Episode 4: On the road to responsible supply chains

with Johannes Danz 05 August 2022 | Podcast
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Starting at mine site, this podcast series have followed cobalt through the supply chain. In episode four, we'll look into the making of cars. When a single car relies on the inputs from 60,000 suppliers, how can you truly appreciate the ultimate impact of your supply chain? Our guest, Johannes Danz, joins us from Mercedes-Benz.

Åsa Borssén:
What goes into your car? As new minerals are rapidly making their way into our everyday life, we’re increasingly concerned about the footprint of the materials that underpin our modern lifestyles. The fungibility of natural resources has helped some business players hide behind the complexity of global supply chains. To shed light on one of the most obscure commodities, join me as I pull back the curtain on the supply chain of cobalt – from deep underground, all the way to your driveway. I’m your host Åsa Borssén, and this is Highgrade.

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Åsa Borssén:
Welcome to Highgrade and this podcast series on the responsible sourcing of minerals. Starting at mine site, we have followed cobalt through the supply chain. Today, we’ll look into the making of automobiles, at a time in which the industry is being transformed by the growing craze for electric cars. Global sales are on the rise, and so is the demand for the cobalt that goes into the batteries that power these vehicles. The challenge is great: When a single car relies on the inputs from 60,000 suppliers, how can you truly appreciate the ultimate impact of your supply chain? My guest today joins us from Mercedes-Benz: Johannes Danz looks after the sustainability of supply chains.

Johannes, welcome to the Natural Resources Podcast.

Johannes Danz:
Thank you, Åsa, for having me.

Åsa Borssén:
Mercedes-Benz has been an early mover in the responsible procurement of raw materials – often referred to as responsible sourcing. In practice, though, why does it matter to Mercedes-Benz what happens in, say, a remote Congolese mine?

Johannes Danz:
Well, there’s actually is fairly straightforward answer to this. And that is that human rights is one of our core company values. It forms a dedicated pillar in our business strategy, which then of course, covers supply chain issues. It covers all of our areas of business, including our employees, our production plants, and then, of course also the hypothetical mine in the DRC. We have indeed been I think that’s fair to say, and thank you for mentioning it, one of the early movers, especially when it comes to developing a human rights diligence system. We call ours the Human Rights Respect System, which is something that we continuously develop and reform and do it again, essentially, to respond to the salient risks that we see in our business area. But of course, also to accommodate new requirements, for instance, coming out of the upcoming due diligence legislation in Germany or on the European level.

“Our goal is to make responsible sourcing a standard and not a standalone product.”

- Johannes Danz

Åsa Borssén:
Does your increasing focus on responsible sourcing, in some way reflect pressure from consumers?

Johannes Danz:
I wouldn’t necessarily say it’s pressure from consumers, but what we certainly see is that there’s a tremendously increased interest in the topic in general. So, we do get these questions from customers, and they are being passed through even to us in the procurement division sometimes. What is even more visible is that we receive lots and lots of questions from investors. And that includes, you know, your dialogue formats that you have on a regular basis, and where the company provides a forum for these kinds of questions. It is a development that we that we find very welcome, we see that going in the right direction, because it also helps us pushing for ESG requirements in the supply chain and supporting the claim that that is actually an important issue for Mercedes-Benz and that that is very close to our core business.

Åsa Borssén:
Let’s move on and consider the sourcing of a metal currently surrounded by controversy. What are the most critical ESG challenges in the cobalt supply chain?

Johannes Danz:
So I will not surprise you when I say that supply chain transparency beyond Tier 1 is an issue right? But it really is one. And it is one especially for a material that is cobalt in the sense that it is something that involves a lot of players in the value chain, it is something that is traded quite dynamically, and these supplier relations in the supply chain also change constantly. So massive challenge to really establish transparency and looking into the depth of it. Mercedes-Benz has gone to some length here. And that begins with contractual questions. So we have agreements in place that look at disclosure of business partners in the deepest supply chain. That’s the starting point, if you will. And then from 2018 on already, we have partnered up with an auditing company, RCS Global, to map and then also audit our corporate supply chain based on the OECD guidelines. And that really has put us into a good position to thoroughly understand our risk of exposure, but also being able to react upon those risks through addressing these in direct dialogues with our suppliers and with suppliers in the deeper levels and the deeper Tiers of the supply chain. Agree on corrective action plans if that is necessary. And also, an often overlooked maybe other half of the same coin, offer training and capacity building wherever needed.

Åsa Borssén:
You mentioned something which you call it Tier 1, etc. And could you just briefly explain that concept to us?

Johannes Danz:
Yeah, for sure. So when we talk about supply chains, we use the expression of different levels, with the OEM being on top and then one being the first supplier that there is a business relationship with and then it sort of goes down the supply chain.

Åsa Borssén:
You mentioned that Mercedes-Benz is now doing audits to the supply chain. What are these audits telling us?

Johannes Danz:
What I can share is that we have not seen, you know, harsh human rights violations. But we’ve seen for sure issues related to Operation, Health & Safety for instance. And also gaps in relation to if a company has adequate due diligence processes in place. That has been rather widespread and that is of course, something that we take back and then again raise in our dialogue form it’s with our suppliers.

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Åsa Borssén:
You are listening to a Highgrade podcast series on responsible sourcing deep diving into cobalt, a metal surrounded by controversy due to the environmental and working conditions during production.

Today we entered a car factory. I’m talking with Johannes Danz from Mercedes-Benz to trace the impact of cobalt production through the many steps prior to reaching their manufacturing plant.

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Åsa Borssén:
From mines to cars, there are numerous steps in the supply chain and the fungibility of metals and minerals adds to the challenge of traceability. Can an end-producer like Mercedes-Benz accurately trace where their multiple inputs come from?

Johannes Danz:
It’s really an interesting one. And if you allow me to take one step back from that question, just to illustrate the magnitude of the issue that we’re talking about. If you combine everything that Mercedes Benz buys, and as you know production materials, non-production materials, everything that feeds into our production plants and offices worldwide, we are talking about roughly 60,000 suppliers – Tier 1. And if you add to this, you’re on average 5-8 Tier levels, which you would have to do if your goal would be to map the entire thing, you can sort of see where this is going right. What comes on top of that is that level of complexity and dynamic attitude that raw material supply chains have, which you just mentioned. That not only relates to raw materials, but also to semi-manufactured products. Copper would be an interesting example where we have quite a high standardisation of the semi manufactured products, that’s certain string of wires, for instance, that are equally being traded quite dynamically. And that it’s something that a trade enthusiast might call efficient. But on the other side, it’s pretty much a nightmare for a sustainability professional trying to establish that sense of traceability in a supply chain – and you can only get so far. And what this means for us practically speaking is that we need to follow a risk-based approach that is in line with the UNGPs, of course. What we then in practice is we have defined a list of critical raw materials – 24 of them for different reasons – and within that list, we look at each material and we look at the parts, we call them focus parts, that are particularly relevant for that material. And so we look at indicators such as weight, we look at how technologically relevant is the part, will that change in the future, put that into a rating and this is essentially how we prioritise and then follow up on these focus parts.

Åsa Borssén:
And what would you say is the weakest link in traceability. Would it be, for example, the mine, the smelter trade or component parts. What would you say?

Johannes Danz:
it is a bit difficult to give a straightaway answer to this, because it really depends a bit on the material that you look at. But traditionally speaking, if you can say that, the smelter is always the focus. Because this is the level where material is combined, and afterwards, you can’t really trace it anymore, or you can’t really follow up where it originally comes from. And that means, in turn, that the smelter has a very important responsibility to perform its own due diligence. If that doesn’t happen at this stage, it’s very difficult to follow up on the later levels. But again, as I just mentioned, we have this high standardisation of even semi-manufactured products, even later in the supply chains, and they are also being traded freely through warehouses, for instance. And here, also, it is incredibly difficult to come up with a system that allows the traceability because it doesn’t really reflect the realities of trade today.

Åsa Borssén:
A lot has been said about the potential of blockchain, which is basically a digital record keeping system that can enable establishing the provenance of goods and tracking their progression through a supply chain. But in the end, these technologies will not really change the human rights conditions on the ground, will they?

Johannes Danz:
They will not change the human rights conditions on the ground, but they are a tool that allows us to get closer to the problem. And I think that is their main benefits. We must not make the mistake, though, to trust everything on technology and be content with having such a tool in place. But then actually use that and, again that might be the more laborious part of the entire operation, use that to address risks and work towards improvement of the situation. Otherwise, it’s pointless.

Åsa Borssén:
And do you see that, for example, blockchain technology will make a responsible sourced certification become a thing?

Johannes Danz:
Yeah, I mean, hopefully, it contributes to that. Interestingly enough, when I came to mining a few years back now, I was still amazed that, in general, mining certification was not a big thing at the time. And is still in the process of development. For us, that is actually quite an important aspect, because mining certification is capable of addressing an entire range of mining-related risks head on where they occur, which is very difficult from an OEM perspective. And therefore, we kind of depend on these systems to really penetrate the markets. And we do support that, especially with regards to IRMA, which is an initiative and a standard very close to our expectations. But you’re absolutely right, there needs to be an adequate system that allows a tracking of these materials to make it also transparent throughout the chain, and eventually to the end consumer.

“Supply chain transparency beyond Tier 1 is an issue.”

- Johannes Danz

Åsa Borssén:
So, when will we see a responsibly sourced Mercedes-Benz come out?

Johannes Danz:
Yeah, that is an interesting one. So I mean, I buy Fairtrade coffee. I’m not sure that we’re going to see any car with a greenish logo, certificate whatever that might be, on the trunk anytime soon. And I’m also not so sure if that is really the right way. So our opinion on this one is really to make responsible sourcing standards and not a standalone product that comes with a higher price tag. I think that would also be a strange interpretation of a human rights-based approach towards responsible sourcing. So we clearly see that as the new normal and not as an addition.

Åsa Borssén:
Once the origin of your supplies is established, you need to decide how to tackle the problem. I imagine that the easiest way is to drop purchases from irresponsible mining, noting that these tend to be disenfranchised artisanal and small-scale miners. The other, much more complex approach is to engage with these producers to improve standards. What is the right approach, according to you?

Johannes Danz:
I think I raised this briefly at the very beginning of our conversation, but we are very clear on this one, actually. And that is, there will be no withdrawal from a difficult situation as a measure to reduce risk exposure. That decision has been taken. And that is also something that is really guiding us as a principle in what we do to tackle human rights risks in our supply chain. Of course, in the case of severe human rights violations that may be committed by a varied business partner, for instance, there will be a significant response and that will lead up to the termination of a business relationship if the situation calls for it. So that’s another scenario. But generally speaking, I strongly believe that our goal must be to improve conditions and to make the entire system that is the entire supply chain stronger and more resilient. And this is also why we push for the market penetration of strong sustainability standards such as IRMA, that can really address those mining related risks at the very beginning of the supply chain.

Åsa Borssén:
Johannes, it’s been an interesting conversation. Thank you so much for joining us.

Johannes Danz:
It was my pleasure. Thank you so much.

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Åsa Borssén:
And thank you for tuning into this Natural Resources Podcast series on responsible sourcing of minerals. Today, we’ve reached the automobile industry. Under increasing pressure from consumers, car manufacturers like Mercedes-Benz are devoting increasing resources to incentivizing best operating practices through their supply chains. There is clear progress, says Johannes Danz. Although challenged by the multitude of parts and inputs their production relies on.

Thanks to our sponsor, the German Federal Ministry for Economic Cooperation and Development through BGR.

Coming up soon, don’t miss the final episode of this series where we explore the role of laws and regulations in advancing responsible sourcing. Until then, so long!