Beyond Compliance 2024

Beyond Compliance: Embedding Impact through Innovative Finance9to LRQA, social risks represent 30% of the environmental, social and governance (ESG) risks associated with responsible sourcing.12 In addressing these issues, companies struggle with compliance and concrete action, especially given the lack of supplier information and reduced transparency further along the supply chain. Indirect suppliers, especially those from developing markets, are at a higher risk of due diligence violations due to a lack of regulatory enforcement.13 These regulatory developments present a risk; that companies will delegate responsibility to their suppliers, pushing smaller suppliers out of their value chains, rather than seeking collaborative solutions. Simply relying on individual engagements with civil society or non-governmental organizations (NGOs) will also fall short given its lack of scalability. This trend exacerbates social inequities and hinder the potential for scalable impact, particularly in emerging markets. As a result, implementing regulations and standards will be challenging for large corporations with long and complex supply chains, due to potentially high associated costs and an increased administrative burden. Penalties and legal risks of non-compliance with supply chain human rights regulations can be significant. Given the dynamics and scale of change, the prevailing reactive approach to social and environmental impact through corporate social responsibility (CSR) or corporate philanthropy is insufficient to effectively mitigate material social risks in supply chains at scale. A more scalable and verifiable impact strategy is required to enhance accountability, drive meaningful change and address social risks across the entire supply chain ecosystem. 1.2 Product and service opportunities Companies that have aligned product branding with sustainability goals are generally able to improve consumer and employer brand equity. According to the PwC Voice of the Consumer 2024 survey, 46% of consumers are buying more sustainable products and are willing to pay 9.7% above average prices for sustainably produced or sourced goods.14 Even beyond the branding effects, however, societal trends linked to SDGs can create a $12 trillion market for SDG-aligned products and services.15 AXA’s EssentiALL division, for example, covers 14 million customers in low- and middle-income markets with affordable insurance.16 It is a strategic business unit that enables AXA’s vision to support the equitable transition to a low-carbon economy. Similar efforts are emerging across different industries – from fast-moving consumer goods (FMCG) to mining. Many, however, struggle to showcase the hybrid business case – the more intangible business benefits they create in addition to their financial results. Often, they resort to tools such as the social return on investment (SROI) to translate social and environmental outcomes into economic terms, showcasing their social and environmental results. Without standardized metrics and independent verification, however, the complexity and subjectivity of some SROI approaches can undermine the ability of companies to demonstrate concrete links between financial return and impact outcomes. Companies are ultimately under pressure to establish a clear connection between their products and services, and their social and environmental objectives. As this paper explores, innovative approaches that explicitly link financial returns to social and environmental outcomes can be part of the solution by clearly establishing this connection..46% of consumers are buying more sustainable products.46% Photo credit: Lifebank