Driving sustainability and the focus on ESG (Environmental, social and governance) is becoming an increasing focus in the agendas of executives, driven by stricter regulation, increasing investor pressures and growing customer and employee awareness. While many organisations have made good progress implementing successful ESG initiatives internally (e.g. reducing scope 1 and 2 emissions, driving diversity in their employee base), most organisations cannot claim to have been equally as successful in driving the same improvements across their supply chain.
Driving the sustainability agenda internally typically falls within the remit of the Board, CEO and potentially a sustainability officer/function. While driving the agenda internally is challenging, influencing the broader supply chain to do the same is significantly harder. This responsibility falls squarely on the shoulders of procurement functions, as the gatekeeper of spend.
While most procurement functions are aware of their unique position to influence ESG within their supply base, few have gone beyond implementing supplier checklists and questionnaires. Some procurement teams face the challenge of a lack of internal alignment – having to ensure consistency of supply and demonstrate cost savings while potentially being pulled away from ‘cheaper’ less sustainable suppliers. Most also face the challenge of visibility. Even with new digital solutions that help to ease the supplier review process, it is difficult to gain a true understanding of their suppliers’ ESG performance, much less across the entire multi-tier ecosystem.
As a result, many procurement teams can end up either trying to do too much or end up ‘greenwashing’ – by collecting lots of data from suppliers, reporting on it but taking no steps to create real impact. For example, many organisations end up focusing all their Scope 3 efforts on ‘baselining’ instead of driving real change by identifying their top emitters and working with them to drive emissions down. On a similar note, many companies have started implementing visibility tools to assess supplier ESG risk, but insights from these tools often don’t translate into actions, as organisations don’t have a clear view on how (and who) to manage poorly performing suppliers. Procurement organisations have a role in driving real change and need to step beyond reporting to achieve this change.
The first step is to internally align and agree priorities and ground rules. It is easy to get distracted with trying to achieve too much, so pick 2-3 top priorities which align with corporate objectives and business KPIs. Then, be clear on the ground rules with internal stakeholders to avoid roadblocks. Agreeing upfront how exactly a business will respond, and the cost/benefit tradeoff they are willing to make will give procurement teams clear mandates on how to deliver the ESG agenda.
For example, will the business switch suppliers (potentially paying a higher price) if their incumbent supplier does not meet agreed ESG standards? A good example can be found at Unilever, where indirect suppliers who do not meet a baseline sustainability performance must undertake a program to improve within an agreed timeframe, failing which, their contracts are typically not renewed. Having strong consequences for non-compliance sends out a clear signal to suppliers and can drive real ESG improvements.
Once priorities are agreed, procurement can develop a clear action plan that drives results, and a set of consistent KPIs that incentivises the right actions across all stakeholders. For example, if your priority is to increase the use of local suppliers, it is important to firstly define what a local supplier is, how much value is targeted to be generated and how much the business is willing to invest in this program. You can then agree these targets with stakeholders and put in place regular reviews to ensure actions are closed off and roadblocks are removed.
Finally, to truly drive a sustainable supply chain, procurement must be empowered with a skilled and fit for purpose organisation. Driving ESG into the supply chain adds yet another element of complexity into procurements’ mandate that cannot necessarily be taken on by existing resources. Procurement must be equipped with the right capabilities and resources, supported by appropriate accountabilities to drive real change. Both procurement and user functions must be trained on sustainable purchasing practices, and incentives must be aligned to meet broader corporate sustainability goals.
Organisations who are serious about improving their sustainability performance must look beyond their internal operations and into the supply chain. Procurement functions are key to driving this change and must be equipped with well aligned ground rules, the right toolset and appropriate resources to help organisations achieve their goals. Without a focus on the external supply chain, organisations risk ‘greenwashing’ and being exposed to operational and reputational risks.
Manager
Michelle Daniel manages our global Procurement and Supply Chain Practice, and has delivered successful sourcing and performance improvement engagements globally.
Director
Tom Sonnen leads our global Procurement and Supply Chain Practice. Tom has over 25 years’ experience as a consultant and has led major business improvement and transformations globally.
