Managing sustainability risks
Given that much of the effect of our environmental, social and ethical impact is felt in our supply chain, working with our suppliers is a crucial piece of our Sustainability & Responsibility strategy.
Our standards and guidelines
We set out our system for managing the sustainability impacts of our supply chain in three main documents, Partnering with Suppliers, Sustainable Agriculture Sourcing Guidelines, and Sustainable Packaging Guidelines.
‘Partnering with Suppliers’ is the principal standard for our suppliers. It sets out the minimum social, ethical and environmental standards we expect, and suppliers must adhere to them as part of their contract with us. It also sets out additional standards that we encourage companies who wish to be our long-term partners to work towards, and provides the platform for building mutually rewarding relationships.
This year we refreshed this standard to ensure it is clear to suppliers what constitutes a minimum requirement as opposed to a standard to work towards. It covers the following key sustainability areas:
- Ethical business practices – we emphasise our Code of Business Conduct standards, and require suppliers both to comply with legislation and to commit to working against corruption, extortion and bribery
- Human rights – we recognise International Labour Organisation standards for safe working conditions, fair pay and reasonable hours, and require our suppliers to maintain a safe working environment as a minimum condition, while encouraging them to endorse the Universal Declaration of Human Rights
- Health and safety standards – we expect suppliers to maintain a safe working environment including providing access to safety equipment and trainings. We also encourage them to conduct routine risk assessments, to improve health and safety standards continually, and to adopt health and safety management systems that can be externally verified and certified
- Environmental impacts – we expect suppliers to have an environmental policy and encourage them to set out our commitment to reduce energy, waste and water, and ask suppliers to demonstrate a similar commitment by monitoring and improving their performance
- Responsible drinking programmes: we explain our commitment to responsible drinking, and encourage our partners to make use of our information and experience in creating a more positive role for alcohol in society.
We distributed the refreshed standard to our key suppliers and have received positive feedback from many of them that it is much clearer, particularly because of its clarity and comprehensive scope.
Given the particular social and environmental impacts of the agricultural side of our value chain, Diageo developed specific agricultural guidelines to expand on ‘Partnering with Suppliers’. Directed at our raw material suppliers, and the farmers managing the land, these guidelines encourage commitment to good environmental practices, fairness to workers and wider economic benefits for grower communities. Since launching the guidelines we have received positive feedback from our stakeholders.
“These [sustainable agriculture sourcing guidelines] represent a practical mix of minimum standards and aspirational direction”
– Mercedes Tallo, Director, Sustainable Value Chains, Rainforest Alliance
Sustainable packaging guidelines
For us, sustainable packaging means packaging designed with the lowest possible environmental footprint while retaining its core functions of protecting, delivering and presenting our products and brands. We are examining our packaging to identify materials that pose a potential risk to the environment, such as inks and heavy metals, and to replace them with viable alternatives where they exist. We expect and encourage our suppliers to achieve high standards and consistent progress along these lines in the sustainable and ethical production of all our packaging.
This year we established sustainable packaging guidelines to help us towards this goal. We also discussed the guidelines with two sets of suppliers – a working group in Europe that we convened to talk through our guidelines to help identify realistic solutions, and a broader supply conference in the US.
Social and ethical risk management
To embed our standards and guidelines into our supply chain, we have developed a four-stage process for managing social and ethical risks (including human rights):
- Initial screening: a series of key risk-based questions which our procurement team applies to all current and potential suppliers. Criteria for identifying high risks include analysis of country of origin, type of goods or service, potential impact on a global brand and use of temporary or casual labour.
- Pre-qualification: a questionnaire that focuses on any areas of concern raised in stage one
- Qualification: any potentially high-risk suppliers are required to register with the Suppliers Ethical Data Exchange (SEDEX) (see below), and to take the SEDEX self-assessment questionnaire
- Audit: suppliers who represent the highest potential risk are audited against SEDEX standards. We agree corrective actions to address any gaps, and work with suppliers to help raise their sustainability standards. These audits cover the following areas: forced labour, wages and benefits, hours of work, freedom of association, child labour, discrimination, abuse of labour and health and safety.
In an effort to reduce audit fatigue for our business partners, we work collaboratively with SEDEX, a not-for-profit organisation that enables global suppliers to share assessments and audits on ethical and responsible practices with their customers. Suppliers pay for their participation as this allows them to own their data and share their reports with many customers.
We are also an active member of AIM-PROGRESS, a forum for leading consumer goods companies to promote responsible sourcing practices and sustainable supply chains. This year we took over the chair of this initiative for a three-year period. With over 20 companies and 8,000 suppliers involved, AIM-PROGRESS aims to develop and promote the use of common evaluation methods, and drive efficiencies for all companies by collecting, assessing and sharing non-competitive information on supply chain sustainability performance. By doing so:
- Suppliers avoid the cost and confusion of undertaking a new audit with every major customer
- Customers can assess suppliers, and improve their supply chain efficiency, using a set of internationally-recognised standards.
Our target has been, through our collaboration with Sedex, to ensure all 700 ‘potentially highest risk suppliers’ complete a self-assessment through SEDEX1. Highest risk is based on industry type, location, or association with our brand. This year, 734 supplier sites were linked to Diageo via SEDEX. Of these, 519 suppliers completed the self-assessment module. While some small areas for improvement have been identified so far, no major issues have been found. For those suppliers that did not complete the self-assessment, we will work to have them complete it and support suppliers to close off any corrective actions.
For additional due diligence, we obtained audit information for 64 of the highest risk suppliers either through audits we commissioned directly or that we obtained through the collaborative work of AIM PROGRESS. While we did not come across significant issues, corrective actions relating to identified issues are being addressed. The most common areas of concern were around excessive working hours, migrant labour and use of casual labour. In general, risks were found to be highest in the merchandising materials and agricultural goods categories. We will be looking at how we can improve our management of these areas in the coming year.
Environmental risk management
Unlike our work to manage social and ethical risks, we do not have a formal system for managing environmental sustainability in our supply chain. This year, we drafted an environmental scorecard that was meant to be a self-assessment tool, however we decided that such a proprietary system wasn’t necessarily the best approach for our partners, who are already burdened with many requests. In the coming year, we aim to collaborate with others, such as the Carbon Disclosure Project, on certain environmental measures in an effort to leverage internationally-recognised standards, and avoid duplicating work for our suppliers.
That said, we have made large gains in addressing what environmental sustainability means for the procurement of our raw materials. This year we launched our Sustainable Agriculture Sourcing Guidelines. We recognise that sustainable farming methods vary by industry, and have begun to examine what additional programming would be necessary to help our suppliers adopt and customise these guidelines to their model, starting first with one of our largest suppliers of cream.
Additionally, we have begun to set up systems in our procurement strategy for improving performance against our operational environmental targets – particularly our goal to reduce carbon emissions by 50%. This year we made progress in a project to switch our procurement of electricity to low carbon sources, negotiating new supply arrangements that will bring us much closer to our target. In 2011, 52% of all Diageo’s electricity came from low carbon sources such as wind, hydro and nuclear. In the UK and Northern Ireland, 100% of our electricity now comes from low-carbon sources. Overall this means we have reduced our carbon emissions by 35,000 tonnes per year – the equivalent of taking around 24,000 cars off the road.