Podcast: The era of Assurance 4.0: Sourcing responsibly

Hello and welcome everybody to LRQA's Future in Focus podcast, where we like to talk about all things risk management. My name is Holly Johnston. I'm the Global External Communications Manager for LRQA, but as always, it's not just me. I have a guest with me and it is Stuart Kelly, LRQA's Chief Commercial Officer. Stuart, welcome back. You're a regular. How are you doing?  

Very good, Holly. Thanks again for the excellent welcome. Looking forward to this particular podcast.  

Me too, and I'm sure our audience is as well. So let's get started. Now I just want to recap for our listeners, actually, before I delve into questions with you, that this episode is part of a mini-series with yourself, Stuart. 

And, we're diving into all aspects of Assurance 4. 0. You've heard of Industry 4. 0, but Assurance 4. 0 refers to the new era of risk management.  And at LRQA, we define this new era by three global trends, and that's ESG considerations, so environmental, social and governance, of course, it's supply chain complexity, and lastly, it's the need for cyber security maturity.  

Combine those new trends with traditional risks across assets, people and systems. And Stuart, you've suddenly got a whole host of challenges that I know our clients are coming to us for support with.  Now, in terms of what those client challenges look like, I've got a list of five here that I just want to recap with you, with myself, with our audience. 

It's assuring assets and management systems. Secondly, we have achieving product integrity. Thirdly, sourcing responsibly. Fourth, we have navigating the energy transition and achieving net zero. And last, we have strengthening cyber security maturity. So, as part of this mini-series, we've been using each episode to do a deep dive into each of those client challenges. 

So today is all about sourcing responsibly. And, I'm going to stop talking now, Stuart, and hand over to you. I wonder if I can ask you to just to start us off and explain exactly what we mean by responsible sourcing.   

Yeah, sure. Thanks, Holly. And, yeah, I think it's really good for our listeners to understand in this miniseries. There are five key areas that we're looking on. For me, though, this is one of the real drivers, one of the real things that are coming out from a client base right now. There's a lot of conversations, there's a lot of media around some of the things in the market, greenwashing, you know, even green hushing now is it, is it, is the latest word that's coming out. 

And I think it's created a lot of misconception around what sustainability and responsible sourcing is actually all about. And I think you can probably summarize it by saying the bottom line is that. Businesses, brands around the world have a responsibility to make sure that they are minimising and reducing negative impacts from their operations, and that can be through lessening their environmental impact. 

It can be, you know, looking at their carbon footprint, or it can be critically, as we're seeing more and more in media and in the news worldwide, mitigating violations of basic human rights for workers. And I think that that's an area that will come out quite a lot as we talk through today.  There's a lot of supply chain legislation, Holly. It's evolving all of the time, as with all governments, as with all legislation.  

Every country, every government seems to do it in a slightly different way. And therefore clients are coming to us asking for support in how do I comply? How do I make sure that what I'm doing is actually keeping me legal? Because it's different in all of these countries.  I think we're also seeing a lot more expectation from governments and also stakeholders around the accountability and the transparency around ESG and increasingly around human rights violations. We've heard quite a lot, you know, in the news recently, a lot of, Different industries have been highlighted and flagged as being concerning for, human rights and workers rights. 

 

And that's something that we're seeing a huge increase in actually getting involved in. And I think probably, I know I've kind of waffled on, but ultimately this is about stakeholder trust and keeping people safe. So this is about clients of ours. It's about global brands being able to demonstrate that you can trust people, their supply chain, you can trust what they're doing and that they are making sure that their suppliers and everyone that is involved in their business is being kept safe and being treated correctly from a workers right perspective.   

Such a good intro there, Stuart. There's so many angles to cover here, aren't there? It's almost making me rethink my next questions to you. There's so many different angles to come at it from.  Actually, let's start by asking why clients really need to care about this within the era of Assurance 4. 0. And I'm thinking here, you know, our clients will have heard about ESG, it's in the news, it's everywhere. But I wonder if we set aside preconceived notions about ESG and some controversies around ESG, which exists in the news. Surely, actually, this all just boils down to one question, which is: Is your organisation safeguarding its workers’ human rights? So is that the fundamental reason why clients should care about this and be taking action on responsible sourcing? Are there other angles here?   

Yeah, I mean, I think if you think about this first and foremost as a human, then we all have a, you know, a duty of care to our fellow humans to make sure that no one has been exploited unfairly. Everyone has been treated correctly and properly for the part that they're playing in society. 

And that's not just a basic business expectation. It's a basic human expectation. So I think setting aside the business challenges here, that there is a, there is a responsibility to our fellow, you know, humankind to actually, you know, to make sure that we're looking after them. So that's the first thing. 

I think the second thing is, you know, That, you know, we are now seeing this whole supply chain assurance and responsible sourcing almost like an onion. We're beginning to see layers becoming unpeeled or peeled away and businesses up until very recently, we're looking at one level of supply chain. And ticking boxes saying, Yeah, we've done the checks and we're okay. Thank you very much. And again, probably one of the massive benefits of social media for me and global awareness of news is that that's no longer enough because it's not the level one that's the challenge. It's the probably some companies not being aware or knowingly not being aware, investigating and diving deeper into their supply chain to really understand what's happening down on the shop floor, on the ground, in the fields, out in the markets, et cetera, where things are really, you know, being, being challenging and where price pressures are actually then forcing people to do inhumane and unethical things in terms of their supply chain. 

So I think that yes, an organisation should be safeguarding its workers, humans rights and also the workers that operate within its supply chain. And that is, you know, things like fair pay. It is things around, you know, working conditions as things around whistleblowing and enabling them to actually, you know, raise challenges and concerns and in a fair way without fear of retribution. And that's again, something which is emerging quite a lot in terms of our programmes of work that we're doing with some of our customers. And I think if companies are looking at this. As doing the right thing for their suppliers, their supply chain and the people that are contributing to their business, rather than putting profit first, they will actually get the benefit of this because they will comply with current and future supply chain regulations easily.  

They'll already be there because they will be best in class. They will be ahead of the curve in terms of what's happening because they really care about the people rather than care about complying with legislation. I think also they will get to that level of trust then that we're seeing increasingly our investors are demanding more and more assurance around supply chain integrity and around responsible sourcing and ethical compliance. I, and also, you know, within consumers because they are making decisions, they are making informed choices on which brands they will and they will not buy from. And any negative impact from a social media point of view, not only is it morally and ethically wrong, it's also impactful to the bottom line of any brand that is actually, you know, in the media for the wrong reasons. 

So I think to summarize, I think businesses that are, that are really focusing on building an effective responsible sourcing program will be able to benefit from obviously ethical integrity across their supply chain. Minimisation of the negative impacts on people and the environment across that supply chain, and I think also having a better awareness across their teams around their performance and their understanding of responsible sourcing challenges, they will build trust, they will gain trust, and they will gain credibility in the marketplace, which is very easy to lose and very hard to build. So I think it's right thing for people to be thinking about.   

I love the phrase you use there as well about, it's about the people that are contributing to your business, and there's lots of useful phrases to kind of frame this issue. Another one I've seen in the media is about cleaner capitalism as well. So lots of way to kind of term what we're talking about today. Now I'd like to talk about, client experiences if we can. So I want to understand what they are struggling with and just a few examples come to my mind.  

I guess one would be visibility of the supply chain. Like you've already mentioned, you know, if we approach it like an onion, that's the right thing to do to approach different layers of the supply chain. 

But that also requires data for instance, and, you know, more sophisticated tools in order to do that. Another area, I guess, would be legislation because it is evolving, all the time, and it is global in its nature, depending on obviously that will have a different impact depending on where businesses operations are. 

So those two items that you'd agree with? 

Yeah, I totally agree with that. And look, let me talk about the client experience here because I'm not the technical expert. There are people who are far closer to the detail on the ground that can help clients with this kind of thing. So,  I'm able to talk very much around what's happening in the market, what, what's keeping my clients awake at night or our clients awake at night and how we're supporting them. 

And I think first and foremost, this costs money, okay. And therefore there's a budget that is being put aside to actually deal with supplier assurance and in particular responsible sourcing. And that is not a bottomless pit. And therefore, the first thing is to understand and our clients don't necessarily understand the true diagnostics of where they are. 

You know, what problems am I facing? Where is my programme? And what risks do I have that I now need to consider? That's the first thing. And then the second thing is actually then prioritizing the mitigation of those risks against the budget that they have. And it's not always possible for businesses to spend more money than they have on doing these things. 

So yeah. being able to prioritise, being able to make sure that the money is being spent on the most critical areas, the things with the biggest impact on, on their supply chain, on humans, on, on responsible sourcing is really important. And the other thing is, we talked about this very briefly, or you certainly mentioned at the beginning, Holly, this is a never evolving feast, right? 

Legislation is changing virtually daily. News is coming in, virtually daily around trends all around the world. And it's not necessarily always in areas that people think, you know, there are other countries that are now being flagged really highly on, on ESG risk scores. And we can talk about that in a second. 

So I think it's also then about being able to use data sources and intelligence, something like our EiQ platform, for example, which, which underpin some of these risk models and on the prioritisation and the programmes and work that people are putting in place to make sure that the money is being spent in the right place, but also that you can.  

Quite, you know, quite quickly to new emerging risks. You can predict and get ahead of them. You can use it when you're actually thinking about supply chain decisions. Is this the right place for me to be buying from? If so, what risks do I need to consider when I'm actually contracting with the supplier? 

How do I work with them to mitigate those risks? So actually getting ahead of again, some of those potential problems, but you do need to have that data source as part of your solution so that you can make the informed decisions Almost in real time with real time data on one size is no longer fitting all. 

So our clients are coming to us saying, where are we? What problems am I really facing? Because I now know that the program of work that I've been religiously following for the last two, three, four, five years is not necessarily fit for purpose in this dynamic of a changing world. How can you help me? 

 

What do I need to be thinking about? And how do we do this in a better way? So that we're having more impact in a positive way. I'm not necessarily, you know, overspending on the commitment that we have from our shareholders, our stakeholders, our board to actually improve what we're trying to do here.  

Thanks, Stuart. I'm always so grateful for you being on this podcast because you do give that client angle and that is the unique insight we're after here. So, that's a really useful, summary and, and what I'd like to know actually is, so we're understanding what our clients are struggling with, but, you know, where are we actually seeing examples of, of best practice? How is prioritizing responsible sourcing, adding value for businesses? Just one idea I had is obviously making yourself as a company more attractive to investors from a financial angle. would you agree with that or any others?   

Yeah, I mean, look, investment is an increasingly large focus for a lot of stakeholders and investors are now investing where they know the money is safe as well as, you know, has high growth potential and therefore they are looking for risk averse investments and companies to invest in. And the cost of funding, you know, is increasingly being linked to your responsible sourcing strategies and how you're actually complying with legislation and how you are actually, you know, maintaining your position and showing how you're continually improving. So investment's certainly one. 

I will always go back to consumer trust. And I think the companies that are open, transparent and showing what they're doing to improve will always be considered highly by the consumer. You know, it's a different world from, from when I was, you know, the teenager or the young adult, where, you know, I would probably shop and look for the cheapest.  

Now, people are actually looking for, you know, labels as to where things were made. They're going on websites to understand what the supply chain looks like. They're looking at things like responsible sourcing policies. You know, they're looking for things like, renewable energy being used and so on. So I think there is a, there is also a competitive advantage here. 

It's a prerequisite, right? You know, as I said before, from a human element point of view, looking at responsible sourcing, looking at, you know, making sure that everyone is treated fairly and ethically right across your supply chain is something we should be doing naturally. Sadly, we're not. And, and our recent, 2024 ESG outlook report, actually, I can talk through a couple of those highlights actually demonstrate this isn't the case, but I think. Being able to demonstrate and being a proactive company around improving workers conditions, regardless of where they are in the supply chain, is something that will set you apart over time with the buyers of today and the buyers of tomorrow, quite frankly. So not only from a, from an investment point of view, but from a consumer and from a buyer point of view. 

And then let's not forget that regardless of where you are in the supply chain, you may not be frontline selling to consumers. But you're selling to someone, they will also be under the same pressures. They will also be expecting you to be able to demonstrate these things. So from a from a business continuity point of view, from making sure that you can hit your growth ambitions, you need to be geared up and ready to respond to the requests and the requirements from the people that you are selling to, whether it be a consumer or another company that is actually buying the goods from you. 

So everyone is impacted here, Holly, and those that really embrace it, those that. Use it as part of their investment strategy, those that actually see it as a critical part of their business will be the ones that, you know, will have the long term growth and the long term security in our marketplaces as we move forward.  

Genuinely such good points there going from, you know, the fact that consumers or customers takes all sorts of shapes and sizes, B2C, B2B, going from compliance to competitive edge, responding to consumer trends. Like I said at the beginning of this podcast, there's so many different angles to take this topic from. So thank you for covering a few of them there for us.  

Now, onto the solution here, you know, how, how do we support clients through this journey? And this is not about just what LRQA does. This is not a sales pitch, but it's what should our clients be looking for and demanding from, partners who they, who they need support with on this? What tools are out there? What data do they need? What types of support are our clients asking for?   

Yeah. Okay. So let me answer that, but just picking a couple of observations on the table first, because that will hopefully explain my, my rambling as we move into the answer. So I mentioned, we have just recently published a global risk outlet report for 2024. It highlights a couple of things that people might find surprising. So it highlights that over a third of sourcing regions are actually having worsening ESG risk scores. Why do I mention that? Because people will go to the obvious countries, okay? They'll think about, yeah, China's probably in there. India is probably in there.  

But let me tell you, the United States was in there. United Kingdom is in there. The Netherlands, Australia are in there. So this is not an isolated or a pocketed issue. This is a global issue. And therefore, I think, companies that probably put a number of their eggs in the baskets of traditional hotspots of risk are now placing the bets wrongly. 

They're putting their eggs in places that they need to think twice about, and that brings me on then to the kind of solutions and the thinking. So again, I will ramble here, but I want to just explain what's happening and what clients are struggling with and how we're seeing the solutions emerge and how we're helping them. 

So the first thing is programmes of supplier audit, things that have been going on for the last two, three, four, five years, maybe even longer, those compliance audit programmes that are in place are not necessarily the right thing moving forward. I'm not saying that audit is wrong, but an audit does not solve the problem. An audit, you know, helps identify the problem. So the first thing is, you know, recognizing that a single standalone, program of audits where every single supplier goes through the same process at the same frequency is no longer fit for purpose. The world is changing far quicker than our audit programmes are. 

Typically an audit programme would be between one and three years, so a supplier would be visited one, two, or three years depending on However, you risk rate them. So, you know, a lot can happen in a year. A lot can certainly happen in three years. And as we've seen over the last year in our risk ratings, you know, countries are really now coming to the fore that you wouldn't have expected. 

So traditional risk modelling needs to change and needs to think much more dynamically. So that's the first thing, you know, your traditional compliance audit programmes need to be refreshed, need to be looked at and need to become dynamic in real time in terms of understanding the emerging risks and the trends that are happening in the marketplace. 

And again, you need to think about that from, the, the analysis, the data, that the capabilities that you've got to help predict that. So something like, you know, EiQ, for example, our platform, there are others, but you know, that, that is, it's there to underpin the decision making process that you've actually got. 

So that, that's the first thing. The second thing is, we're seeing the good companies, we're seeing the market leaders, understand that this is not about burying the bad news. It's about bringing the bad news to the top so they can actually do something about it. So things like, you know, grievance mechanisms for your workers and your supply chain workers, is a, is a really important way of, you know, getting a transparent, independent, and safe channel in place for them to report health, safety, social, labour, and environmental issues anytime, anywhere, anonymously, with no recrimination for them, because that's a massive fear for them, that you then can actually act on and that you can do something about. 

And again, it can feed into your compliance audit programmes and your other programmes of work. I think training is an area where people are asking us for more support so that they and their teams are aware of the latest trends, aware of the latest things that are going on. You know, this is a, this is a market thing where there's a lot of illegal money that can be made here. 

So as with all these things, the criminals stay ahead. The criminals are always at the front of innovation in terms of how to do things differently and better to keep pulling the wool over our eyes. So I think regular training to make sure that people are aware of what's going on, of the findings, of some of the examples that have been seen will really help. 

 

And then I think last but not least for me is that, and I mentioned at the beginning, is the diagnostic and the so what, how do I change my programme moving forward? How would I continually check in and monitor that I'm doing the right thing? Too often we come across companies that are spending good money, thinking they're doing the right thing, but in actual fact, you know, they're five degrees off course. And I think that regular check in with companies like LRQA is there to, to support, make sure that your programmes are right, refresh them if needed, and just make sure that you're actually doing the right thing. 

And part of that is also understanding that you cannot take this in isolation, because a lot of companies we speak to will say, oh yeah, I don't get involved in sustainability. That's not my, that's, that's, that's so and so over there. I'm, I'm the, I'm the technical director. And then, you know, I don't get involved in cyber because that's the seesaw who sits over here. 

So we're, we are now increasingly seeing a lot of great things coming out of the workshops and a lot of great ideas and, and changes to programmes is where we actually look at, you know, supplier assurance. We look at responsible sourcing more holistically, and we get these people together and we actually talk about how all of those risks are actually more intertwined than you think. 

And how we can then put a programme together that is, you know, more effective and also more cost efficient for our clients at the same time. So I guess I've said I would ramble. I have, but I guess what I'm saying is. This is changing daily, weekly, and, you know, you need to have that regular check in, you need to kind of redirect your programme of work, you need to prioritise, you need to be able to use data and emerging trends to make sure that you're prioritizing the right things, and you need to do it regularly because, you know, once a year, it is not cutting the mustard anymore.  

It's good quality ramble, I can assure you. 

I'll take that.  

No, it's the point we've echoed throughout that this is a complex issue and there are so many different angles to pursue it from. And that's why, you know, working with somebody you can approach it holistically for your client, you know, the client, the business is really important. 

So, I mean, despite how complex the issue is, I always just try to remind myself that this is fundamentally, this is about retaining stakeholder trust and keeping people safe. And I always try to remind myself of those two, two points. And I kind of want to ask you the same thing for your final thoughts, Stuart, you know, what lasting message do you want to leave our listeners with today?  

Oh yeah, good question. So I think firstly. Don't think that you have all the answers because you have an internal team of experts. That's the first thing. That internal team of experts will certainly know your business inside out. They may well know your supply chain inside out and they may well be speaking to like-minded companies in your sectors, around the world at various conferences and events. 

But you need someone that can bring a different landscape. You need someone that can bring that full risk landscape, because, you know, we're seeing supply chains merge and intertwine from different sectors and so on as the world's become much more accessible. So don't just rely on internal experts to give you the right answers. 

They may well have them, but it's great to do that check and balance and that due diligence of understanding what else is going on in the world that you should at least have on your radar, particularly as a senior, you know, ELT or board member or, or a stakeholder. You need to be thinking about that and holding any companies that you're investing in to account for it. 

 

So that's the first thing. And I think that the second thing is I don't assume that because a programme was right, six months ago, it's still right. Okay. Yeah. And we all know the story of being one or two degrees off at the beginning, how far away you are at the end of the journey and make sure that's not you. 

And finally, the third thing is do the right thing. This, this is about humans as much as anything. Responsible sourcing is about making sure that we have no modern slavery. It's about not enabling people to exploit other humans and their workers, supply chains. So do the right thing as an organisation.  

Thank you so much, Stuart. You know, we have an entire team of advisors and consultants, because this is such a technical topic. So I really appreciate you supplementing that with that client angle, that commercial angle that I'm sure our audience can appreciate across whatever sector or geography that they're based in. 

So thank you for giving us that breadth of perspective and, sharing your relentless focus on our clients.  And also thank you to our listeners, again for tuning in and giving us your time, and also hopefully for coming back, hopefully your regular visitors now to this Assurance 4. 0 mini-series. 

So thank you everybody. Please do visit our homepage on Spotify to stay up to date with the new releases. And to find out more about LRQA services, please visit LRQA. com. Thank you everyone. And thank you, Stuart.  

Thank you, Holly. It's been a pleasure.