IBM Experts: Could ESG Redefine the Procurement Function?

In the last decade, businesses have been rapidly increasing their prioritisation of suppliers with eco-friendly practices to reduce their carbon footprint and promote sustainability. 

Innovations like blockchain and AI are improving supply chain traceability and helping to monitor supplier compliance with ESG standards. These tools enable better data-driven decision-making and enhance accountability.

Despite advancements, inconsistencies in ESG metrics and resource constraints for smaller suppliers remain obstacles. Companies address these issues through collaboration, supplier training and long-term partnerships.

Driving visibility and change through procurement

While the bottom line will continue to be the main focus for procurement, investments in ESG goals are becoming key components of corporate strategies. 

An Index Industry Association survey conducted in 2023 found that asset managers’ projections of the future proportion of ESG elements in their portfolios are 50% by 2026, 54% by 2028 and 62% by 2033.

Initiatives being adopted by procurement include: 

• Reducing environmental impact
• Promoting social responsibility 
• Upholding governance structures 
• Ensuring employees have avenues to raise concerns without fear of retribution

“Driving visibility and change with these ESG initiatives relies heavily on action from procurement organisations,” say George Webb and Nikolett Gábriel, members of the IBM Procurement Analytics as a Service, via the Institute for Supply Management.

They add: “The procurement function intersects with each component of the ESG framework through its influence over the supplier network, sourcing of raw materials and deciding the businesses to connect branding with.

“Considering that ESG metrics capture not just a corporation’s in-house activities but also those of their Tier-1, Tier-2 and Tier-3 suppliers only adds to the challenge of ESG goal tracking and risk evaluation through data reporting and analytics.”

A five-step framework

The two IBM executives detail five actionable steps that can elevate procurement’s ESG analytics. 

1. Define your source of truth

Defining a single source of truth data set is the first step to achieving effective ESG analytics to track the metrics. 

“If different geographies or business units are operating with their own assumptions on how to calculate these figures, or are generally estimating where they might stand, it will be very difficult to get a concrete assessment of current behaviour or track actual progress,” say George and Nikolett. 

2. Align with trusted data

Typically a lot of ESG data isn’t captured in an ERP system, therefore it requires additional effort to identify trustworthy data sources.

George and Nikolett pose that procurement considered six possible sources and their reliability:

• CSR reports
• Managed service partners with reputable knowledge base and ESG expertise
• Reputable online publications
• Self-report questionnaires 
• Direct data extracts 
• Purchased information from third-party providers

“While setting up your data consolidation structure, it’s vital to ensure the data you are collecting is trustworthy," they explain. "Self-reported numbers should not be blindly accepted and validating this information, such as through regular audits, is imperative. Third-party data should similarly be evaluated for accuracy, with consideration given to the frequency of evaluations performed on suppliers covered."

3. Know the needs of procurement users

Once the data set is established, visualising data in a BI tool ensures that decision-makers have visibility.

Different use cases should also be established to meet tailored needs, with examples including:

• CPOs and executive teams want to see high-level diversity statistics of their supply base.
• A category manager may be keen to evaluate a category’s ESG performance over time.
• Tactical buyers might have a target goal for spending with suppliers who meet certain environmental standards.

4. Expand the programme over time

Once established, the programme can serve as the base for future expansions and goals.

Three in five (60%) CPOs planned to expand their ESG programmes in 2024, according to an Ardent Partners report, emphasising the need for a strong ESG baseline. 

5. Act quickly to remove risks 

While organisations need to identify suppliers who meet diversity and environmental criteria, it's also vital to identify potential bad actors in the supply chain who could cause operational and reputational damage. 

Requesting environmental standard data and investigating the labour practices of suppliers allows organisations to proactively identify suppliers who don’t meet the standards set by the business or may pose potential risks.

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