GUEST POST: How Investors Think About Supply Chain Risk

Meagan Tenety, an ESG Analyst, discusses supply chain risk, using an example from the flowers industry

Introduction to Meagan Tenety

As a professional, and currently as an ESG analyst, I’ve always been interested in things that connect us.  Throughout my career in international development, philanthropy, consulting and finance, I have centered that curiosity around the decisions that corporations make and its global ripple effects.  The practice of ESG analysis is identifying the interconnections between corporate strategy, impact and risk and shareholder value.  There is no greater example of that interconnectedness than global supply chains and their varied and unique risks.  

Currently, I work as an ESG analyst at a value focused asset management firm. ESG considerations are integrated across all our investment strategies as this is critical for accessing a variety of risks and opportunities. Prior to my current role, I was the founder of an ESG consulting team at a stock exchange where I co-development an engagement process with our corporate issuers. 

How Investors think of Supply Chain Risk 

Every time you make a purchase of a good (be it a car, a cup of coffee, or a candy bar), your purchase has ripple effects across the globe.  From the producers who made, assembled, mined or grew the good, to the land, shipping and packaging, your purchases have ESG impacts all over them.  

So how are investors thinking about these interconnected issues in global supply chains? Let’s look at it through the lens of an ESG analyst.  When assessing the supply chain impact investors will divide the issues into two buckets; social and environmental.  

To assess the social impact and risks analysts will ask the following questions: Where is this good produced? How is it produced? Are there regional or ethical issues commonly found in these supply chains? Does it have political implications? Has the company been embroiled in labor disputes or ethical issues with its labor force? 

These questions center around assessing the labor risk, and impact within a single supply chain. You might ask why these things matter.  To an investor all of these risks can impact the future availability of labor, litigation risk, and brand reputation risk which can have lasting impacts on a company.  

Next, an analyst will look at the environmental impacts both in the short and long-term.  Questions can look like: How resource intensive is the creation of this product? Does the production of this good produce emissions? How intensive are the emissions? Are there extreme weather patterns/climate issues that can impact the future availability of these goods? To an investor, all of these risks can impact cost of production, future availability/stability of a given good and business continuity risk. 

A Case Study 

Let’s walk through a case study to understand how investors evaluate these questions in action.

Everyone has sent a loved one a bouquet of flowers, whether it's for a birthday, wedding, graduation or even a funeral.  We are going to take a deep dive into the environmental and social risks in flower supply chains and how this fuels investor decisions. The global cut flowers industry is worth up to $55 billion USD a year, according to Rabobank. Within this industry 1-800-flowers is a publicly traded company  (one whose stock trades on an exchange). A typical ESG analyst would evaluate the following issues:

Social Risks

Flowers are produced in a variety of regions with the largest producing countries being The Netherlands, Ecuador and Colombia. Each of these regions face different labor/human rights issues as well as unique political risks.  The Netherlands has strong labor protections and is the largest exporter of flowers globally.  While they are a large producer they also source from Ecuador and Colombia for export.  This means that global flower supply greatly relies on South American flower production.  There are unique labor risks including political risks in Ecuador and Colombia including lack of labor protection, child labor, and suppressed wages. Additionally,  in June of 2022, an indigenous leader in Ecuador was arrested which led to large-scale violence and protests.  These protests halted exports of goods including flower and greatly impacted the availability of flowers in the global market.  For these reasons, as an ESG analyst I would look at social risks as elevated for the flower industry due to political uncertainty. 

Environmental Risks 

Flower production is resource intensive and has unique environmental impacts.   For flower producers, flowers can lose 15 percent of their value for every extra day spent traveling. This means that quick and rapid transit is crucial in flower production.  

To control diseases and pests, flowers are often grown in high-altitude, industrial-scale greenhouses. Flower production also requires high water use and can produce chemical runoff. Flower transport also requires refrigerants and transport emissions.  Overall, production has a high impact on its local communities and is emission and water intensive.  This means that the price of gas and energy among other macro factors greatly impacts the cost of production.  Additionally, climate change impacts such a drought, can greatly affect both production and the local growing communities where flowers are produced.  Overall, as an ESG analyst, I would rate its environmental risks as elevated.  

When put together these two risks, environmental and local, show an elevated supply chain risk for a flower company like 1-800-flowers.  

In Conclusion

ESG risks are prevalent in every company and in today's environment, it's critical an analyst understands the potential negative and positive impacts it brings. While the scale and scope may vary, it's important to identify, prioritize, and assess the whole value chain. This includes a thorough understanding of the entire supply chain where the majority of human rights or labor violations take place. While this is just one of the many ESG risks to assess, it could be instrumental in building a company that is resilient, equitable, and profitable for years to come.

---

DISCLAIMER:

The information in the Blog constitutes the authors’ own opinions (and any guest bloggers posting from time to time) and it should not be regarded as a description of services or opinions provided by Pickering Energy Partners LP or Ariel Investments.

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. The views reflected in the commentary are subject to change at any time without notice.

Nothing on this Blog constitutes investment advice or any recommendation that any security, portfolio of securities, investment product, transaction or investment strategy is suitable for any specific person.  You should not use this Blog to make financial decisions and we highly recommended you seek professional advice from someone who is authorized to provide investment advice.