ESG materiality and third party audits of supplier sustainability

Pirelli manages its own sustainability by using materiality analyses. In environmental terms, the materiality of the impact of the supply chain is prevalent in the category of raw materials and the use of water in the transformation processes of natural rubber. The impact of a social nature (human rights and labour rights, in particular) is found instead in all categories of purchase, with the need for the company to focus in particular on suppliers operating in countries considered more at risk than others from a point of view of compliance with national and international labour laws.

There are many activities involving suppliers put in place by the Company with the goal of creating environmental and social value, inextricably linked to the creation of shared economic value.

This is the case of the many agreements that the Company has made with strategic suppliers for the development of innovative materials and low environmental impact, as well as initiatives that aim to support social growth within the value chain. In Indonesia, for example, an initiative is underway in support of the welfare of natural rubber producers which supply to one of the main transformers, which in turn supplies to Pirelli.

Every year since 2009 and with joint activities carried out by the Group’s Risk Governance, Sustainability and Purchasing functions, local buyers and local Sustainability Managers are asked to prepare a list of suppliers that, on the basis of the results of adequate Risk Assessment, may be usefully subjected to independent audits as part of the Annual Audit Campaign. 

The "critical issues" of the supplier guide the choice and may be such as:

  • the supplier is bound to Pirelli by multi-year contracts;
  • the replacement of the supplier may be complex;
  • news of ESG risk events is received;
  • the economic magnitude of the purchase is material, and thus it is decided to audit the supplier’s on-site compliance with the Pirelli ESG standards, as agreed by the supplier during the contractual phase, with independent audits commissioned by Pirelli;
  • the supplier operates in countries with ESG risk;
  • the supplier has not yet undergone an ESG audit by Pirelli or no particular issues were identified in previous audits;
  • there is news, perception or doubt of any violations regarding social, environmental and/or business ethics responsibility.

The annual Audit campaign also includes ad hoc audits deemed appropriate during the year: in 2014, for example, Pirelli conducted extensive environmental Audits of Chinese suppliers of importance for the Company, in light of the increasingly stringent Chinese regulatory context on environmental issues.

At the central level, a team composed of the Group Sustainability and Purchasing Departments defines the Guidelines for the selection of suppliers to be audited, supporting the corresponding local functions that manage the process at an operational level. The Purchasing and Sustainability managers who coordinate the supplier auditing activity locally are adequately trained and made aware of the subject and method of auditing by the central functions in charge, namely Sustainability and the Purchasing Department.

The external auditors conduct audits based on a check-list of Sustainability parameters derived from the SA8000® standard (reference tool officially adopted by the Group for the management of social responsibility since 2004), the “Policy of Social Responsibility for Occupational Health, Safety and Rights and Environment” of the Pirelli Group, consistent with the areas of social, environmental and governance sustainability dictated by the Global Compact of the United Nations, and the Group's Ethical Code. 

Independent audits, each lasting an average of 2-3 days on site, include extensive interviews with workers, management and trade union representatives.

Between late 2009 and early 2010, 72 audits were conducted; between late 2010 and early 2011 an additional 56 were conducted and in the second half of 2012, 62 new audits were initiated on suppliers of raw materials, machinery, logistics and services which were concluded in 2013. In 2014 a further 78 audits were performed on suppliers from all the categories mentioned.

In most cases the audits in 2014 involved suppliers of Pirelli Tyre operating in countries where the Company is present at industrial level, namely: Brazil, Argentina, Egypt, China, Romania, Russia, Turkey, Venezuela, Mexico and the United States. Or countries from which Pirelli buys raw materials such as: Indonesia, India, Malaysia, Thailand, Japan, Korea and Colombia. Among the Western countries where the Group operates audits were performed on suppliers of Pirelli Tyre in: Italy, England, Germany, Poland, Spain and the Netherlands.

Based on the findings of the audit, where necessary and appropriate Pirelli drafts a recovery plan with the supplier to prevent, mitigate or remedy any non-conformities identified. The Plan envisages specific actions to be implemented by precise deadlines agreed by the parties, in addition to clear identification of the person in charge of the action at the supplier company.

This certainly contributes to a virtuous circle of continuous improvement. The Internal Audit function has been directly involved in the process of monitoring of progress on supplier compliance recovery plans since 2012. This function stands out for its independence at Pirelli insofar as, aside from the Board of Statutory Auditors, it reports to the Audit, Risks, Sustainability and Corporate Governance Committee of Pirelli & C. S.p.A., which is composed only of Independent Directors.

On the basis of the results of audits carried out from 2009 to 2014, the non-compliances recorded continue to be linked to the processes of managing health and safety, the use of overtime and the correct implementation of Environmental Management Systems. Moreover, the number and severity of non-compliances are constantly decreasing.

With particular reference to Suppliers located in Asia, it is worth mentioning the strong desire to improve, as well as the reaction rate in implementing recovery actions in generally very short times.

There have been no cases where the supply relationship was terminated due to the results of the audits. In most cases, no Supply contracts have been concluded with Suppliers considered inadequate or at risk already in scouting phase. 

The recovery plans as a result of 2014 audits have been completed or are under implementation.

The achieved results are attributable to the Sustainable Management System adopted by Pirelli, which is extensive and covers all phases of the relationship with the supplier. Over the years, it has allowed constant improvements in the panel of suppliers. Then, it must be considered that Pirelli suppliers perceive the importance of compliance with sustainable management factors, also in consequence of the engagement of a number of their customers, and this certainly contributes to trigger a virtuous chain of continuous improvement.