Sustainable ESG-oriented
Supply Chains:
A Strategic Imperative for Modern
Businesses
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Introduction
The Significance Of Supply Chain Impacts On The Environment And Society
What Factors Push Companies Towards Supply Chain Sustainability?
Motivations: Benefits And Opportunities Of Implementing ESG-Oriented Supply
ChainsRisks Of Inaction
What Are The Necessary Steps And What Are The Challenges?
Technological Solutions
The Solution From aiESG
Conclusions And Future Trends©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/Introduction

Figure 1 The visualization map showing various ESG impacts from the supply chain impact when producing acertain product

The significance of supply networks in today's society is hard to overstate. Supply chains link all
the people, organizations, resources, activities, and technology involved in the transformation of theresources and energy into a consumer good or service through multiple processes such as extraction,transportation, production, and sales. Needless to say, in a modern highly globalized world, any producer
or service provider, be it a multinational corporation or SME, is essentially a hub with extensive and highly
complex supply chains, spanning across multiple countries and involving a multitude of supply actors.
As such, a company’s business activities have real effects (i.e., impacts), both globally and locally,on the environment (e.g., resource use, energy consumption, waste generation, carbon emissions, etc.) andsociety (e.g., employment practices, worker safety, community relations, etc.) through the activities of its
supply chain. This means that companies are responsible for the potential adverse impacts on the planet andpeople through their supply chain operations, even if they are not fully aware of these impacts or would
typically consider them beyond their accountability. While traditionally companies were only concernedwith increasing efficiency and managing costs when it comes to supply chain management, recent trends
indicate that this paradigm is rapidly shifting. Today, companies are expected to not only understand andreport the potential ESG risks1 that are embedded in their supply chains but also take proactive measures tomitigate such risks and improve ESG performance by engaging closely on this issue with the suppliers.
In this article, we will discuss the following themes:

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Risks that can hurt the company as a result of its impact on the Environment (e.g., climate change, resource
scarcity, pollution, biodiversity loss), Society (human rights violations, labor and community impacts) and
Governance (corruption, unethical behavior)©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/

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What impacts do supply chains have on the environment and society?
What trends drive the recognition of the importance of considering ESG in supply chainsby the business community?
What potential benefits and opportunities motivate businesses to begin the journey towards
making their supply chain sustainable and resilient?
What are the risks of not doing anything?
What are the necessary steps and what are the challenges?
How can technology help companies understand and improve their supply chain ESG
performance?
What is the cutting-edge solution from aiESG?
What are the near future trends for supply chains?

First, we will begin by establishing the significance of the supply chain's impacts on theenvironment and society.

The significance of supply chain impacts on the environment andsociety

Supply chains have large impacts on both the environment and society. For instance, let's takegreenhouse gas emissions. In fact, supply chains are the biggest GHG emitters, responsible for over 60%
of global emissions. Very often, the bulk of an organization’s carbon footprint is attributed to scope 3©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/

emissions, which are essentially emissions from the supply chain (upstream emissions) plus emissions fromproduct use and utilization (downstream emissions)2.

Figure 2. Overview of the GHG Protocol's scopes of emissions across the value chain

Some industries have over 80-90% of their entire carbon footprints coming from scope 3. That is
the reason why so much attention nowadays are being focused on encouraging companies to measure andtake action on reducing their scope 3 emissions and report the progress through various initiatives, such as
SBTi, CDP, GRI, TCFD, ISSB and others.

Not only are supply chains the biggest emitters, but they are also the biggest victims of climatechange. Extreme weather events, such as heat waves, droughts, hurricanes, flash floods, and others, areincreasing in frequency and magnitude due to global warming and cause disruptions in supply chains byposing health hazards to vulnerable workers and communities at the extraction and production sites.
According to recent surveys, every second CEO mentions struggling with supply chain disruptions due toclimate change, with 25% of CEOs calling it one of the biggest business risks.
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For more information regarding Scope 3 refer to the original source: GHG Protocol Corporate Value Chain (Scope3) Accounting and Reporting Standard©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/In addition to exacerbating climate change, supply chains greatly impact the broader environment,
including pollution, resource depletion, biodiversity loss, and other effects. According to the UN, manyindustries have much larger impacts on the environment from their supply chain operations than from theirdirect business operations. For example, in such industries as financial services, food and beverages, andbanking, the impact on the environment comes predominately from supply chains (98%) compared to only
a minuscule impact coming from direct company operations (2%). Companies, therefore, cannot simply
claim that their business operations are green, without addressing the elephant in the room - their supply
chain operations. With such realization, new initiatives are
emerging (e.g., TNFD, SBTN) that require companies toreport on the nature-related risks (e.g., biodiversity loss,
ecosystem degradation, and resource scarcity) of theirbusiness operations, including up- and downstream of
their value chains.

©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/

Similarly, on the social front, supply chains have enormous social responsibility, employing an
estimated 450 million people annually, according to ILO data. Supply chains often present serious humanrights risks that many companies have failed to mitigate. As supply depth increases, visibility decreases,
raising the likelihood of violations, especially in the deeper tiers where abuses are often overlooked. Limited
visibility in supply chains increases risks of violations, especially in emerging markets, where manybusinesses are unaware of their adverse impacts on workers and broader society. Vulnerable groups suchas women, migrants, and children are particularly at risk.
Human Rights Watch recorded a plethora of unethical labor practices and human rights violations
in deep supply chains. For example, the apparel industry has seen abuses on textile fabrics, including newsbreaking disasters such as Rana Plaza textile fabric building collapse in Bangladesh, which killed 1,138
garment workers. The jewelry sector is infamous for the case of “blood diamonds” referring to human rights
abuses associated with diamond mining in conflict zones like Zimbabwe and Angola. The technology andmanufacturing sectors are plagued with scandals related to the mining and excavation of raw minerals suchas tantalum, tungsten, gold, lithium, and cobalt which are known as “conflict minerals” as they are sourced
in conflict-ridden areas in the Democratic Republic of the Congo and adjoining countries. Global carmakers
are put on the spot regarding the use of aluminum sourced from the Chinese province of Xinjiang,
implicating the risk of forced labor of Uyghurs. According to ILO, globally, an estimated 28 million people
are victims of forced labor.

©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/

Table 1. Examples of human rights risks in the global supply chain
Forced or compulsory labor
Human trafficking
Bonded labor
Restrictions on freedom of association and the right to collective bargaining
Poor, unhygienic, or unsafe working conditions
Illegal child labor
Excessive working hours
Source: UNEP
Table 2. Examples of risks of human rights violations associated with supplier transactions (asidentified by the financial company)

The risk that suppliers are not paying adequate wages or delaying salaries
The risk of long working hours at suppliers as a consequence from transactions with the suppliers
The risk of forced labor and threats of punishment, etc., as a consequence from transactions with the
suppliers
The risk of discrimination or disadvantage in hiring, promotion, or wages without reasonable cause due
to race, gender, language, age, etc., in companies within the supply chain
Source: SMBC. 2023/05
The majority of risks associated with human rights violations or environmental damage occur deep
within supply chains. Most companies are unaware that they may be unintentionally contributing to these
violations unless they have the necessary intelligence into their value chain operations. This includes
insights into the ethics of supplier business practices, as well as an intricate understanding of the productlifecycle, such as the geographical origins of the source materials, their journey to the company gates, andthe associated ESG risks. Until recently, companies had few incentives and lacked the necessary know-how
to address these issues. However, this is rapidly changing.

©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/What factors push companies towards supply chain sustainability?
A. View from the academic side
Academic studies that reviewed the body of academic literature related to sustainable supply chains
have identified over 40 distinct factors (also known as ‘pressures’, ‘triggers’, ‘enablers’, and ‘drivers’) thatpush organizations toward the implementation ofsustainability in supply chains. Among the most cited
Academic research finds more than 40
external pressures were government legislation,
major reasons why companies are pushedinternational regulations, and customer pressure, while
influential internal pressures included drivers related to toward sustainable supply chainscorporate strategy (e.g., top management commitment,
organization mission statement) and the organizational
resources (e.g., availability of resources for sustainability initiatives, pressure for more efficient use ofnatural resources) (Saeed & Kersten, 2019). We will not describe each driving factor here, but you can see
the whole list of factors in the table below.
Table 3. Drivers of sustainable supply chain implementation:
Drivers group

Drivers
External (outside of the organization)

Regulatory
pressures• Government legislation (regulations on labor, employment, andenvironment; noncompliance results in fines)• Regional (e.g., the E.U.) or international regulators (supranational
regulations influence organizations to adopt sustainable practice)• Professional/trade associations (trade associations impose requirements;
non-compliance can lead to penalties)• Financial benefits (incentives like tax exemptions encouragesustainability adoption)• Certifications (standards like ISO help organizations meet ecological andsocial requirement)

Socialpressures• NGO pressure (NGOs push organizations to adopt sustainability
initiatives)• Media/press (Media reports can damage reputations and prompt
government action)• Value-based networks (Scientific communities encourage sustainable
innovation)• Public pressure (Public awareness drives demand for sustainable
practices)• Consumer organizations (Organized consumer groups demand©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/

sustainability)• Social well-being/community focus (Communities expect organizations
to support local welfare)Marketpressures• Competitive advantage (Improving sustainability for a competitive edge)• Competitors’ pressure (Competitors' sustainability practices set industry
norms)• Shareholders’/investors’ pressure (Shareholders and investors push forsustainability; poor performance can lead to divestment)• Institutional pressure (Banks and financial institutions pressure forsustainable practices)• Suppliers’ pressure (Suppliers help and pressure organizations to adopt
sustainability)• Customers’ pressure (Consumer demand drives adoption of sustainability
practices)• Reputation/image (Sustainability improves brand image and stakeholder
satisfaction)• Globalization(Global market access increases pressure for supply
chain sustainability)
Internal (inside the organization)

Corporate
strategies• Top management commitment (Leadership supports proactive
sustainability)• Organization strategy (Sustainability is integrated into the mission andstrategy)• Cost-related pressure (Cost reduction through energy savings, reduction
in material consumption, increased efficiency, and profit)• Operational/economic performance (Sustainable strategies for longterm economic benefit)

Organizational
culture• Socio-cultural responsibility (Moral obligation to meet social
expectations)• Innovativeness (Willingness to improve and generate new sustainability
ideas)• Code of business conduct (Standardized decisions and procedures forstakeholders)• Information dissemination (Sharing sustainability information to promotecollaboration)• Health and safety (Pressure to report and reduce work-related incidents)

Organizational
resources• Organizational resources (Adequate resources drive sustainability
initiatives).
©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/• Resource depletion (Pressure to use natural resources efficiently)• Human capital (skills and capabilities)(Sustainability
practices
improve expertise and capabilities)• Employees’ pressure/involvement (Employees push internally forsustainability practices)• Physical capital (technology and equipment) (New technology aids in
implementing sustainability practices)• Training & development (Training improves sustainability performanceand reduces waste)
Organizational
characteristics• Size (Large organizations face more internal and external pressures)• Industrial sector (Different sectors require different sustainability
initiatives)• Position in supply chain (Downstream organizations face more pressure
for sustainability)• Geographical location (Compliance with local environmental and social
regulations)• Degree of internationalization(Multinationals face more pressure
to adopt sustainability practices)• Current level of sustainability actions(Highsustainability
performance reduces stakeholder pressure)

Source: Saeed, M.A.; Kersten, W. Drivers of Sustainable Supply Chain Management: Identification andClassification. Sustainability 2019, 11, 1137. https://doi.org/10.3390/su11041137

In addition to identifying existing drivers, recent
Academic research identifies causal academic research has also made progress in establishingpositive causal relationships between the implementation ofrelationships between supply chain
sustainable supply chain management and benefits tosustainability and business success companies, such as lower reputational risks and improved
performance (Agoraki et al. 2023). Similarly, there is pilingevidence that climate change is associated with health hazards
for employees in supply chains, causing unstable commodity prices and thereby affecting companies
downstream (Kovacs and Falagara Sigala, 2021).

B. View from the business side
Voices from business leaders and industry experts:“The business case for supply chain sustainability
has never been clearer and the stakes for not doing
so have never been higher.

From the perspective of businessowners, implementing sustainability insupply chains has ceased to be just a “niceto-have” but instead has become a “need-tohave”, and makes perfect sense for runninga modern competitive business.

©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/

Recent surveys indicate that CEOs and supply chain officers strongly agree that incorporating
sustainability is crucial in their own operations (53%) and among suppliers (45%). This sentiment is echoed
among leaders and experts in the Asia Pacific region, who identified resilience in the supply chain as the
top success factor for business competitiveness. Furthermore, The World Economic Forum interviewed
large businesses running global supply chain networks, revealing that many interviewees associate supply
chain sustainability with long-term financial success, citing operational gains such as reduced material
wastage, improved energy efficiency, and streamlined
processes, alongside shifting investor interests.
According to experts, businesses are
ESG-oriented companies are favored byincreasingly aware that investors nowadays evaluate
investors and can gain capital at lower
companies based on their ESG performance.
costs
Furthermore, the cost of capital can be prohibitively
high for companies exposed to high ESG risks in supply
chains. Already, ⅔ of all capital is allocated throughsome sort of ESG lens, making it costly for low ESG-performing companies.
Another concern for companies worldwide is talent
shortages. An international survey reports that globally 75%
Global scarcity of talentof employers are struggling to find the talent they need to fillpositions, with Japan topping the list with the world’s worst
shortages at 85%. “The talent shortage is real, and manybusinesses are struggling”, writes Forbes, stating that “employers in multiple countries and industries—
and those of all sizes—are experiencing a shortage in attracting and retaining workers”. In this context,
companies are in fierce competition for attracting talent, while talented workers themselves nowadays are
attracted by the sense of purpose and meaning in a company, rather than by simply receiving a salary. As
such, companies that fail to prove that their business operations are ethical and sustainable, including supply
chain operations, will struggle to attract and maintain a talented workforce.

Other concerns

Finally, companies are highly concerned about increasing
regulations, raising consumer awareness, and increasing public scrutiny
and demand for transparency in the supply chains, which we will discuss
further.

C. View from the public side
As supply chains are more complex than ever, it is no
surprisethat public scrutiny is rising, vulnerabilities are being
The global trend of increased
public scrutiny towards supply exposed, and regulations and demands from stakeholders are
rapidly increasing. As consumer awareness increases, there ischain operations
more pressure on businesses to comply with sustainability
principles and more pressure on governments to establish thenecessary regulations and guidelines to ensure such compliance.
Moreover, the growth of social justice movements in recent years, along with the shifting climate change
narrative towards ‘climate justice’ and ‘just transition’, is contributing to a heightened focus on ensuring
human rights and fairness, particularly for people from vulnerable groups. These are people who labor in©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/

supply chains directly or people from the communities who are affected by the impacts from the supply
chain operations. In such a context, companies must be constantly vigilant over their business practices
within their supply chains.
While international frameworks promoted byinternational organizations and NPOs have been largely
Regulations are tightening aroundvoluntary and focused on reporting, recent years have seen
the world
national governments (and supranational, i.e., the EU)
proposing, discussing, and passing legislation with a particularfocus on ensuring that businesses adhere to sustainable
practices in their supply chains.
The Securities and Exchange Commission of the United States proposed a legislature that willlegally require publicly traded companies to report their GHG emissions, including indirect scope 3
emissions. The legislature is currently at the public comment stage, but if passed, companies like Walmart
will have to report the emissions from their entire supply chain, not just Walmart stores.
In the UK a law has been discussed that will force big companies to clean up their supply chainsby fining them if they use agricultural products (e.g., cocoa, rubber, soy and palm oil) grown on illegally
deforested land.
But perhaps it is the European region that is moving the fastest in the direction of tightening ESG
laws, including regulations that specifically focus on supply chains. In Germany, the Act on Corporate Due
Diligence Obligations in Supply Chains came into force on 1st January 2023, which legally requires large
German enterprises to exercise due diligence in their supply chain to minimize environmental-related andhuman rights-related risks. The Corporate Sustainability Reporting Directive (CSRD) and Corporate
Sustainability Due Diligence Directive (CSDDD) are two complementary legislations by the European
Commission under the umbrella of the European Green Deal3. Both acts have already entered into force in2023 and 2024 respectively, and target EU or non-EU companies operating on the EU market. Bothregulations apply to companies' own operations and their supply/value chain operations. CSRD focuses on
the disclosure of information relevant to the company’s social and environmental impacts, while CSDDD
requires companies to establish due diligence* procedures regarding human rights and environmental issues
when they interact with their supply/value chain counterparties. Non-compliant companies risk exclusionfrom public procurement contracts, financial penalties and administrative measures.
As these laws are being passed nationally with a focus on large enterprises, they will inevitably
affect companies globally, including smaller companies with fewer employees. Large companies under thejurisdiction of such laws will have to engage their global and smaller partners to comply with relevant
requirements in order to do business with them, or even oblige them by specifying relevant clauses in supply
contracts.

In summary, according to the above tendencies and viewpoints from all three sides (academia,
private, and public sectors), the global trend towards more emphasis on ESG in supply chains is undeniable.
It would be a mistake, however, to think that companies are simply forced to follow and unwilling to act
on their own. As companies begin to recognize that numerous benefits and opportunities can be realized on

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European Green Deal is a package of policy initiatives, which aims to set the EU on the path to a green transition,with the ultimate goal of reaching climate neutrality by 2050

©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/

this pathway, they become motivated and thus they themselves become a large driving force behind thetrend toward ESG-oriented supply chains.

Motivations: benefits and opportunities of implementing ESGoriented supply chains
aiESG research team has explorednumerous sources to understandwhat motivates companies

Let's examine in more detail why companies may get
motivated to pursue sustainability and ESG-orientation
throughout their supply chains. Through exploration ofacademic sources, as well as online news articles and blog
articles, we have compiled a table of factors (i.e., benefits andopportunities) that motivate companies (and investors) to
pursue sustainability throughout their supply chains.

Table 4. Motivations for companies that implement ESG-oriented supply chains:potential benefits and opportunities
Enhanced
response toregulations
and enhanced
qualitystandards

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Access to newcontracts andmarkets• Gaining access to government contracts• Entering new markets

Increasedstakeholder
confidence
and improved
brand image

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Quicker response to regulations
Smoother compliance
Lower cost toward regulation compliance
Receiving sustainability certification/label
Raising quality standards above average

Gaining the image of a responsible and trustworthy company
Gaining priority from investors
Creating enduring stakeholder value
Reputation enhancements
Enhanced brand value
Gaining trust through transparency and traceability©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/Improved risk
management

Long-term
success

Enhancevalue creation
andoperational
performance

Reduced costs
and improved
financialstability

Enhancedhumanresources• Reducing supply chain risks by:○ Improved ability to anticipate risks○ Improved ability to respond to and recover from disruption○ Resilience of supply chain to disruption○ Preventing harmful activities• Cost reduction and increased financial stability through betterrisk management.

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Enhancing business continuity and long-term success
Driving innovation
Increasing competitivenessAchieving a circular economy
Improving relations with shareholders• Developing new sourcing routes and better suppliermanagement• Leveraging new technologies• Efficiency gains (through optimization and cleaner operations)• Flexible and green product design• Logistics optimization• Improved supply chain cooperation

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Reduced product costs through energy and resource savings
Access to capital on beneficial terms
Lower cost of capital
Lower debt cost
Increase financial performance
Gaining the right to price the product at a premium(consumers are willing to pay more for eco-friendly products)• Logistics optimization• Improving relations with employees• Attracting employees who value sustainability, including
premium talent• Retaining employees (being socially responsible reduces theannual quit rate by at least 3%)• greater employee involvement leading to improved
productivity• improved job quality and working conditions for employees inboth the company and supply partners©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/Enhanced
customer
relations••••

Enhancedpartner
relations• Improved collaboration with suppliers• Development of long-term partnerships with suppliers

Improving relations with consumers
Attracts customers who value sustainability
Enhanced customer loyalty
Being able to deliver a premium to consumers

Enhanced
corporatesocialresponsibility
performance• Help meet emission reduction commitments, including
reducing scope 3 emission, by engaging supply chain partners• Enhanced social performance• Enhanced corporate governance

Benefits fromthe investors’
perspective• Aligning with responsible investment policies and bestpractices;• Higher company revenue from realized opportunities
mentioned above

Source: Compiled by aiESG research team by reviewing academic and online sources

With so many opportunities and potential
benefits (the number of which is growing as knowledge
in the academic and business community grows),
companies are not only driven by pressures (as discussed
in the above chapter) but also intrinsically motivated asthey aspire to realize these opportunities and benefits.
This is a great opportunity for frontrunningcompanies that moved early to improve the ESG
performance of their supply chains. For others, it isgetting harder to avoid serious risks to their businesses.

Due to numerous opportunities,
motivated companies themselves are
becoming the driving force behind thesustainable supply chain trend©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/

Risks of inaction
Companies are increasingly expected to understand and manage
their exposure to supply chain risks. As we discussed above, those with a
While there aregood understanding of their supply chain have great opportunities fornumerous benefits ofbusiness stability and long-term success. Companies that ignore current
trends and become late in orienting their supply chain operations towards
action, there are also
ESG principles face various risks.
significant risks ofThese risks can include
inaction
direct impacts from supply
There are direct risks related tochain disruptions, such as
interruption of the flow ofsupply chain disruptions andmaterials, impact on delivery times, loss of social license toindirect risks of damaging theoperate, increase in cost of materials due to last-minute change
company as a result of ESG
of supplier, etc. Other risks include reputation damage,violations in the supply chain
regulatory non-compliance, operational disruptions, financial
risk, being unable to attract and retain employees, and lost
business opportunities.
As public scrutiny of this issue increases, many global companies are increasingly held accountable
for their supply chain operations. In 2020, executives from Amazon, Ikea, Nike and other major companies
were asked to appear before the U.K. Parliament to address claims that their suppliers were using forcedlabor. Another company, the UK based fashion retailer
Boohoo, lost over $1.5 billion in market value on a single day
Companies are increasingly being
after poor working conditions at one of their garment
manufacturers were disclosed. ESG-related supply chain
held accountable for ESG violations
scandals have recently brought financial and reputationalin their supply chainsdamage to other corporations like Hershey's and Nike.
Growing ESG and Human Rights regulations makefirms directly accountable for violations, such as child labor,that are happening deep in the upstream supply chain
Most companies are unaware of the operations. Such violations may have been committed by asignificant risks arising from ESG
supplier, or a supplier of a supplier, which the company
violations deep in the supply chain might not even know existed. Yet, experts caution that if such
violations' risks materialize and become scandals, firms cansee 30-40% of their entire value wiped out instantly.
In the above chapters, we have seen in detail how various pressuresand motivations, including the necessity to avoid serious risks, all drive
companies to start working on gaining the proper understanding andimproving their supply chains’ ESG performance. Let's turn to the necessary
steps for companies and the challenges on that pathway.

The trend is clear, but
how do we address
the issue?

©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/

ESG-oriented supply chains: What are the necessary steps andchallenges?
Most academic research and experts mention that in general, the following steps must be taken byfirms in order to grasp and improve their supply chain ESG performance:
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Measurement & Monitoring (gathering data on ESG performance indicators)
Supplier Engagement (Communicating expectations for regulatory compliance andethical/sustainability standards to suppliers)
Procurement Decisions (consider labor conditions, ESG impact from transport methods, andsupplier transparency about materials used when making procurement decisions)
Supplier Management Program (regular reviews of supplier performance against metrics)
Sustainable Supply Chain Management Strategy (Develop an effective strategy with goals)

While there exist various recommendations for what steps should
be taken, most follow the simple scheme: “get facts -> mobilize resources
and create an action plan -> take action -> monitor”. It is the first step “get facts” - that most companies have to focus on first, which mostcompanies are currently struggling with. According to academic research,the “get facts” stage may include the following actions:
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Recommendations frombusiness and academic
experts

get consultancy
understand sustainability and ESG
gather facts to understand where change is needed
assess the current stage
identify the kind of change needed
identify regulatory and compliance requirements
identify ESG risks
identify opportunities

It is however with this “get facts” stage that most companies are struggling nowadays, due to thecomplexity of the supply chains and lack of ESG expertise in companies. Companies need to understandtheir supply chain ESG risks by first mapping out their supply chains and understanding where major risk
hotspots4 are located. This however is challenging without having the necessary expertise and tools.

4

Risk hotspots are areas within a supply chain that are particularly vulnerable to disruptions due to high exposure toenvironmental, social, economic, or operational risks.

©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/Indeed, surveys reveal that while procurement professionals
face a lot of pressure due to a growing understanding of the necessity
The importance and theto reduce negative environmental and social impacts across supply
chains, they are not always clear on how to begin addressing thesestruggle with the initial
issues. In addition, companies face challenges such as financial
stage
constraints or high costs, confusion with many ESG frameworks andstandards, lack of skills, lack of external assistance, and otherchallenges.
That is why supply chain professionals have recently been eager to utilize cost-effective IT
technology solutions that will help them take the first steps toward ensuring sustainability within supply
chain operations.

Technological Solutions
The issues described above bring us to the indispensable role that external consultancy and IT
solutions can play in assisting companies in assessing and improving the ESG performance of their supply
chains. According to experts who conducted surveys with business owners, most CEOs agree that the useof IT technology for improving the sustainability of their supply chains is crucial.
Despite the fact that most environmental and social impacts of businesses occur in the activities of
their supply chains, most businesses don’t know how much of that impact happens, where the biggest risks
are located, and so on. In fact, many businesses often don’t know anything about suppliers beyond directtier-1 suppliers. While mapping the extended supply chain beyond direct suppliers can seem too daunting
as the resulting image may be too complex, in reality, the big impact is often situated among just a few
suppliers with the highest ESG risks. Therefore companies can prioritize engaging with these high-risk
suppliers to make the entire supply chain more sustainable.
Thus, a thorough supply chain analysis is required to reveal opportunities for increased
sustainability. Sustainable supply chain management requires very detailed attention, which can be difficult
without the right digital tools and external assistance to help make sense of complex structures andrelationships.
ESG work takes considerable resources, time, money, and care from companies. It may seem that
only corporations with high financial endowments canafford to take comprehensive steps toward sustainable
IT solutions can help companies
supply chains. Most companies utilize semi-manual tools tomap out and assess ESG risks, such as supplier surveys,
initiate their response strategies by
where companies ask suppliers to provide information via
bringing clarity and strategic insightquestionnaires. Apart from being costly and timeinto the complex issue of sustainableconsuming, such surveys can often help map only a few
supply chain management
direct suppliers who returned the surveys. They, however,usually need to create a complete picture of their supply
chains beyond tier-1 suppliers. Without a thorough ESG
impact analysis of the company’s product/service throughout its entire lifecycle, companies cannot grasp
the full picture of how their extended supply chain looks and where major ESG risk hotspots are located.
Modern supply chains may have thousands of nodes. In addition, as companies have to take into
account the growing number of relevant ESG indicators (e.g., ESG contains hundreds of relevant indicators©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/

such as GHG emissions, water consumption, child labor risk hours, and so on) it quickly becomes unfeasible
to manually manage such data.

The solution from aiESG
Fortunately, the integration of cutting-edge academic research and the latest developments in big
data and AI have given rise to a new generation of tools to assist companies in such tasks. aiESG is proudthat it is the first product-focused solution in Japan and worldwide that helps companies assess the ESG
impacts of their products and services throughout the supply chain based on the lifecycle analysis principles.
The unique know-how of aiESG allows the creation ofan approximate model of the extended supply chain of thecompany’s product or service based on credible statistical data
aiESG offers a unique solution
and a scientific approach. The product/service lifecycle model
based on cutting-edge scientificbuilt by aiESG tracks the materials to their source andresearch and powered by AI
calculates ESG impacts associated with the journey throughout
the supply chain, allowing one to view the entire picture of the
supply chain. The company can use this model for various
purposes, including:• Grasping the approximate structure of the supply chain can help companies initiate the creationof their real-life extended supply chain maps. This will, in turn, allow companies to reach out toand engage with their suppliers (and their suppliers' suppliers) to work together on improving thesustainability performance of the whole value chain.
• Understanding which ESG impacts are the biggest and where they are located can help companies
better manage their risks. This enables companies to understand what are the weak spots of theirvalue chains.
• Companies can then begin optimizing their supply chain operations by addressing high-risk
hotspots through supplier engagement or by developing new sourcing routes.
• Furthermore, these insights also enable companies to begin planning their compliance response
to growing regulations.
There are many other beneficial ways companies can use aiESG services. In short, aiESG provides
a cutting-edge solution that helps companies in their first “get information” step toward a sustainable supply
chain. With these valuable insights at just a fraction of the price, companies can begin improving their
supply chain ESG performance.

Conclusions and Future Trends
In this article, we have seen in detail how the trend towards making supply chain operations moresustainable and ESG-oriented is developing, what tendencies drive such a trend (e.g., objective pressures,companies’ internal motivations, and growing risks of inaction), what steps companies should take inresponse, what challenges they face, and how modern technological solutions can assist companies. We
have also briefly mentioned how aiESG service can be a low-cost and helpful solution for companies thatplan to address the sustainability of their supply chains, particularly at the initial stage of their response.
©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/

Finally, based on our research at aiESG, we offer a brief outlook on the three major future trends regarding
supply chains.
First, there is no doubt that public scrutiny will grow further and regulations will tighten, forcing
companies to assess, improve, and report their extended supply chain performance. Voluntary reporting
frameworks will become not just good business practice but a necessary one in on order to remaincompetitive. Legislation, currently in the discussion and testing phase in several forerunning countries, will
become more widespread and harder to ignore.
Second, from the consumer perspective, we observe how growing consumer awareness and demandfor ethically made products has spurred the market response in the form of a growing market niche of the“ethical products” and “ethical industries.” For example, the trend of “ethical fashion” or “sustainablefashion” is rapidly growing within the apparel industry. Companies such as Patagonia (an American retailerof outdoor clothing), and Avantii (a Japanese fashion company specializing in organic cotton) are just a
few examples of fashion brands making strides in this increasingly competitive market.
Finally, we observe the growing importance of social dimensions, particularly human rights
considerations. The most recent academic review (Truant et al., 2024) revealed that discussions within the
ESG field have steadily changed from ‘financial performance’ and ‘environmental sustainability’ to ‘social
disclosure’. Recent legislation in the European Union, such as the Germany Supply Chain Act andCorporate Sustainability Due Diligence Directive (CSDDD), obligates companies to implement humanrights due diligence across their suppliers. Leading companies, such as Apple, FAST Retail (Uniqlo, GU),
Mercedes-Benz Group and others, have already taken pioneering steps in this direction. In our next article,
we will discuss this trend toward human rights due diligence in supply chains, describe case studies byleading companies, and describe how aiESG can help companies begin planning their compliance with thedue diligence process.

© 2024. For information, contact aiESG. Inc.

https://aiesg.co.jp/en/©︎ 2024 aiESG, Inc. https://aiesg.co.jp/en/