Climate & ESG risk

ESG stands for environmental, social and governance. In supply chains, each part shows up as a concrete risk:

Climate risk comes in two forms:

• Physical: floods, heatwaves, cyclones and droughts that shut plants, warehouses or roads. A warehouse on a flood plain or a supplier in a cyclone-prone port city is exposed.
• Transition: costs from the move to a low-carbon economy, such as carbon pricing, efficiency rules, or the EU’s carbon border adjustment (CBAM), which puts a carbon cost on imports like steel and aluminium. Customers’ own net-zero targets also push suppliers to measure and cut emissions.

Social risk: unsafe working conditions, child or forced labour, or unfair wages at a supplier, often several tiers down. Beyond the ethics, the consequences include import bans, lost customers and reputational damage.

Governance risk: bribery, fraud, weak controls and non-compliance, at your company or at partners acting for you.

Management usually follows a familiar loop: map where exposure sits (sites, suppliers, routes, materials), assess it with climate data, audits, certifications and questionnaires, act through supplier codes of conduct, corrective plans, alternative sources and climate-proofing sites, and report. In India, the top 1,000 listed companies publish a Business Responsibility and Sustainability Report (BRSR), which includes value-chain information. Reporting frameworks such as the GHG Protocol and climate disclosure guidance shape what gets measured.

Physical climate risk, site by site

Risk at a site combines three things:

• Hazard: how likely and how severe floods, heat, cyclones or droughts are at that location, today and under future climate scenarios.
• Exposure: what sits there: stock, equipment, the flows that depend on the site.
• Vulnerability: how badly the site is affected and how quickly it recovers (building height, drainage, backup power, alternative sites).

Transition risk in numbers

Transition risk shows up as costs: a carbon price on emissions, carbon border charges on exports to the EU, higher costs for high-emission materials, or customers moving to lower-carbon suppliers. Modelling the effect of a carbon price on landed costs, as in carbon-aware network design, shows which products and routes are most exposed.

Checking social risk

1. Prioritize suppliers by country, sector and spend, since some sectors and regions carry higher risks of forced or child labour or unsafe conditions.
2. Self-assessment questionnaires, followed by audits for higher-risk suppliers, often against recognized standards such as SMETA or SA8000.
3. Corrective action plans with deadlines, verified by follow-up.
4. Grievance channels that workers can use safely.
5. Trace materials to their origin where laws require it, such as cotton or polysilicon under forced-labour import rules.

Frameworks converging on supply chains

• ISSB standards (IFRS S1 and S2, 2023): a global baseline for sustainability and climate disclosures, building on the earlier TCFD recommendations, including climate risks and Scope 3 emissions.
• EU CSRD and its reporting standards: detailed sustainability reporting for large companies, including value-chain information.
• EU due diligence rules: obligations to identify and address human-rights and environmental harms in supply chains.
• India’s BRSR: SEBI’s Business Responsibility and Sustainability Report for the largest listed companies, with a core set of indicators subject to assurance and growing expectations of value-chain disclosure.

For suppliers, this means customers will ask for emissions data, policies and evidence, and the questions will become more standardized.

Double materiality

European reporting uses double materiality: a topic matters if it affects the company’s finances (outside-in) or if the company’s activities significantly affect people and the environment (inside-out). Supply chain teams contribute to both: climate risks to sites and suppliers, and the company’s impacts through its suppliers’ practices.

The limits of audits

Social audits find some problems and miss others: they are announced in advance, they last a day or two, and they can be manipulated with false records and coached workers. Better results come from combining audits with worker voice (anonymous channels and surveys), long-term supplier relationships that support improvement, responsible purchasing practices (realistic prices and lead times, since squeezing suppliers can push them towards abuses), and traceability for high-risk materials.

Greenwashing rules in India

Environmental claims are now regulated more tightly. The Advertising Standards Council of India issued guidelines on environmental claims in 2023, and the Central Consumer Protection Authority issued guidelines in 2024 on preventing greenwashing and misleading environmental claims. Claims such as “eco-friendly” or “carbon neutral” need specific, verifiable evidence. Supply chain data is often that evidence, so its quality has legal consequences.