Pressure from consumers, regulators, and world leaders through events like COP26 has catapulted Environmental, Social, and Governance (ESG) issues up boardroom agendas. Many organisations are now treating ESG as a board level priority, and pioneers are reaping the benefits. The Bank of America recently found that organisations adopting ESG investment strategies outperformed by 5 to 10 percentage points in Europe and the US.
Yet, in many cases current ESG strategies are often skin deep. They don’t look at the impact of the organisation’s supply chain – where most of its emissions, as well as compliance and ethical labour challenges, typically take place. Recent research found just one third of suppliers said customers frequently include sustainable practices in contracts and agreements.
Without addressing ESG in the supply chain, organisations are missing out on the greatest source of tangible business, and societal, benefits. A recent report from Forrester found that increasing corporate and social responsibility programmes had actually increased sales (69%), improved compliance (69%), and improved supplier relationships (72%) for organisations.
So, what are the challenges to achieving an ESG-driven supply chain?
Making real strides in ESG isn’t easy
Put simply, unlike internal initiatives, the scope and complexity of managing ESG across suppliers and their subcontractors is much greater. To create a truly ESG-driven supply chain, organisations must be able to share, gather, and validate supplier information so they can put sustainability policies in place. They need to track suppliers’ environmental impact and work with suppliers to make products more sustainable.
When we think about who in the organisation is best placed to take on this challenge, procurement should be top of mind. Procurement teams are responsible for managing relationships with suppliers, negotiating contracts, and processing transactions. Without involving procurement, many sustainability initiatives fall short, because organisations simply don’t have the insights they need to drive change across the supply chain.
Even after the important step of involving procurement teams, organisations will still face challenges. Firstly, the accuracy and quality of ‘foundational data’ in the supply chain can be a big problem; organisations may deal with inaccurate material master data – that is all information related to materials that an enterprise procures, produces, and keeps in stock. This is vital information to ensure the resources needed to deliver a product responsibly and on time are present. Additionally, inaccurate supplier information and master data, which includes information needed to do business as well as certifications, credentials, or financials, can wreak havoc on everything from processes to compliance.
Taking procurement into the cloud
To gain a complete view of suppliers and work with them more closely to improve ESG, organisations need to overhaul their procurement strategies. One way to do this is by bringing suppliers across all tiers in the supply chain onto a single, cloud-based platform. This could be a sourcing, eProcurement, or other supply chain related solution, to gain the data and visibility needed to collaborate across multiple tiers of the supply chain.
Operating in a single, cloud-based platform allows firms to transform supply chains to be more transparent and collaborative, giving them the ability to communicate and share data beyond the company walls. By linking customer demand to supply chain orders, shipments and deliveries, platforms can track and trace products across tiers of the supply chain at a significantly lower cost than on-premises. Having access to this information is key to managing ESG initiatives, assessing supplier performance, and identifying opportunities to collaborate with suppliers.
Cloud-based procurement tools can also identify opportunities for companies to invest in certain suppliers and improve their sustainability standards. This ensures impactful change in the long term across the supply chain and turns ESG into a competitive advantage for suppliers. For example, Unilever recently collaborated with Google, to help it better identify sustainable sources of palm oil in order to reduce its environmental impact.
Proving a point
By arming businesses with a better understanding of their supply chain, organisations can collaborate more easily, and work with stakeholders to drive ESG initiatives. To reap the benefits of ESG, boardrooms need to recognise the important role that procurement plays in driving ESG initiatives. Those that don’t modernise their procurement approach risk falling behind their more ‘responsible’ competitors.