of the report is diversity in the sense of avoiding dependence on one region or one supplier, it clearly recognizes the importance of diversity in the DEI sense – diversity aimed at achieving goals such as acquisition of diverse talent and the use of DEI-diverse suppliers all along the supply chain.

Related federal efforts reflect some focus on DEI diversity as well. For example, on November 29, 2023, the newly formed White House Council on Supply Chain Resilience ("CSCR") held its inaugural meeting and discussed long-term strategies to foster supply chain resilience, including 30 new actions to further support critical supply chains, which included creation of the CSCR and the promise that the Department of Defense would publish the "first ever National Defense Industrial Strategy (NDIS)."[38]

In the since-published NDIS, the Department of Defense links supply chain resilience to DEI diversity through a short set of logical steps.[39] First, the NDIS identifies systemic challenges that the government must address to realize its supply chain and national security priorities – listing "Inadequate Workforce" among these challenges. The NDIS then lists actions that will address the challenge of workforce readiness: "Broaden the industrial workforce through diversity and inclusion efforts" and "Invest consistently in DoD Research and Education Program (REP) for Historically Black Colleges and Universities (HBCUs) and Minority Serving Institutions (MIs)."[40] Finally, the NDIS outlines risks of not achieving workforce readiness, which include the inability to compete globally, reduced productivity, and limited innovation.[41] The NDIS elaborates on this point as follows:

Although industrial base participation among women and minorities has improved, these groups are still underrepresented in the ranks of both ownership and the broader workforce. Lack of diversity indicates that companies may not be targeting diverse groups for employment, which in turn limits the available pool of talent from which the industrial base can draw. Lack of diversity leads to a lack of new ideas and innovation. Diversity, Equity, and Inclusion (DEI) is important to ensure that we have an industrial base that reflects the nation itself … By supporting efforts to expand representation, the [Department of Defense] can assist companies in expanding the industrial workforce and creating a workplace that is representative of the United States.[42]

Notably, though the NDIS does not explicitly mention DEI diversity in its discussion of supply chain productivity, DEI diversity is the critical factor the NDIS identifies as needed to avoid "Limited Innovation."[43] Efforts like those described in the NDIS, and steps announced by the CSCR, are expected to positively impact other industries, many of which have already taken similar steps to synergize supply chain DEI and resilience.[44]

Conclusion: The Future of Supply Chains – DEI Initiatives Promote Diversity and Innovation

Engaging alternative suppliers creates an opportunity for companies to "do right" by "doing good." Choosing suppliers that are diverse in the DEI sense is one way to capitalize on important synergies at the intersection of ESG and DEI. The potential symbiosis between supply chain resilience and progress towards DEI objectives has captured the attention of supply chain stakeholders. These stakeholders include investors who continue turning up the volume on their strong preference that companies prioritize operational resilience and their corporate footprint.