Due Diligence for Responsible Procurement

Risk Management

Proper due diligence requires efficient risk management - a systematic approach to identify, analyze, evaluate, monitor, and treat risks. At Essity, risk management is performed for both new suppliers and for existing suppliers. The applied risk-based approach is a method of managing risks by identifying, prioritizing, and addressing them according to their potential impact and probability. For this purpose, Essity has a Supplier Risk- and Resilience Management Procedure to secure supply in accordance with agreed contracts, specifications, sustainability requirements and to reduce cost, to avoid regulatory fines and reputational harm on Essity Brands.

Establish the context

Establishing the context is necessary to customize the risk management process so that the business needs are met, and to ensure effective risk assessment and appropriate risk response. First step in Essity’s Risk- and Resilience Management Procedure is to identify suppliers that have a high or very high business impact on Essity brands and / or on Essity sourcing and production. The business impact parameters that are evaluated are: Sustainability/ESG, Regulatory Compliance, Material / product specific regulations, Product Quality and Safety and Operational Impact and Sourcing Complexity. 

Country of Origin

Essity has global manufacturing, however most production sites are located in Europe and North America. Some sites are located in Australasia, India, South Africa and South America. Essity sources many raw materials and chemicals locally, often from supplier sites that are part of large multinational corporations based in Europe and the USA. This is conscious choice by Essity to reduce social and ethical risks throughout the supplier base, as best practices and relevant certifications and standards have been implemented across all sites throughout the entire supplier company. 

Some raw materials are closely associated with specific regions due to natural reasons, such as wood pulp or cotton. Many times, those materials are considered to primarily have risks several tiers away, in the beginning of the value chain. Essity takes further measures here, such as audits of sub suppliers, or chooses certified raw materials that guarantee more sustainable extraction and production.

Origin and Risks

Essity is taking location of supplier and origin of raw material into consideration when assessing risks. The same material can entail different risks depending on the area where it is manufactured or grown, whereas other items can have similar risks regardless of where they are produced and delivered, such as certain services.

Sustainability Risk Assessment Well Embedded in Established Routines 

To safeguard sustainability considerations and to minimize any environmental or social impact related to our procurement activities and suppliers, we have integrated the requirements into our standard processes and normal routines. For Essity, there are several checkpoints in the mandatory supplier qualification process that are covering sustainability issues and risks.

Supplier Qualification

Essity Global Procurement has a risk-based approach when assessing individual suppliers as part of the supplier qualification process as well as when evaluating the entire supplier base in the yearly strategy work.

1) Set the Requirements

Essity’s requirements on our suppliers are spelled out in our Global Supplier Standard which also contains our Supplier Code of Conduct. Suppliers should commit in writing that they will honor the requirements in this document and pass on similar requirements towards their own suppliers. Failing to respect our Standard can lead to discontinued business relations. Essity is following up share of total spend with suppliers who have committed to our Standard and report on this KPI in our Annual and Sustainability Report: Responsible Sourcing in ASR 2022.

2) Sustainability Risk Assessment

All suppliers are assessed from an inherent risk point of view, i.e. the risks that often are associated with the kind of business activity, raw material, technology or region of the supplier. Potential suppliers can also be screened against various sanction lists or adverse media data banks.

Essity requires that suppliers use Sedex (Supplier Ethical Data Exchange) to conduct a self-assessment linked to working conditions, environment, business ethics and health and safety. A risk profile of the supplier is obtained through a combination of a questionnaire and several different risk indexes. In 2023, close to 1000 of Essity’s main suppliers share data through the Sedex system, allowing for detailed desktop risk assessments on site level.

All suppliers are screened related to ethical business, and we use Dow Jones Risk Center to secure anti-corruption and sanction screening.

3) Ethical Audit

If there are indications of sustainability risks coming out of the detailed risk assessment, Essity requests an ethical audit to be performed at the premises of the supplier. The preferred format is SMETA 4 pillar that focuses on areas such as human rights, employment conditions and corruption. The number of suppliers who are assessed through ethical audits is published in Essity’s Annual and Sustainability Report 2022. Close to all ethical audits result in findings and consequently, Corrective Action Plans are established. Although the responsibility to approve corrective actions and to close findings lays with the auditor, Essity procurement staff monitors the progress and include this topic in the regular meetings with supplier. In 2022, no critical findings were reported. Most frequent findings from audits are missing policies or certificates, but also cases of too much overtime, not enough fire drills, missing safety assessments, incorrect storage of chemicals and incorrect evacuation paths (markings, signs, exits). No ethical audit in 2022 resulted in the termination of a business relation with a supplier.

Continuous Supplier Risk- and Resilience Management

In parallel with the assessment that takes place when qualifying new suppliers, there is also a recurrent and continuous supplier risk and resilience evaluation, targeting suppliers with a high business impact on Essity brands and / or on Essity production capability. Risk categories that are assessed are among others:

• Financial Risk Category - we use the Dun and Bradstreet “D&B” Finance Analytics solution to perform financial risk assessment and monitoring of suppliers
• Regulatory Compliance (incl. ESG) - Regulatory compliance risk is the risk of legal penalties, financial loss, or loss of reputation that an organization may face due to its failure to act in accordance with industry laws and regulations, codes of conduct, or corporate standards of practice.
• Sustainable, Ethical and Compliant Risk Category - Sustainable and Ethical Risk Category covers risks related to environmental, climate, social, health & safety, modern slavery, human rights, and business integrity. Sustainability risks are mainly driven by type of material/service bought and its country of origin and/or geographical location of the supplier
• Operational Risk Category - Operational Risk Category covers risks of Supplier non-performance. This includes foreseeable or unforeseen events like nature hazards, fires, strikes, material- and / or labour shortages, or other disturbances that will affect the Suppliers ability to fulfil contracted obligations

As a result of the assessment, suppliers are risk ranked based on sourcing complexity and operational impact, triggering various mitigation and preventative activities.

Risk Prevention and Mitigation

Based on the overall risk score calculated for the supplier, the procurement manager decides if the new supplier can be approved or not, or, for existing suppliers, if business relation can continue. In addition, different types of mitigating actions can be implemented for the suppliers, such as a corrective action plan in case of non-conformities or as general risk reduction.

A detailed analysis of a supplier or a material can also conclude that the main risk is not with the direct supplier, but that it is laying further upstream in the supply chain. If this is the case, there are several different mitigation alternatives. One can be to go for certifications where external bodies using audits and chain of custody safeguard certain standards. Other possibilities involve inspections and collaboration with sub suppliers, joint business initiatives or team up with non-governmental organizations (NGO) who are addressing particular issues. Even if there is not always a guarantee that the actions taken will have a direct impact on the exact material bought t, it will improve the situation for the business as a whole. 

Essity’s general approach is that it is better to remain with suppliers and improve the situation, rather than walking away from a business relation and potentially leave the workers in an even worse situation. Terminating a relationship should be the last option.

Identified Sustainability and Workers’ Rights Risks