Managing ESG risks with poor data? That’s risky business

Reading Time: 6 minutes

Authors:  

Dr Hayley Watson | Director, Sociotech Innovation
Toby Fenton | Product Growth Manager
Dr Julia Muraszkiewicz | Head of Programme for Human Trafficking and Human Rights

Date: 4 April 2023

Barely a day goes by without the term ‘ESG’ appearing in our news and social media feeds. So, what exactly is it? ESG goes beyond Corporate Social Responsibility (CSR), and refers to the Environmental, Social and Governance factors used “to measure and evaluate a business’s impact on society, the environment, and how transparent, accountable and sustainable it is.” While things like being sustainable and accountable might have been brushed off as ‘nice to haves’ several years ago, in today’s business climate they’re increasingly the kind of ‘must haves’ that can affect your business’s bottom line. As the British Business Bank explains:

According to the CBI [Confederation of British Industry], two-thirds of investors take ESG factors into account when investing in a company meaning ESG has the potential to grow your business while benefiting the environment and community.

 

 

ESG provides a framework that your business can use to advance responsible business practices, enhance your reputation in the marketplace, and deliver greater impact. In an increasingly socially conscious world, where values and positive social impact are often at the forefront of people’s minds, ESG considerations could prove essential for your business growth – particularly as they concern evaluating the sustainability and ethical impact of your company.

How can I put ESG considerations into practice?

From a strategic perspective, the United Nations Principles for Responsible Investment (PRI) provide a framework for incorporating ESG factors into your investments. At an operational level, the United Nations Sustainable Development Goals (SDGs) provide a framework for you to incorporate ESG factors into your business operations, ensuring your contribution to global sustainable development. 

In more practical terms however, for many (or dare we say, most) companies, the greatest challenge is still how to monitor, track, and improve their compliance with ESG objectives. As said above, ESG provides a robust framework that your business can use to advance responsible corporate practices, reputation, and impact. Unsurprisingly, data therefore plays a critical role in driving ESG compliance and risk management, enabling you to measure, track, and report on your performance across a variety of these ESG indicators. This data can help you identify what’s working, what isn’t, your degree of ESG risk exposure across a portfolio of operations, and those areas in which you need to do more to drive stronger outcomes and reduce ESG risk.

Where does human trafficking fit into this?

Let’s look at one particular part of ESG, the social part (‘S’ in ESG): the social impact and responsibility of a company or investment activity. This includes issues related to human rights, labour practices, product safety and quality, community relations, diversity and inclusion, and other social factors. 

Human trafficking (often overlapping with ‘modern slavery’) is a huge ESG risk factor for basically every business. Human trafficking falls squarely under the social part of ESG – and is specifically related to the impact on the society in which your company operates. Human trafficking is especially important when thinking about the labour practices occurring across your company’s supply chains and risks that lie within. Forced labour is probably the most cutting issue. According to the ILO, forced labour consists of:

…work that is performed involuntarily and under the menace of any penalty. It refers to situations in which persons are coerced to work through the use of violence or intimidation, or by more subtle means such as manipulated debt, retention of identity papers or threats of denunciation to immigration authorities.

 

 

Forced labour is a prominent risk in several major industries, including agriculture and fishing, fashion and apparel, construction, electronics manufacturing, hospitality, and mining. A 2022 report by the US International Labor Affairs Bureau cited a number of goods and commodities associated with forced labour or child labour such as fruit, fish, coffee, tea, palm oil, cotton, leather, silk/thread, textiles, tobacco, timber, granite, limestone, diamonds among many others. 

Given the prevalence of forced labour, your company’s ability to properly conduct due diligence within your supply chain is absolutely essential in mitigating risks to the company itself, as well as its investors. (A company that can’t demonstrate a deep understanding of its supply chain risks, and the steps it’s taking to mitigate them, is far from an attractive investment prospect – especially given increasing pressure on values-based investing). 

Suffice to say, a holistic and proactive approach to addressing human trafficking risks is business critical.   

How can I assess the risks?

A key part of this puzzle is leveraging your data to identify, understand, and assess the risks of human trafficking in your supply chains. Data can be collected, created, curated and collated across a number ofareas, and then brought together to provide a holistic picture of human trafficking risks intersecting with your supply chain operations. This provides a big uplift in how your company ensures compliance with legislation, standards, and norms. Moreover, using data like this can help identify those areas of risk in a more transparent and visible way, ensuring the right information gets to the right people, so mitigations can be applied before the risk escalates and costs go up. 

Your data can be used to tackle human trafficking risks in a number of ways. These include:

  • Supply chain mapping: Collecting and analysing data on your company’s suppliers’ network, including locations, local political and economic risks, sources of materials, rigour of local business practices, and the strength of local labour standards (in policy and in practice). 
  • Supplier audits: Using data-driven automation tools to reduce the costs and overheads in deploying established audit methodologies (e.g., SMETA or Slavery and Trafficking Risk Template by the Social Responsibility Alliance) across your business. This will allow you to assess your suppliers’ approaches to labour standards (e.g., overtime, low wages, working conditions), health and safety issues, turnover rates, worker satisfaction among other items, in a data-driven and scalable way.
  • Worker interviews: Speaking to workers across your supply chain can enhance your audits and shed light on the reality of labour practices. Qualitive data is still massively under-leveraged for ESG risk purposes, despite the fact that interviews, surveys, and similar kinds of unstructured information can contain rich nuance and help shed light on ‘hidden’ risks that might be missed.

So yes, data plays a key role in assessing risk and informing mitigating actions. But using data isn’t without its own challenges. For example, the challenges in using data for supply chain risk analysis can be linked to several factors, including:

  • Lack of access to the right data, particularly in remote locations (i.e., “low data environments”).
  • Difficulty navigating cultural and linguistic barriers in supplier locations, which hamper data collection and analysis.
  • Lack of cooperation from your suppliers in sharing information about their supply chains, and lack of real transparency when they do. This is especially true when pricing, not social responsibility, dictates business strategy. Limited capacity (personnel and time) to collect, process, harmonise, and analyse data to inform supply chain risk. This can be particularly difficult for small and medium-sized enterprises (SMEs).
  • Lack of standardisation when collecting data and reporting on supply chains. This could limit your ability to analyse that data, identify potential risks, and develop effective strategies for mitigating them.

Overcoming these data challenges is essential for any company that wants to meaningfully assess human trafficking risks in its supply chains as part of its overall ESG risk management strategy. 

Where does ethical AI come in?

At Trilateral, we’ve had a lot of discussions on ESG-related challenges with many different companies and organisations. The insights we gained were one of the drivers behind why we started building  STRIAD:Honeycomb, our new ethical AI application. 

Honeycomb helps organisations optimise limited resources by surfacing otherwise hidden patterns, trends, and insights across huge volumes of text data and structured data. With Honeycomb’s natural language processing (NLP) tools, smooth search functionality, clear and understandable data visualisations, and user-friendly web app, your company would take a methodical, repeatable approach to ESG risk analysis that can reduce the time needed to get the insights that matter. 

Here are just a few ways that organisations can use Honeycomb:

  • Supply chain mapping – Gain a stronger, cleaner understanding of your supplier network and the risks involved with Honeycomb’s maps and document analysis modules. Location-based data helps you understand the social, demographic, cultural, economic and political dimensions of a supplier’s local area, along with issues and trends in news reporting of human trafficking in a given location. Honeycomb includes socio-demographic data, global news coverage and human trafficking related data from third party reports that can support and enhance your analysis effort. If further data is needed to ‘go deep’ on specific issues or geographies, our subject matter experts in human trafficking can support you in collecting cultural, political and labour-related data, including in remote locations.
  • Supplier audits – Let’s be honest, supplier audits aren’t always great when it comes to ESG risk management. From questions that don’t ask much (or ask confusing things), to inputs that don’t really answer the questions, supplier audits often end up being little more than a tick-box exercise. Honeycomb provides an alternative. It can be used to rigorously and systematically generate, process, standardised, and visualise meaningful audit data, leading to clear and digestible insights that actually make sense – and can be acted upon. If more support is required, Trilateral’s subject matter experts in human trafficking can help you collect the right data, in the right way, to bolster your risk analysis.
  • Worker interviews – Qualitative data is still massively under-used for ESG risk management. Despite the fact that companies do generate a lot of potentially rich text data (i.e., unstructured data). From interview transcripts to site observation notes to surveys, Honeycomb can process this wealth of unstructured data using our purpose-build natural language processing tools – designed with our in-house human trafficking experts – to understand what’s happening on the ground, the issues that workers and staff are reporting, and feed all this into an integrated risk assessment. Unsure how to go about this? That’s where our subject matter experts come in, helping you collect the right data to feed into your analysis and address any gaps.

We’re an ethical AI company at heart (look closely: it’s in our logo) and so using data and AI in the right way is paramount for us. Unlike a lot of tools out there, we’ve built additional measures into Honeycomb to ensure we follow an ethical approach in leveraging AI for to assess your ESG and supply chain risks. We place an acute emphasis on ensuring the highest standards of security, ethics, accessibility, understandability, and explainability in how we process and leverage data to support decision-making. 

Interested in how we can help you hit your ESG goals with the proper use of AI and data? Find out more about Honeycomb here, or get in touch with us.

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