What is the United Nations Global Compact (UNGC)? A practical explanation of its relationship to CSR procurement and supply chain management.

In today's global business environment, the risks faced by companies—such as climate change, forced labor, and corruption—extend beyond their own boundaries and encompass the entire value chain. To address this, "CSR procurement," which involves fulfilling social responsibilities across the entire supply chain, including trading partners, has become a core management Issue that determines a company's resilience. This article will explain the definition of CSR procurement, its benefits, and how to apply it in practice, based on the framework of the United Nations Global Compact (UNGC), the world's largest sustainability initiative.

An overview of the United Nations Global Compact (UNGC) and its 10 principles

overview and International Significance

The UN Global Cooperative ( UNGC) *1 is the world's largest sustainability initiative, proposed by then-UN Secretary-General Kofi Annan at the World Economic Forum (Davos) in 1999 and launched the following year in 2000. Currently, it has more than 15,000 signatories and over 3,000 non-business organizations from more than 160 countries worldwide.

Within Japan, the Global Compact Network Japan (GCNJ) *2 serves as the location of activity , and through specialized subcommittees such as the "Supply Chain Subcommittee," it actively facilitates the resolution of practical Issue faced by Japanese companies and the sharing of best practices.

The 10 Principles of the United Nations Global Compact (UNGC) *3 : Perspectives on Supply Chain Management

UNGC signatory companies are required to incorporate the following four areas and ten principles into their strategies and operations. Many companies adopt the four areas of the GC10 principles (human rights, labor, environment, and anti-corruption) when Create Code of Conduct for their suppliers.

【human rights】

• Principle 1: Businesses should support and respect the protection of internationally declared human rights.
• Principle 2: Companies should ensure that they do not participate in human rights abuses.
  • It is crucial to prevent complicity in "significant human rights risks" that arise not only with direct business partners but also with Tier 2 (second-tier) suppliers and beyond.

[Labor]

• Principle 3: Businesses should support the effective recognition of freedom of association and the right to collective bargaining.
• Principle 4: Employers should support the elimination of all forms of forced labor.
• Principle 5: Employers should support the effective elimination of child labor.
• Principle 6: Employers should support the elimination of discrimination in employment and occupation.

【environment】

• Principle 7: Businesses should support a precautionary approach to environmental Issue.
• Principle 8: Companies should take the initiative to assume greater environmental responsibility.
• Principle 9: Businesses should encourage the development and dissemination of environmentally friendly technologies.
  • Principle 7, the "precautionary approach," is an attitude of taking measures when there is a risk of environmental damage, even if the scientific evidence is insufficient, and it is an important evaluation criterion when selecting suppliers.

[Anti-corruption]

• Principle 10: Businesses should take measures to prevent all forms of corruption, including extortion and bribery.
  • In procurement in third countries, bribery poses not only legal sanctions but also a fatal risk that can jeopardize the very continuation of business operations.

Definition of CSR Procurement and Differences from Traditional Practices

CSR procurement is a process that integrates ESG (Environmental, Social, and Governance) factors such as environment, labor, human rights, and anti-corruption into the traditional evaluation criteria of quality, price, and delivery time (QDC).

Comparison of traditional procurement and CSR procurement

Why CSR Procurement is Essential Now: Regulations and Economic Benefits

Risk Management and International Regulations

International guidelines, including the "OECD Due Diligence Guidance for Responsible Business Conduct" *4 , obligate companies to identify and rectify negative impacts not only within their own operations but also within their supply chains (due diligence). Legislation is accelerating, such as the European Corporate Sustainability Due Diligence Directive (CSDDD) and Germany's Supply Chain Due Diligence Act (LkSG), and failure to comply can result in hefty fines and market exclusion.

Clear business benefits

According to data from sustainability assessment firm EcoVadis *5 , implementing CSR procurement practices does not simply increase costs, but yields clear economic returns.

• Improved brand value (15-30%): Companies that engage in responsible sourcing are said to gain greater trust from customers and investors, leading to improved brand value (such as brand valuation and customer loyalty).
• Lower cost of capital: Approximately 90% of companies actively engaged in sustainability have been reported to have favorable terms in Funding, which tends to result in a lower cost of capital.
• Reduction in procurement costs (9-16%): Cost reductions are expected across the entire supply chain through measures such as reducing waste, improving resource efficiency, and reviewing excessive specifications.
• Strengthening resilience: Identifying and addressing potential risks early on helps avoid economic losses due to supply disruptions and quality issues.

A "common language" connecting the United Nations Global Compact (UNGC) and CSR procurement.

The UN Global Commonwealth (UNGC) 10 principles serve as a "common language" when engaging in dialogue with global suppliers while considering diverse cultures and legal regulations. By basing negotiations on "globally recognized standards advocated by the United Nations" rather than imposing one's own standards, it becomes easier to gain the understanding and acceptance of suppliers.

Furthermore, the " Decent Work Toolkit " provided by the UNGC (*6) resolves dilemmas faced by procurement personnel, such as the trade-off between cost and working conditions, and offers concrete methods for incorporating sustainability perspectives into the evaluation metrics of the procurement department.

How to proceed with CSR procurement

Step 1: Formulation of policy

We will formulate an organizational "sustainable procurement policy" and express our commitment to it from management. This needs to be positioned not merely as a philosophy, but as an integral part of our business strategy.

Step 2: Development of a Supplier Code of Conduct(CoC)

We will Create a "Supplier Code of Conduct " that embodies the 10 principles of the UNGC.

• Practical points: As indicated by the UNGC Network Italy guidelines *7 , the purpose of developing norms is to "prevent and mitigate negative impacts." By incorporating them not just into the distribution but also into the master contract, legal effectiveness can be ensured, resulting in responsible contracts.

Step 3: Evaluation and Due Diligence

We will understand the current status of our suppliers.

• SAQ (Self-Assessment Questionnaire): SAQ is one of the most widely used methods in CSR procurement. By having suppliers answer questions on items such as human rights, labor, environment, and anti-corruption using the UNGC's "CSR Procurement Self-Assessment Questionnaire" *8 or a questionnaire prepared by the company, risks across the entire supply chain can be efficiently grasped. It is particularly effective as an initial screening tool for companies with a large number of suppliers.
• Third-party evaluation: By utilizing sustainability evaluation platforms such as EcoVadis, Sedex, and RBA, you can obtain objective scores based on external standards.
• On-site audits: For suppliers in high-risk areas and Industry, we conduct detailed due diligence, including audits and on-site investigations. We identify potential human rights abuse risks through worker interviews and other means.

As a practical point, it is difficult to fully grasp the actual situation of a supplier using SAQ alone, so a multi-layered evaluation that combines third-party assessments and on-site audits, depending on the risk level, is recommended.

Step 4: Correction and Engagement

If Issue are found during the evaluation, we will not immediately terminate the transaction, but will instead encourage the development of a corrective action plan.

• Practical points: Capacity building is key. Through training and dialogue, we support suppliers in creating a system that enables them to continuously improve autonomously. This is the practical application of the UNGC's goal of "building a sustainable economy."

Key factors for success: A well-organized promotion system

1. Settings our own KPIs: We will incorporate metrics such as "supplier ESG score improvement rate" into the evaluation of procurement personnel. Procurement that places excessive emphasis on cost and delivery time can impose unreasonable demands on suppliers, potentially leading to human rights risks such as long working hours and inappropriate labor practices. Therefore, it is essential to balance the evaluation system.
2. Phased approach: A one-size-fits-all approach is impossible for thousands of suppliers. Priorities are determined based on procurement value, difficulty of substitution, and country/region risk, and the process is rolled out gradually, starting with key suppliers.
3. Cross-functional collaboration: We will establish a system of collaboration between the procurement department, sustainability promotion department, legal department, and management. Utilizing GCNJ subcommittees and considering joint audits with other companies in the industry is also an effective approach.

summary

CSR procurement is evolving from a "defensive" phase of legal compliance to an "offensive" management strategy that enhances corporate value and competitive advantage. Guided by the 10 principles of the UN Global Computing Standard (UNGC), it is necessary to engage suppliers as "partners in building a sustainable future together."

To achieve this, it is essential not only to increase transparency in the supply chain, but also to build a practical system that continuously monitors the situation of suppliers and uses that information to drive improvements.

On the other hand, in practice, the large number of suppliers and the dispersion of information often make the collection and management of ESG information burdensome, and in many cases, initiatives end up becoming mere formalities.

Supplier evaluation using SAQ is an effective way to address these Issue. It makes it possible to visualize risks across the entire supply chain and prioritize responses.

<Reference>

*1: United Nations Global Compact (UNGC)
https://www.ungcjn.org/gcnj/about.html

*2: Global Compact Network Japan (GCNJ)
https://www.ungcjn.org/

*3: Explanation of the 4 areas and 10 principles of the UN Global Compact
https://www.ungcjn.org/library/files/10principles.pdf

*4: OECD Due Diligence Guidance for Responsible Business Conduct
https://www.oecd.org/ja/publications/2018/02/oecd-due-diligence-guidance-for-responsible-business-conduct_c669bd57.html

*5: EcoVadis, Sustainable Procurement
https://ecovadis.com/solutions/sustainable-procurement/

*6: UN Global Compact, Decent Work Toolkit for Sustainable Procurement
https://sustainableprocurement.unglobalcompact.org/

*7: UNGC Network Italy Guidelines
https://www.globalcompactnetwork.org/en/tags/guidelines.html

*8: UNGC "CSR Procurement Self-Assessment Questionnaire" https://www.ungcjn.org/activities/help/index.html