ESG materiality and third party audits of supplier sustainability

Pirelli manages its sustainability by using materiality analyses.

In environmental terms, the impacts are absolutely prevalent in the raw materials category, and specifically in regard to the use of water in natural rubber transformation processes. The social impact (human rights and labour rights in particular) is found in all procurement categories, although it demands special attention by the Company towards suppliers operating in countries that the international community deems to be more risky than others in terms of compliance with national and international labour laws.

Every year since 2009 and with joint activities by the Group Risk Governance, Sustainability and Purchasing Departments, local buyers and 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. Therefore, the “criticality” of the supplier guides the choice. It may be so insofar 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 ESG risky countries.

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 on 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 their audits on the basis of a checklist of sustainability parameters derived from the SA8000® standard (the reference tool officially adopted by the Group for the management of social responsibility since 2004), from the Pirelli Social Responsibility Policy for Occupational Health, Safety, Rights, Environment, consistently with the Social Sustainability, Environmental and Governance areas dictated by the United Nations Global, and from the Group Ethical Code.

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

Seventy-two audits were carried out between the end of 2009 and the beginning of 2010, a further 56 were conducted between the end of 2010 and the beginning of 2011 and in the second half of 2012 some 62 new audits on suppliers of raw materials, machinery, logistics and services began, and were completed in 2013. In the majority of cases the audits involved suppliers of Pirelli Tyre operating in Brazil, Argentina, Egypt, China, Romania, Turkey, and Venezuela, or countries from which Pirelli purchases raw materials, such as Indonesia, India, Malaysia, Thailand, Japan, Russia and Korea. Among the Western countries in which Pirelli conducts its business, audits were carried out on Pirelli Tyre suppliers in Italy, UK, Germany, the Netherlands and the United States.

On the basis of the audit results, as necessary and appropriate, Pirelli prepares a compliance plan that may be designed to prevent, mitigate or remedy any found compliance violations.

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.

Critically observing the results of the audits performed between 2009 and 2013, the observed non compliances continued to be related to the health and safety management processes, use of overtime and proper implementation of the Environmental Management Systems. However, from one audit cycle to another, their number is steadily decreasing, just as their seriousness has steadily decreased. No violations of human rights or fundamental work rights have been found. There have been no cases where the supply relationship was terminated due to the results of the audits.

The compliance plans resulting from the 2013 audits have been completed.

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 oftheir customers. 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 Internal Control, Risks and Corporate Governance Committee of Pirelli & C. S.p.A., which is composed only of Independent Directors.