Sustainability in supply chains: A guide for private markets investors

General partners (GPs) can use the guide to inform their supply chain due diligence and ongoing management processes, while limited partners (LPs) can use it to better understand their GPs’ approaches to sustainable supply chains. It also provides guidance applicable to private markets investors’ portfolio companies.

The guide is intended for investors and portfolio companies at different stages of maturity and practice on sustainable supply chains.

• For those new to or less familiar with the topic, it provides a general introduction to the importance of supply chain sustainability risks and breaks down the different elements of conducting sustainability diligence and ongoing management of supply chains.
• For those with an existing supply chain due diligence process, the guide can be used to review and benchmark their current processes against leading industry practices and learn from peers using the case studies and examples provided throughout the document.

Executive summary

The current environment makes it more critical than ever for companies and investors to understand the detail and structure of supply chains and the associated sustainability risk and opportunity. As geopolitical and regulatory shifts continue – creating conflict and uncertainty – having visibility into and a deep understanding of supply chains can enable the identification of points of leverage and the flexibility needed to ensure their resilience.

This guide explores why and how private markets investors might approach sustainability risks in the supply chains of investee companies. It addresses the regulatory, operational and financial implications for private markets investors and corporate stakeholders.

Our findings underscore that embedding supply chain visibility requirements and due diligence, both pre-investment and during ownership, is no longer optional but is a strategic driver of value creation and protection and an enabler of exit readiness. Firms that proactively assess and manage supply chain risks can safeguard assets, enhance financial performance, unearth opportunities and strengthen long-term resilience. This guide offers leading practices and practical guidance for integrating due diligence into investment processes, equipping investors and portfolio companies with a roadmap to navigate regulatory complexities while unlocking new growth opportunities.

Its key take-aways are:

• There is a clear business case for supply chain due diligence. Failing to identify or manage human rights and environmental impacts in the supply chain creates exposure to financial, operational and reputational harm. Real world cases illustrate these business risks and the corresponding economic impacts.
• Supply chain due diligence can be embedded across all investment stages. While many investors have responsible investment policies and conduct initial high-level sustainability risk screening, a more rigorous assessment of portfolio companies’ supply chain risks and management practices should form a core part of due diligence. This deeper evaluation is particularly critical for companies operating in or sourcing from high-risk countries and industries and can enhance investors’ ability to monitor, engage with and incentivise performance improvements across the entire investment cycle.
• Mapping out supply chains can uncover hidden risks and opportunities. Limited supply chain visibility remains a major challenge for businesses, often masking critical risks such as forced labour or poor working conditions. Companies and leading investors are addressing this by integrating supply chain mapping exercises into due diligence – starting with tier 1 suppliers and extending deeper in high-risk areas. Not doing so limits the ability of investors and portfolio companies to exert leverage to mitigate risk.
• Risks in the supply chain vary across regions and industries and can be mitigated when portfolio companies have mature risk management processes. Sound due diligence identifies and prioritises human rights and environmental risks, followed by evaluation and ongoing performance monitoring of the portfolio company’s supply chain risk management capabilities.
• To protect and create value, portfolio companies should establish robust supply chain frameworks and processes. These include supply chain mapping, targeted risk assessments and focused due diligence, as well as risk-based mitigation measures such as supplier training and continuous performance monitoring.

To support active engagement, this guide discusses key practices across the investment cycle, from early screening and investment decision-making, to exit and re-investment. It offers practical insights on:

• industries with high exposure to human rights and environmental risks in the supply chain;
• key considerations for general partners, limited partners and portfolio companies when assessing supply chain sustainability;
• critical questions for integrating supply chain topics into early investment screening and due diligence;
• varying approaches to engaging with companies on supply chain risk management, based on investors’ leverage;
• managing subcontracting risks.

The regulatory landscape

A growing number of laws and regulations around the world are creating requirements on companies to conduct due diligence, or similar obligations, anywhere within the supply chain. These laws generally require businesses to identify and/or act to prevent human rights or environmental impacts, or explain these actions, including regulations that apply across sectors and those that are sector/impact specific.

Supply chain due diligence as an investor

Human rights and environmental supply chain due diligence can be integrated along every stage of the investment process, from early screening and subsequent in-depth due diligence, within legal agreements, as part of ongoing monitoring and engagement and in exit planning. Practices range from foundational approaches to more advanced methods adopted by frontrunners.

To effectively identify and manage risks of adverse environmental and social impacts within supply chains, investors need to critically assess and integrate relevant practices across all stages of the investment cycle. There are multiple entry points to embed supply chain sustainability considerations throughout the investment process, including:

1. Governance and policies. Putting clear governance structures, roles, policies and procedures in place helps ensure supply chain-related risks are considered in origination, investment decision-making, portfolio management and oversight activities.

2. Early screening. Reviewing potential investments early on can identify any red flags or sustainability incidents that may conflict with investor policies and standards or represent risks that cannot be sufficiently mitigated.

3. Due diligence. Thorough due diligence to identify and assess actual and potential impacts on people and the environment in the supply chain enables findings to be integrated into an action plan with measures for prevention, mitigation or remediation.

4. Decision-making and agreements. It is important to ensure that investment decisions are informed by due diligence outcomes and that agreements with investee companies clearly define expectations, responsibilities, required actions and monitoring provisions related to supply chain sustainability.

5. Engagement and monitoring. Actively engaging with portfolio companies supports capacity-building and continuous improvement on supply chain due diligence. Systematic monitoring ensures progress is tracked and emerging or evolving risks are identified.

6. Exit strategy. Sustainability impacts should be taken into account when planning and executing an exit, which should also aim to ensure that key mitigation measures remain in place after investment.

The chart below outlines standard and advanced activities for each step of the investment cycle. The activities apply specifically to GPs that have a significant stake or ownership in the portfolio company.

Figure 1: Overview of standard and advanced activities by step in the investment cycle

Supply chain due diligence as a portfolio company

It is important that portfolio companies understand the specific actions they can take in conducting human rights and environmental due diligence for effective risk management and value creation. Standard and best practices require designing effective due diligence programmes, mapping and screening suppliers, assessing risks, training suppliers, monitoring, remediation and disclosure.

Figure 2: Overview of activities for portfolio companies

Considerations for limited partners (LPs)

Sustainability risks can cascade through investment structures, originating at the supplier level and impacting portfolio companies, their investors and, ultimately, limited partners through their commitments to general partners.

GPs and LPs have distinct but complementary roles when it comes to integrating supply chain due diligence into the investment process. While GPs are responsible for implementation and oversight within their portfolios, LPs focus on setting expectations, monitoring and holding GPs accountable. More precisely, LPs, such as pension funds, sovereign wealth funds and institutional investors, act as stewards of capital and ensure GPs align with responsible investment standards.

An LP can use its position to assess its GP’s policies, request transparency on supply chain risks and impact responsible investment standards through capital allocation and engagement. To ensure responsible investment practices with a focus on supply chain responsibility, LPs should evaluate whether GPs have established strong monitoring and reporting mechanisms. Key questions to ask include:

• Has the GP put supply chain sustainability policies in place before committing capital?
• Has the GP implemented clear reporting frameworks specifically focused on supply chain sustainability?
• Are there well-defined protocols for reporting and addressing supply chain-related human rights or environmental violations?
• What monitoring procedures does the GP enforce to mitigate risks?

In turn, GPs are directly responsible for assessing and mitigating sustainability risks within portfolio companies’ supply chains. To do so, a GP can use its leverage to actively conduct due diligence, set sustainability policies, engage with portfolio companies on compliance and implement monitoring frameworks.

Downloads

Technical guide

Summary of key regulations

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