A new report on supply chain due diligence is sounding the alarm for business leaders and boards to take immediate and comprehensive action on climate change, as well as other environmental, social, and governance (ESG) risks within their supply chains. That is the key message of ‘Supply Chain ESG Risks: Harnessing the Potential of Internal Audit’ published by the Chartered Institute of Internal Auditors (Chartered IIA).
The report examines the critical need for organizations to align their supply chain operations with their own social values and environmental targets. With regulators, customers, and investors increasingly demanding greater supply chain transparency and accountability, the report underlines the important role of internal audit when providing assurance and supporting due diligence activities.
The report makes several recommendations, including:
- With the renewed focus on the climate change crisis, now is the time for boards, audit committees, and internal audit functions to start having conversations about the work they are doing to ensure their supply chains are working to decarbonise as part of the journey to Net Zero.
- As the climate crisis exacerbates the risk of supply chain failures, boards and audit committees should harness the potential of their internal audit functions to assess the effectiveness of business continuity and crisis management plans. This can include stress testing the organization’s ability to cope with supply chain disruption caused by climate-related extreme weather events, such as tornados, hurricanes, floods, wildfires, and droughts.
- With new laws and regulations requiring businesses to take their supply chain environmental and social responsibilities more seriously, boards and audit committees can leverage their internal audit function to independently evaluate the organization’s legal and regulatory compliance in this area.
- Undertaking thorough and comprehensive due diligence when engaging and selecting suppliers has become vital for operations that are facing ESG risks. The report emphasises the importance of the board and senior management working with their internal audit function, to get independent assurance that due diligence processes across the supply chain are effective.
- Organizations and internal auditors should be leveraging innovative methods such as data analytics, AI, and other technologies to enhance their capabilities when evaluating ESG risks within the supply chain.
The climate crisis is already having a significant impact on supply chains and boards need to ensure they have robust risk management and business resilience strategies in place to cope with this. At the same time, businesses need to focus on ensuring supply chains are decarbonising and not sabotaging their transition to Net Zero. Internal audit has a key role to play by providing the board and senior management with independent assurance that climate hazards in the supply chain are being addressed effectively.
Anne Kiem OBE, Chief Executive of the Chartered Institute of Internal Auditors
