The COVID-19 pandemic is raising questions about risks in supply chains in all industries. For mining companies, where operations are not temporarily shut down to comply with government directives, or when restrictions relax, success for the remainder of the pandemic may very well depend in part on the ability to continue to source the fundamental equipment, materials and services required to continue the exploration, development or operation of their projects. As many have experienced over the course of the past few weeks, some suppliers are ﬁnding it challenging to deliver and, in extreme cases, are being forced to breach their contracts or declare force majeure.
A robust supply chain is clearly a key contributor to business resiliency for mining companies when major unpredictable events such as the current COVID-19 pandemic arise. The pandemic has exposed the weaker links in the supply chain risk management practices of companies, with the reliability of both miners and their suppliers largely dependent on their ability to adapt to the circumstances and continue to deliver while protecting the safety and human rights of their employees and other stakeholders. Supply chains are at risk, and front and centre in all of this is the risk to the health and safety of workers and the communities in which mining companies and their suppliers operate.
Long-term business resiliency requires good management of systemic sustainability risks
The goal of good supply chain risk management is to make the unpredictable slightly more predictable and manageable. Good planning also can make the boundaries of any given crisis slightly easier to work within and reduce the overall impact on the business. The pandemic has shown that sustainable businesses are more resilient to crises, as they are better prepared to weather the effects and will also bounce back more quickly when the storm has passed.
Whether the unexpected crisis is a recent headline topic, such as COVID-19, the “Me Too” movement or modern slavery, or one that has been on the radar much longer such as climate change, labour disputes, regulatory change or environmental liabilities, companies need to plan and be ready to withstand the next big challenge so they are not caught off guard. Also, investors are increasingly considering environmental, social and governance (ESG) systemic risks in making investment decisions and are demanding more disclosure to assess whether risks are being managed effectively by companies.
Fast forward to the next crisis, what can be done differently?
Companies need to have the right tools at their disposal to assess the sustainability risks posed by their suppliers and the right governance framework in place to mitigate those risks. This means doing ESG due diligence before entering into a supply relationship to assess the risk and selecting suppliers on the basis of the sustainability risks they pose and in light of broader risk management strategies. It also means mapping the supply chain to improve visibility of the sustainability risks posed by current suppliers. Asking suppliers to complete questionnaires can serve as a good starting point and there are emerging technological platforms available to assist in integrating and analyzing the data collected.
Implementing the right framework
An effective governance framework should be driven by a carefully tailored Supplier Code of Conduct addressing the most salient risks identiﬁed in the supply chain. The way the code is drafted is important, as the adoption of voluntary codes or standards can affect legal liability for companies.
It is important that the Supplier Code of Conduct be used as a tool in the overall risk management process and not just sit on a website. Companies should prepare contractual provisions implementing the code into formal contractual arrangements that not only allocate risk, but also provide the opportunity for ongoing tracking and monitoring of supplier performance. To mitigate legal risks, initial and ongoing due diligence efforts are best undertaken using legal privilege wherever possible.
Successful crisis management and good governance go hand in hand. Allocating the resources to proactively work with suppliers and implement corrective action plans to ensure that any sustainability risks identiﬁed are appropriately managed is a worthwhile investment, as the costs of a crisis tend to vastly exceed those of its prevention.
COVID-19 will accelerate the transition towards more sustainable supply chains and mining leaders need to move quickly to stay ahead of the curve.
Carole Gilbert is an associate practicing corporate and commercial law at Norton Rose Fulbright’s Montreal office.