McKinsey: Two-thirds of ESG footprint lies with suppliers

You may be asking yourself: ‘why do I need to understand and manage my environmental impact through every part of the business?’. Well with two-thirds of an average company’s environment, social, and governance (ESG) footprint lying with suppliers, a company has many reasons to focus on their efforts in this field. 

Some core reasons include:

• Satisfying customer expectations. Customers are increasingly selecting brands with strong ESG credentials even if the price is higher.
• Staying ahead of more stringent regulations, or pressures from banks, investors, employee engagement, or talent retention. 

Procurement’s role in shaping an organisation’s ESG footprint 

In a McKinsey report, the company explains that with procurement being “the primary interface with the upstream supply chain, the procurement function has a decisive role to play in shaping an organisation’s ESG footprint, both directly through purchase decisions and indirectly by influencing product design.”

But while chief procurement officers (CPOs) clearly understand the significance of ESG, many companies are struggling to transform that understanding into a clear vision or sustainability strategy for the procurement function. For example, in a survey of European CPOs, 60% knew where they wanted to be but lacked an aligned strategy, with only 20% stating that their organisations used sustainability measures as a primary criteria in sourcing decisions or supplier reviews. Less than 10% reported that they included sustainability in their category strategies.

When asked why ESG wasn’t built into their sourcing DNA, most reported a lack of necessary tools, skills, and data. 70% reported that they didn’t understand where their Scope 3 emissions came from. While 90% struggled with identifying the right actions, and 75% didn’t know what ESG targets to set. 

Significant work is required 

While it is accepted that significant work is required in the industry, McKinsey believes that many organisations already have the foundations - especially those with mature procurement capabilities - to create the sustainable procurement that organisations need. Most organisations also have rich upstream value chain data showing how much a company buys, where it comes from, and who makes it. “A procurement organisation can build on these foundations by taking a holistic approach to the development of new ESG-focused data, processes, and capabilities,” commented McKinsey.

The consultant outlines three basic steps to achieve such an approach: 

1. Determine a baseline and how far to go: Understand and quantify the current ESG footprint; identify the most significant risk areas, improvement opportunities, and what matters most when it comes to the overall ESG agenda; and set goals and targets.

2. Drive value-creation initiatives: Define ESG metrics and policies that can be integrated into the organisations standard supplier selection, procurement, and supply-management processes. As well as select a number of top priority ESG themes and address them with innovation and improvement initiatives. 

3. Shift the organisation: Scale up and roll out successful initiatives, integrate sustainable practices into the organisation, continuously train the procurement community, and track the organisation’s performance against established targets.