How ESG is Reshaping Procurement's Function

Procurement priority remains the bottom line – but more and more teams are making investments which will help them to reach environmental, social and governance (ESG) goals. These are increasingly becoming key components of corporate strategies.

This is the opinion of George Webb and Nikolett Gábriel, both members of IBM's Procurement Analytics as a Service team, who outlined the change ESG is having on procurement in a blog post for the Institute for Supply Management.

With ESG, it can be captured in a wide range of metrics and initiatives that are increasing in focus for investors and consumers – all of whom want to ensure that the companies they support are operating in a responsible and thoughtful manner.

How procurement can drive change

Findings in a 2023 survey by the Index Industry Association uncovered that asset managers' projections of the future proportion of ESG elements within their own portfolios are around half by 2025, 54% by 2028 and 62% by 2033.

Such examples of these ESG efforts include reducing environmental impact through consideration of carbon footprint, water consumption, land use and waste management. 

They also focus on social responsibility by considering job applicants from a diverse applicant pool, complying with labour laws, prioritising employee health and uplifting local communities through philanthropy.

Additionally, they involve upholding governance structures such as board composition or corporate leadership, which demonstrate transparency to various stakeholders, promote responsible and transparent policies, procedures and decision-making and ensure employees have avenues to raise concerns without fear of retribution.

Using visibility and change with ESG initiatives is dependent on action from within procurement organisations. Procurement acts as an intersection for the ESG framework through its influence over the supplier network, sourcing of raw materials and deciding the businesses to connect with branding.

The consideration of ESG metrics now captures not only a corporation's in-house activities but also those across all tiers (1, 2 and 3) of suppliers – which adds challenges to ESG goal tracking and risk evaluation through data reporting and analytics.

The five-step plan

George and Nikolett proposed a five-step framework, which they believe will elevate the procurement team's ESG analytics.

Step 1: Define your source of truth

The first step on this journey should see the procurement team defining a single source of truth for these metrics. This will pose a problem for procurement teams to get a concrete assessment of behaviours or track actual progress, especially as different geographies or business units operate under their own assumptions about how to calculate these figures.

A standardised set of definitions, calculations and data sources will establish an agreed-upon baseline from which to track and improve progress over time.

Step 2: Align with data you can trust

ESG-specific data is not typically captured in an ERP and requires additional effort to uncover a trustworthy data source. For example, from an environmental standpoint, you could look at collecting data directly from suppliers to track their CO2 impact or water use.

The authors suggest considering data sources with greater reliability, including corporate social responsibility (CSR) reports, managed service partners with a reputable knowledge base and ESG expertise (such as IBM Procurement Analytics as a Service) and other reputable online publications like NGOs. Data sources that require further vetting include questionnaires sent to suppliers for self-reported metrics, direct data extracts from suppliers and purchased information from third-party ESG data providers.

When establishing the data consolidation structure, it is vital to ensure the collected data is trustworthy. Self-reported numbers should not be blindly accepted and validating this information through regular audits is imperative. Third-party data should similarly be evaluated for accuracy, with consideration given to the frequency of evaluations performed on covered suppliers.

Step 3: Know the needs of your procurement users

Once the data set is established and visualised in a business intelligence tool, it ensures decision-makers have the visibility required for their roles. Different user groups will derive value from different information.

The Chief Procurement Officer (CPO) and executive team might want to see high-level diversity statistics of their supply base, such as the percentage of diverse spend and how these metrics are trending over time. These should be benchmarked against the company's own goals and potentially the performance of other businesses in their industry.

Category managers may be keen to evaluate a category's ESG performance over time, potentially incorporating category-specific standards to track compliance for specific environmental or ethical standards.

Tactical buyers might have target goals for spending with suppliers who meet certain environmental standards, benefiting from a dashboard showing their category's supply base with supporting environmental data such as carbon dioxide (CO2) impact to use when making purchasing decisions.

Step 4: Expand your programme over time

With an ESG programme and data architecture in place, this can serve as a base for future expansion. According to an Ardent Partners report, 64% of CPOs planned to expand their ESG programmes in 2024, highlighting the need for a strong ESG baseline to build from.

A programme initially focused on CO2 impact could shift its attention to examining water waste treatment or energy efficiency while maintaining a similar tracking and reporting structure. As ESG programmes grow, they create knowledge around existing data sets, potentially uncovering gaps in ESG areas or geographies that can become focus points for improvement.

Given that ESG is a growing field, it is expected that goals and standards will continue to evolve in the coming years, making the infrastructure to track them increasingly valuable.

Step 5: Act swiftly to remove risky partners

This approach helps companies uncover suppliers who meet certain criteria in diversity or environmental efforts, thereby improving their ESG rating. Equally important, it can identify potential bad actors in the supply chain who could cause operational or reputational damage.

By requesting environmental standard data or investigating the labour practices of suppliers, businesses can identify those who do not meet set standards or could bring risks to the company's ESG performance. Early discovery of such suppliers allows businesses to examine and move to alternative partners.

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