Social risk

Case companies have a global business network, which means they have trading relationships with foreign dealers and distributors. Companies perceive that the risks are mostly in primary production, where the raw materials are processed before they are packed and shipped. The most typical primary production risks are social sustainability risks if the operator is located in so-called risk country. Risk countries are frequently characterized by relatively poor sustainability-related conditions. Interviewees mentioned that it is difficult to avoid risk country sourcing, due to availability challenges. Sometimes, it is simply not possible to purchase the product or raw material closer. Companies also have financial interest in exploiting risk country operators. Depending on the Case company, however, risk country sourcing plays at best only a small portion of the total sourcing volume.

The main raw materials of two Case companies come from Finland, but smaller raw material component, e.g. spices, come from risk countries. Although risk country purchase may represent only a small portion of the total purchase volume, the risk itself does not depend on the size of the volume. As an example, most of the company’s purchases can come from domestic raw material supplier, in which case the company knows exactly where the production is located and who are the raw material producers. Here, raw material components, such as spices, will have a smaller role in terms of volume but the sustainability risk may still be higher especially if the raw materials are sourced from a geographically distant country, where workers' rights are not realized in the same way as for example in Finland.

Case companies are well aware of the countries in which problems typically occur.

Moreover, companies know that there are social sustainability issues also occurring inside the Europe. However, the level of risk varies from country to country, due to

which countries are grouped into low-risk countries and risk countries. Case company B operate in a risk country outside Europe. Although extreme examples, such as child labor, have not occurred in the Case company’s operations, the existence of risks is nevertheless recognized. In turn, Case company B and F both operate in so-called low-risk countries, which are nevertheless characterized with labour issues. There may be areas within low-risk countries where there are increased human rights risks. For example, in southern Europe there are increased human rights risks due to the use of cheap migrant labor in agriculture.

’’Of course, there are these social risks in the supply chain, as well as human rights issues: child labor, forced labor, overtime hours, unfair wages. These are real risks and especially overtime and the wages are actual issues which are not even far away. But then again, child labor and forced labor are so extreme that they have not come up - at least in the audits.’’

(Case company B)

‘’We do assess where the biggest risks are. At the moment, however, we cannot think that, for example, human rights risks only occur outside of Europe. There are clearly risks in southern Europe and there are also risks in Finland. Yes, risks can be found. Usually those in Southern Europe are related to migrant workers' livelihoods. But we have not encountered a situation where it would be at risk, but they are still being assessed. The smaller risks often relate to, for example, overtime work, salary, or there is not enough fire extinguisher per square meter. These are usually the most critical measures.’’

(Case company F)

Sustainability risks can be further categorized to low and high risks based on their feasibility. Most companies do not utilize systematic risk management in their operations, but they still are aware of the sustainability risks associated with their own operating environment and know how to proceed with them. An interviewee at Case company C mentioned that the company does not spend time and resources to think about which risks are high and which are low. It relies on outsiders i.e.

business information providers such as Down Jones, Reuters and Dun & Bradstreet which provide commercial data, analytics and insights for companies. From them,

the company buys information on country-specific risks, thus saving their own time and resources. The other interviewee mentioned that energy suppliers are vulnerable to corruption, but do not know why, because the information comes from an outsider.

Social sustainability issues concerns not only humans but also animals. One of Case company’s sourcing work is mainly based on animal procurement thus the emphasis of the risk management is on animal welfare issues. Risk management is considered important by the company because a well-being animal is also productive. The company is involved in various research projects aimed at increasing and improving the welfare and health of animals. This is also important because the company is aware of the growing interest of stakeholders in animal welfare issues. The interviewee mentioned that animal welfare is really important in terms of risk as the topic is really emotive, which is why the company audits beef farms and slaughterhouses quite often. The risk management of the company is promoted by the fact that they have ownership of the primary production and thus receive accurate information on the animals. In addition, the company is well aware of the actors in the lower supply chain, i.e. the suppliers of the supplier. However, the industry is constantly struggling with financial challenges that directly affect sustainability-related risk management. If operations are not profitable, there is a greater risk that the sustainability perspective will not materialize. The interviewee said that financial issues have a direct impact on sustainability.

‘’If you think about animal welfare, for example, then there comes the question of how much space per animal, which means more investment - and what kind of animal enrichment. They can all be translated into euros.’’

With primary production under the control of the company, the materialization of risks has a direct negative impact on the company's reputation. When the risks have been detected, the company has had to terminate a number of contracts with the, particularly with regard to animal welfare issues. For the company, however, sustainability is a const balance between its own values and business needs. The Case company must weigh the continuity of its business and its profitability in relation to its own values and operating methods. Other companies also mentioned

that business must first and foremost be profitable and risk management cannot be done at its expense. The animal welfare issue is challenged if the business customer's demands for sustainability are less stringent than Case company’s own.

If the customer relationship is important and the operator is significant, it is possible that the company supplying its own products to the customer may have to conform to the customer's wishes and requirements, even if they differ from the Company’s own requirements. Such situation may pose a potential reputational risk if animal welfare is significantly neglected. In this case too, the company has to weigh its own values and practices in relation to the client's own and to consider how important the relationship is to them and whether business can be done at the expense of well-being of animals.