The combination of President Biden’s executive orders on U.S. supply chains, the climate crisis, and lessons learned from the pandemic will likely result in a major rewrite of the compliance handbook as we know it. What does this mean for supply chains? History shows that what starts as an executive order can result in increased financial and compliance disclosures, and finally migrates to enhanced oversight and regulations.
Instead of taking a wait-and-see approach, supply chain risk leaders can proactively prepare for this new regulatory landscape now. By understanding the weaknesses exposed by the pandemic, assessing the current administration’s priorities, and adopting more advanced supply chain risk management practices today, enterprises can not only ensure compliance with future regulations but also reap the benefits of greater supply chain resiliency in the near term.
COVID-19: A Catalyst for Change
With up to 75% of companies reporting significant disruption in their supply chain, the pandemic wreaked havoc on economies across the globe. The pandemic exposed critical weaknesses in supply chain management processes and revealed that most companies lack great visibility into their supply chains.
COVID-19 illustrated the importance of knowing early warning signs for effective disruption avoidance efforts. Unfortunately, most companies lack the continuous, 24/7 risk monitoring capabilities needed for early warning and instead rely on traditional point-in-time practices like periodic risk assessments that happen at best every few months but most often annually or biennially. During the pandemic, data collected during third-party risk assessments conducted a year or even months before the pandemic quickly became stale during the pandemic’s rapidly changing risk environment. When informed and quick decisions in response to disruptions or risks were required, supply chain leaders simply didn’t have the timely data needed to maintain continuity.
Additionally, supply chain risk practices were too focused on a limited set of risks like supplier financial health and contract compliance. During the pandemic, financial and compliance risks were lagging indicators. Supply chain resilience requires widening the risk aperture beyond financial and contract compliance to include regulatory, ESG, and location-based risks. During the pandemic, leading indicators were location-based risks such as local government regulations aimed at controlling the spread of the pandemic - including forced workplace shutdowns, border closures, and travel bans - and local infrastructure weaknesses in terms of equipment and internet availability to enable work from home.
Finally, the lack of supply chain visibility was exacerbated by the fact that most companies’ knowledge of their supply chains was not deep enough. During the pandemic, many supply chains were disrupted by shortages or disruptions occurring at their suppliers’ suppliers. These “Nth” party suppliers often were operating in different locations with different location specific risk landscapes than the companies’ third-party suppliers. Today, “Nth” parties operating in nations or with ownership not aligned with U.S. interests pose significant disruption risks. Supply chain resiliency requires knowing your entire supply chain from third parties all the way to “Nth” parties.
Undoubtedly prompted by the supply chain disruptions experienced during the pandemic,
Biden’s executive order on America’s supply chains outlines the administration’s desire to ensure resilient, diverse and secure supply chains in the United States. The findings from the ordered 100-day review of supply chain risks could result in new regulations to address the exposed shortcomings. For example, requirements to disclose monitoring of climate change and diversity activities and the outcomes achieved by both the entity and its suppliers. Along the lines of ensuring secure supply chains, the order highlights the need to identify areas in the civilian supply chain that are dependent on foreign adversaries or competitor nations.
Climate change regulations coming
President Biden has been very clear on his priorities and plans to drive the mitigation of climate pollution and climate-related risks. On day one, he rejoined the Paris Climate Accord, revoked the Keystone XL oil pipeline federal permit, and pledged to “review” a laundry list of existing business regulations. Then in his Executive Order on Climate Change, he established the National Climate Task Force and outlined a broad spectrum of climate goals, including achieving net-zero carbon emissions by 2050.
As outlined in the executive order, the administration intends for climate change initiatives to be adopted across the federal government in terms of policymaking, budget process, contracting, and procurement. These changes could be implemented across every sector of the economy. Therefore, in the near future, we can anticipate emerging regulations to address a variety of climate issues including reduction of climate pollution, increased resilience to the impacts of climate change, environmental justice reform, protection of public health, and conservation of land, water, ocean, and biodiversity. For supply chain professionals, this will mean kickstarting and monitoring initiatives to reduce carbon emissions, waste, water usage and more – and to ensure adequate reporting on performance for assessment. Interestingly we are already seeing signs of this. As an example, the SEC Examination Priorities for 2021 also includes a greater focus on climate and ESG related risks. Based on this, companies can first expect increased financial statement disclosure requirements and new regulations focusing on climate change initiatives throughout the entire business.
Preparing for change? Know your risks.
Keeping up with supply chain changes and expectations requires visibility and continuous risk monitoring. As effects from the pandemic continue and new regulations around sustainability, third-party visibility and near real-time collaboration are created, companies need to advance their supply chain management practices. Integrating continuous monitoring capabilities will enable supply chain leaders to not only make timely and effective decisions to improve supply chain resiliency, but it will also enable companies to keep up with the changing regulatory landscape and avoid costly fines and tarnished reputations.
