Ignite establishes a basis for evaluating suppliers' risks associated with human rights violations and decent working conditions, also known as social risk. To arrive at this basis, we use risk factors related to the suppliers country and industry, then a weighted average of these factors are used to calculate to social risk.
Continue reading this article to understand more about how the calculations used to establish a risk for geography and industry are done, and how this is weighted to a social risk.
Geographic Risk:
We use the International Trade Union Confederation's (ITUC) index of labor conditions as a basis for assessing the risk associated with a country. The ITUC index divides countries into six categories based on the degree of respect for workers’ rights:
Sporadic violations of rights
Repeated violations of rights
Regular violations of rights
Systematic violations of rights
No guarantee of rights
No guarantee of rights due to breakdown of the rule of law
In the geographic risk field, we convert this to "Low", "Medium" and "High" based on which category the country is placed in:
Category 1 = "Low"
Category 2-3 = "Medium"
Category 4-6 = "High"
Note: To obtain geographic risk, you need a field in the table that indicates the country to which the supplier is associated. This field is usually the country code or country field. Any supplier that has an invalid or missing value in this field, such as a misspelled country or non-existant country, will not get a score in geography risk.
The risk calculations have usually been ran in advance by our team, but if not, you can run the calculations by clicking the Social Risk Evaluation button located in the top right of your Supplier list (See this article on "How to Use Social Risk Evaluation" for more info about usage of the feature).
Industry Risk:
To say something about the risk associated with an industry, we use the European Bank of Reconstruction and Development's (EBRD) index that links social risk to NACE codes. These are standardized codes in the EU to be able to compare economic activity across countries.
We automatically enrich suppliers with NACE codes when setting up "Social Risk Evaluation" using third-party data sources (Enin). Note that these enrichments are only possible on Nordic suppliers unless other services have been enabled through agreements with your CSM.
EBRD divides risk into "Low," "Medium," and "High," and we use this directly as Industry Risk in Ignite.
Note: If we have not been able to find a NACE code for your suppliers, the "Industry Risk" field will be blank. You can then go to the supplier and add the correct NACE code, rerun the evaluation, and get updated information on industry risk.
Social Risk:
To establish a basis for social risk, the following happens:
We quantify geographic and industry risks to a score.
We calculate an average of the score for these two factors and set "Low," "Medium," or "High" based on the average.
Step 1:
To quantify geographic and industry risks, we use the following conversions:
Geographic Risk Score (we use the ITUC index for better differentiation than just low, medium, and high):
a. Sporadic violations of rights = 33.33
b. Repeated violations of rights = 46.66
c. Regular violations of rights = 60
d. Systematic violations of rights = 73.33
e. No guarantee of rights = 86.66
f. No guarantee of rights due to breakdown of the rule of law = 100Industry Risk Score:
a. Low = 33.33
b. Medium = 66.66
c. High = 100
Step 2
We now use the score for both factors and take a weighted average to calculate social risk using the following formula:
Social Risk Score = Geographic Risk Score * 50% + Industry Risk Score * 50%
We now use this score to set either "Low," "Medium," or "High" social risk with the following score intervals:
0 - 33 = Low
34 - 65 = Medium
66 - 100 = High
Note: If you want a different risk score for the supplier, you can easily create your own column in Ignite to keep track of this, for example by creating a "single choice" column with "High", "Medium" and "Low", where you manually set your own risk assessment.