Authors: Nick Garrett and Harrison Mitchell, Co-Founders, RCS Global Group, Part of SLR
China’s reopening after the Covid pandemic was a watershed moment for global industry, signalling the end of two years of stagnation and instability within some of the world’s most critical supply chains. Yet the legacy of Covid, and other ongoing events such as the war in Ukraine and tensions in the Pacific, are still fuelling debate about deglobalisation. Corporate discussion about onshoring has significantly increased since the pandemic, according to Barclays Investment Science, whose team tracks corporate transcript records. This discord is mirrored by policy-makers. Governments including those of the US and Australia, as well as blocs such as the EU, have promised to legislate or release funding in support of the onshoring of manufacturing, processing and finishing of elements of critical products in key sectors such as battery and renewable energy generation.
At first sight, the spectre of deglobalisation also threatens a lot of the progress made in embedding sustainable and responsible practice across global supply chains. But the threat of deglobalisation shouldn’t be overblown. There are examples of government and industry leaders using the deglobalisation narrative to question adherence to or alignment with global norms on issues such as carbon emissions reduction and labour rights. But these examples remain in the minority.
Current trends actually seem to indicate the resilience of responsible production and sourcing as a global norm. Not only have several key multilateral bodies – the G7 most recently – restated their commitment to the Paris emissions reduction targets, but at state level, China and other larger industrial players also remain committed to their Paris Agreement pledges. State-level commitments to global responsible supply chain issues such as modern slavery are also increasing, not decreasing. And companies have followed suit. Again, taking the battery sector as an example, rather than backsliding on responsible sourcing, further collaboration on good practice is emerging. In January the Global Battery Alliance launched the proof of concept for its Battery Passport at the World Economic Forum’s Annual Meeting in Davos. This multi-stakeholder, multi-jurisdiction initiative is a picture of globalisation at work on responsible sourcing, with supporting companies from the US, Europe and Asia, including Audi, BASF, CATL, Eurasian Resources Group, Glencore, LG Energy Solution, Tesla, Umicore, Volkswagen Group. Similar responsible sourcing initiatives are emerging in other sectors as diverse as apparel and foods, among others.
The reality is that what we are seeing is a more nuanced picture of global supply chains and supplier interaction. Concerns about security of supply in the context of geopolitical and pandemic concerns are real, but there is also a realisation that most sectors will, to varying degrees, always remain globalised. The green technology transition is a good example. There are increasing calls for ‘energy sovereignty’ and localising renewable energy generation and storage, but many of the raw materials needed to enable the creation of that localised infrastructure are inescapably global. Companies selling their products in the US and Europe will still need to demonstrate the responsible sourcing of raw materials for use in battery storage, renewable energy conduction and green transport. That is why we are seeing a confluence of legislation (such as President Biden’s Executive Order 14017 to preserve domestic critical minerals) which supports both localisation in key industries where viable, and responsible and sustainable sourcing of materials that these jurisdictions cannot easily onshore at the required scale, whether that is cobalt or cotton.
Companies struggling to navigate these new, nuanced trends should probably not overthink the potential challenges ahead, but instead take a measured approach. Geopolitical risk and deglobalisation are now rising up the commercial risk register, but proving sustainable good practice and maintaining responsible supply chains also remain core expectations of policy-makers and the market – and this has remained consistent during and since Covid. In some cases, while geopolitical risk and responsible sourcing risks will correlate, making decisions on sourcing strategy easier, this will not always be the case.
One positive for supply chain professionals, is that while deglobalisation and geopolitical instability are hard to pre-empt and de-risk, the parameters and expectations around responsible sourcing are becoming more structured, and more aligned globally even between geographies, which in other spheres may be perceived to be diverging. This is encouraging. If responsible sourcing can survive a global pandemic – the greatest shock to global supply chains since World War Two – the signs are it is here to stay.
As a business, you should consider the following actions:
- Navigate Supply Chain Changes Strategically: Amid evolving global supply chains, businesses should adopt a balanced approach. This involves understanding the interconnected nature of sectors and recognising the continuous global need for raw materials. Seeing these shifts as opportunities, rather than challenges, can enhance responsible sourcing strategies.
- Prioritise Responsible Sourcing: Despite geopolitical risks and deglobalisation, businesses must emphasise responsible sourcing. Compliance with international sustainability and ethical standards, including emissions reduction targets and labour rights, is a core expectation of both policy-makers and the market.
- Engage in Collaborative Sourcing Initiatives: Participating in multi-stakeholder, multi-jurisdiction initiatives that promote responsible sourcing, such as the Global Battery Alliance’s Battery Passport, can amplify sustainable practices. Such collaborations demonstrate the potential and benefits of global co-operation in fostering responsible sourcing.
- Adapt to Global Sourcing Norms: With the growing predictability in responsible sourcing expectations amid geopolitical instability, aligning sourcing strategies with evolving global norms is essential. This not only mitigates potential reputational risks, but also positions businesses as leaders in sustainability and responsible sourcing.