The Impact of ESG on Procurement

Research has shown that two-thirds of the average company’s ESG footprint lies with suppliers. Environmental, social, and governance is the measurable evolution of Corporate, Social, Responsibility (CSR). Environmental covers issues around climate change, such as pollution, carbon emissions and footprint, deforestation, and more; the Social covers everything from health and safety, human rights, diversity, equality, and community impact; while Governance deals with business ethics in general, encompassing compensation, bribery and corruption, as well as legal and regulatory compliance.

Sustainable Purchasing practices can incorporate ESG into day-to-day operations as it directly determines what is purchased, from whom, how it is delivered, and product lifecycle sustainability, while indirectly influencing both suppliers and consumer behaviour. Furthermore, increase in demand for sustainable products and services is reflected in a company’s buying decisions, and has a broader effect on the surrounding industrial ecosystem, often acting as a domino effect, motivating its downstream supply chain to adopt a similar approach.

Today, the pressure to deliver on ESG commitments is intensifying from all directions, from customers to employees, and investors to governments. More and more, consumers and customers are seeking brands and strategic partnerships only with those who have strong ESG credentials. Internally as well, employee engagement and talent retention are increasingly influenced by sound ESG strategies.

The following article not only elaborates on procurement’s role in driving cross-functional collaboration to achieve overall ESG targets, but also the steps a company should be taking now to implement sustainable procurement practices.

Increasing Pressure For ESG Aligned Procurement Strategy

The pandemic exposed weaknesses in global supply chains and bottlenecks in organizational procurement, especially those that were heavily reliant on single-source, third-party, or overseas suppliers. ESG values embedded in procurement activities can improve supply chain resiliency. For example, striving towards a circular economy can make corporations less reliant on raw materials from third parties, while near shoring with alternate suppliers can prevent businesses from facing delays and simultaneously reducing greenhouse gas (GHG) emissions.

Consumers’ demand for sustainable products and production is leaving organizations with little choice but to prioritize ESG goals, and provide visibility into their procurement and supply chain activities. Additionally, the emergence of savvy activist investors is also forcing enterprises to improve their ESG performance, transparency, and reporting metrics. All of this is exacerbated by increasing public scrutiny brought about by social media campaigns and the internet’s dissemination of what was once ‘difficult to find’ information. Strong ESG practices are now a prerequisite to maintaining and enhancing brand value, consumer loyalty, and even the ability to raise funds or bid on projects – all of which directly impact revenue.

There are many reasons companies struggle to include ESGs in their Procurement Strategy. Oftentimes supply chain networks are complex and obscure. Getting transparent data from your suppliers and your supplier’s suppliers can be daunting. Even if the information is available, the data quality may not be adequate to make informed decisions. Additionally, there can be cost disadvantages to being the first movers in the space, especially in under-regulated markets. Even if one is willing to take on these challenges, putting a dollar value on responsible sourcing and further communicating this value to stakeholders is not an easy task.

Research has shown that most companies and procurement leaders understand the importance of ESGs, but simply do not know where to start and how to successfully implement ESG values into their sourcing strategies.

Steps To Implement Your ESG Strategy

An action plan is needed to lay out exactly how procurement decisions will turn good intentions into a measurable difference in the world. Achieving this will require developing metrics and milestones as well as dedication to a long-term vision and organizational discipline.

Benchmark & Develop a Pathway

Establishing one’s current position in relation to one’s desired position, is the first step. A company must take time to understand and quantify its total ESG footprint and then identify the most significant areas for improvement opportunities, in order to set clear goals and realistic targets for sustainable procurement pathway. This is unique to every organization, and contingent on what matters most in the context of the company’s overall ESG agenda and broader industry market.

Make The Data Work

Improving ESG performance starts with gathering the data needed to define the baseline, shape targets and KPIs, and drive performance. For procurement teams to be able to make use of the available ESG data, they need a to be equipped with quality data sets to navigate this still relatively uncharted territory. From there, long term success will hinge upon an ongoing commitment to organize and maintain clean ‘data’ to maximize the value that can be extracted. This will help improve process efficiency, reporting accuracy, and ultimately well-informed decision making.

Reevaluate Cost vs. Value

Before establishing KPI’s, a company must first be ready to prioritize value over monetary costs, essentially re-establishing their ‘bottom-line’ to account for ESG value. A company’s balance sheet needs to factor in ESG metrics and redefine the company’s targets. An ESG-adjusted total cost of ownership (TCO) should develop an environmental P&L (EPL) and a sustainable return on investment (S-ROI) approach that takes into account external impacts and long-term sustainability. For instance, a company might define objectives as a zero-plastic packaging or 100 % sustainable raw material sourcing, and clearly decide what these objectives mean to the ‘new’ organizational bottom line.

Assign KPI’s to Activities

Only after an organization has determined the value of ESGs within their operating balance sheet, can it start assigning metrics and tangible milestones, and benchmarking progress.

By establishing and applying these metrics, a company will also be able to compare its progress with its peers. In addition, these procurement KPIs should be redefined with cross-functional collaboration across the organization. For example, they should engage with marketing teams to quantify impacts on brand and reputation, with HR to quantify improvements in employee satisfaction and retention, and with sustainability experts to quantify benefits in GHG reductions. A combination of these KPIs will help quantify the intangible benefits of achieving ESG commitments.

Establish New Polices & Processes

Once a pathway is laid out and the key metrics developed for tracking success, leadership needs to craft new policies and revise internal procurement processes to ensure long term success in action. Lasting organizational change will only happen by overhauling how business is conducted. Consider the standards used to select and evaluate suppliers, methods for upkeeping statistics and database maintenance, as well as ways to manage these relationships overtime to continuously meet your targets. The aim should be aligning procurement with the circular economy, rethinking the supply base in terms of sourcing and materials to mitigate risk, while avoiding excessive costs and negative ESG impact.

Communicate With Suppliers

After the new targets and operating procedures have been defined, they need to be set in stone as codes of conduct and purchasing policies with your actual suppliers. For example, a code of conduct for suppliers may require them to provide employees with a living wage, never use child labor, and always comply with the company’s ethics and human rights policies. Communication and contract renegotiations are key here. It is critical that a company underlines what these standards mean in practice for its suppliers by itemizing metrics and giving specific examples, as well as outlining non-compliance clauses. Failure to comply with these criteria should automatically lead to a review of the relationship and potentially terminating business contracts all together.

ESG Procurement Champion

If a company has successfully redefined its procurement strategies to include ESG values (congratulations!), now it is ready to go beyond its supplier network to have a much bigger impact. Become an industry pioneer and gain competitive advantages by becoming a champion of ESG procurement and forming broader coalitions of influence and action. Consider partnering with non-governmental organizations (NGOs), academia, and even peers, to build well-coordinated approach to mitigating ESG risks and developing best practices for the industry. A major benefit of this collective approach is greater leverage to engage effectively with policymakers when defining industry standards.

Conclusion

As an organization takes on a holistic approach to examining the impact the business is having on the world – the environment, community, and governance – its unique ESG values need to be at the center of this discussion. Most of the biggest risks and opportunities are found in a company’s upstream supply chain, placing procurement at the front line of the transition to sustainable business models.

Procurement strategies orchestrate where and how a company spends resources as well as the materiality of the products created. And procurement alone has the most comprehensive overview of corporate ecosystems, including internal structures, suppliers, assets, and customers. With this comes the ability to shape corporate vision and create value by selecting and supporting partnerships, structures, and relationships that best support a company’s ESG agenda.

However, this transition needs to be realistic. Overhauling a supply chain cannot happen overnight. As companies seek to reduce the negative impact of their activities, they must ensure their procurement teams have the collaborative framework, agency, and data, needed to support this shift. Additionally, it is important to consider if what you are asking of your suppliers is feasible and if they have the resources to comply with all your demands. If not, work with those willing to improve and map out a synergistic game plan.

ESG centered procurement strategies can ensure that external business relations with suppliers and consumers are aligned with certain environmental, social and ethical standards. Start shifting the organizations focus from being ‘the best in the world’ to being ‘the best for the world’.

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