A new report on supply chain due diligence is calling on business leaders and boards to take immediate and comprehensive action on climate change and other environmental, social and governance (ESG) risks within their supply chains. 

The report, issued by the Chartered Institute of Internal Auditors (Chartered IIA), examines the critical need for organisations to align supply chain operations with their own social values and environmental targets. Regulators, customers and investors are increasingly demanding greater supply chain transparency and accountability. 

The report, Supply Chain ESG Risks: Harnessing the Potential of Internal Audit, underlines the important role of internal audit when providing assurance and supporting due diligence activities.

The report makes several recommendations around the role of internal auditors and boards when it comes to reaching net zero. Boards and audit committees, the report says, should harness the potential of their internal audit functions to assess the effectiveness of any business continuity and crisis management plans. 

This can include stress testing the organisation’s ability to cope with supply chain disruption caused by climate-related extreme weather events such as tornadoes, floods and droughts.

New laws and regulations require businesses to take their supply chain environmental and social responsibilities more seriously. Boards and audit committees can leverage their internal audit function to independently evaluate the organisation’s legal and regulatory compliance in this area, according to the report.

The report stresses the importance of close collaboration between the board and senior management and their internal audit function, to get independent assurance that due diligence processes across the supply chain are effective.

“The climate crisis is already having a significant impact on supply chains, and boards need to ensure they have robust risk management and business resilience strategies in place to cope with this,” says Anne Kiem OBE, Chief Executive of the Chartered Institute of Internal Auditors. “At the same time, businesses need to focus on ensuring supply chains are decarbonising and not sabotaging their transition to net zero. Internal audit has a key role to play by providing the board and senior management with independent assurance that climate hazards in the supply chain are being addressed effectively.”

Richard Chambers, Senior Internal Audit Adviser at AuditBoard, adds that accelerating climate change means the risk of supply chain disruption is growing by the day. “Meanwhile, business leaders are also being called upon to ensure their supply chains are more environmentally and socially responsible. By harnessing the power of internal audit, organisations can enhance their ability to identify, mitigate and manage climate-related and other ESG supply chain risks effectively.”