Smart alliances: a sustainable approach to value chain management
Federico Merlo
Sustainability and Climate Change, PwC Switzerland
Intelligent companies are setting new industry standards for supply chain management through extensive cooperation with their business partners and rigorous due diligence in sourcing. Legislative frameworks such as the Corporate Sustainability Due Diligence Directive (CSDDD) in the European Union and other value chain regulations require the adoption of these practices and demonstrate how compliance not only reduces risk, but also provides the opportunity to strengthen a company’s reputation and financial growth potential.
In the rapidly evolving regulatory landscape, increasingly driven by sustainability concerns, companies need to rethink and adapt their business models. This means developing future-oriented strategies and taking responsibility for their operations and supply chains to meet the demands of consumers, business partners, and other stakeholders. Against this backdrop, the concept of intelligent business is gaining momentum. But what exactly are intelligent companies? They are characterised by the ability to forge robust external collaborations across the entire value chain. This approach shifts the traditional view of suppliers and customers from mere transactional partners to integral stakeholders in a comprehensive business strategy that encompasses all aspects of sustainability.
From regulation to business growth
An example of this advanced business mindset is the one required by the Corporate Sustainability Due Diligence Directive (CSDDD). Adopted by the European Parliament on 24 April 2024, the CSDDD mandates large companies operating in the EU to conduct human rights and environmental due diligence throughout their operations and supply chains. The directive underscores the need for a deep understanding of social and environmental impacts to ensure responsible business conduct and sustainable practices. Companies must also proactively mitigate any adverse human rights and environmental effects caused by their own activities and those of their partners, including those with indirect relationships far upstream the supply chain.
A second example is the Swiss Due Diligence and Transparency Ordinance. As of 2024, companies larger than small and medium-sized enterprises (SMEs) based in Switzerland are required to take specific actions and disclose information about their supply chain practices. This includes ensuring due diligence when importing minerals and metals from conflict-affected regions and preventing child labour in their supply chain. The ordinance applies to all relevant activities of Swiss companies and aims to mitigate the risks associated with the sourcing of materials – mandating the businesses to conduct their activities in a responsible manner.
Balancing cost and ethics
Intelligent businesses focus on responsible sourcing, choosing products not just based on cost or convenience, but also on ethical standards. Toy manufacturers, for example, must ensure that no harmful materials enter their products at any point in the supply chain. Such due diligence is essential not only for consumer safety but also for maintaining brand integrity. Failure to manage these risks can have serious consequences, affecting both consumer health and the company’s reputation.
Similarly, brands of the textile industry must ensure that their products are manufactured in safe working environments. This requires a comprehensive process in which all participants in the supply chain, regardless of location or role, adhere to strict operational standards. It is no longer enough for companies to merely observe or delegate responsibility to suppliers; they must actively make sure that their partners and suppliers uphold ethical practices. Sustainable supplier relationship management is the driver of business benefits in terms of managing the trade-off between cost, resilience, and sustainability.
It’s about leadership
How can a company ensure that all participants in a complex, global supply chain adhere to ethical practices? Given that a large company might manage relationships with thousands of suppliers and indirect suppliers, this task is both challenging and resource intensive. Businesses may be tempted to turn to advanced IT systems and technology to streamline and scale their due diligence efforts and make it easier to assess and manage risks. Even more valuable, however, are people-centric systems and frameworks that focus on human interactions and relationships to create a responsive and responsible supply chain network.
A systematic and effective due diligence framework involves six key steps:
The due diligence process is well known for managing negative social impacts. It can be adapted to identify opportunities for companies and drive positive change. A due diligence process can also be easily translated to address impacts on nature and climate. In all situations, however, it is leadership and people, their processes and incentives, and their collaboration – both internally within a company and externally with trading partners – that will make a difference.
Beyond compliance: embedding sustainability and responsibility in business
Integrating sustainability into business operations and supply chains goes beyond mere compliance; it’s about weaving responsible practices into the very fabric of business decision-making. While regulations such as the European Sustainability Reporting Standards (ESRS) and the Corporate Sustainability Reporting Directive (CSRD) set reporting guidelines, true sustainability comes from comprehensive due diligence throughout the value chain and creating business opportunities from it. Intelligent business is about not missing the value of this challenge.
Companies that prioritise collaboration and implement robust due diligence frameworks across their operations and that engage deeply with industry partners not only mitigate risk. They also ensure that their activities have a positive impact on society and the environment, setting the stage for a more sustainable and successful future, and reaping the rewards of their efforts. Effective risk management leads to a more stable business performance, which, in turn, is rewarded by the financial community and other stakeholders.
