The path to true ESG: a wider view of supplier sustainability management
'Sustainability' is often used as a synonym for GHG emissions and how they can be reduced. However, there are plenty of other metrics you need to consider in order to be truly holistic in your journey to the most sustainable supply chain possible. Vizibl explores the path to true ESG.
Given that the majority of any company’s environmental impact sits in its supplier base, organisations with any type of sustainability objectives must not only focus on the impacts of their own operations, but also those of their suppliers. In fact, the UN report “Integrity Matters: Net Zero Commitments by Businesses, Financial Institutions, Cities and Regions” calls for immediate and cross-border legislation on emissions across all scopes throughout the value chain. This goes beyond reporting, with the report suggesting that evidence-based plans be required, by law, detailing how each of these non-state emitters will move to net zero. As recognition of these facts grows, we see procurement teams becoming more and more involved in the organisation’s broader sustainability agenda in the march towards 2030.
According to the 2022 Gartner/SPP Sustainable Procurement Pulse survey, "79% of organisations are either fully committed or somewhat committed to achieving sustainable procurement goals. However, more than half of respondents (57%) highlighted the top challenge they face when engaging suppliers is the lack of a standard way to assess suppliers’ sustainability performance."
This lack of standardisation has been an issue for sustainability professionals for a long time. While there are well-established frameworks for reporting greenhouse gas emissions (the most prominent of which being CDP), true sustainability assessments should move beyond just being CO2e reduction schemes and look more closely at areas such as water usage, deforestation avoidance, the upkeep of human rights, responsible sourcing, and stretching ambitions to always improve in all these areas. This is, essentially, the often-referenced but irregularly implemented concept of "ESG" reporting.
As we’ve covered in our previous blog, “The true cost of one-way Supplier Relationship Management”, procurement functions often simplify their supplier relationships down to a simple operational cost/benefit model. However, increasingly, forward-thinking companies are understanding that integrating collaboration, innovation, and sustainability into their ongoing engagements with suppliers is the only way to truly address environmental, social, and governance issues.
Too much of the time, ‘sustainability’ is used as a synonym for greenhouse gas emissions, and often, the conversation focuses too much on GHG Protocol scopes 1, 2, and 3, and how they can be reduced. This isn’t to say that reducing scope 3 emissions isn’t important – in fact, the reason why it gets so much attention is that it’s one of the easier dimensions of sustainability to start measuring, managing and reducing right away. However, there are plenty of other metrics you need to consider in order to be truly holistic in your journey to the most sustainable supply chain possible. Here are a few examples you might already be familiar with.
Definition: “The use of water resources in a way that meets the needs of organisations today and the water needs of ecological, social and economic systems in the future” – Gartner research
Most people in the developed world have been very lucky to take water availability for granted throughout our lives so far. While water is considered a plentiful and renewable resource, there’s no question that the world's fresh water basins are at a higher risk at present than at any other point in human history.
To illustrate the scale of the problem: the United Nations predicts a 40% global shortfall in water supply by 2030 if current consumption and production patterns do not change, while analysis by NASA suggests that 13 of the world’s 37 largest aquifers have been depleted to the point where regional water availability is threatened. For all our talk of oil and gas exploration and extraction, it’s a little-known fact that groundwater is the most extracted resource in the world. And unlike oil and gas, it’s a resource that we absolutely cannot survive without.
Water is also an essential resource for many companies, especially those who have manufacturing in their direct or indirect operations. As we move through the 2020s, it’s essential that companies ensure sustainable water usage throughout their operations – ensuring that they return either the same or greater volumes of clean water back to the environment, enabling dependent ecosystems to survive and thrive.
Definition: “Rights inherent to all human beings, regardless of race, sex, nationality, ethnicity, language, religion or any other status” – Gartner research
Businesses have a significant impact on the way people live their lives, whether it’s as a direct or indirect employee, a customer, or living alongside the companies that share our towns, cities, and nations.
Aside from it being the right thing to do, it makes good business sense to respect human rights. Businesses can find themselves involved in lawsuits, suffering reputational harm, and missing out on opportunities and investments as well as the chance of recruiting the best new employees if they fail to properly care for the people who keep their company in business.
“The Protect, Respect and Remedy” framework outlines the state’s responsibility to protect, the business’s responsibility to respect human rights and the responsibility to “make right,” or remedy human rights abuses.” Historically, and arguably even currently, businesses have beenvehemently opposed to any kind of imposition on them to guarantee the rights of workers, either those employed directly by them or elsewhere within their supply chain. However, aswe recently explored, turning a blind eye to human rights issues in your supply chain is no longer an option for any company who wants to avoid potentially huge financial, regulatory, and reputational risks.
Definition: “Oversight and accountability of executive leadership, including the board of directors, for the organization’s sustainability practices and outcomes” – Gartner research
Sustainability governance is the corporate practice of embedding sustainability throughout the overall business structure, with ultimate accountability falling to the CEO and Executive Committee. It should also be something that’s very clearly measured, monitored, and improved over time – including transparent and clearly-defined goals, a record of the investments made to achieve the outcomes, and board-level oversight over sustainability.
The benefits of good governance have been covered in myriad blog posts in the past, but for the sake of clarity: companies, as well as society and the wider economy, will benefit over the long term from both responsible corporate conduct and a level playing field for customers, suppliers, employees, and local communities.
Sourcing and Procurement
Definition: “The act of incorporating ESG factors in the way a buying organisation purchases products and services” – Gartner research
In good news for people and the planet, companies are increasingly looking to source green and recycled versions of common materials such as steel, aluminium, and plastic, rather than investing entirely in primary production. However, with this increasing interest in greener versions of much-needed materials, a new issue emerges: the lack of supply to meet this increasing demand. Without very deliberate decisions made by buying companies to adhere to sustainability principles, this lack of supply will, by itself, force companies to revert to their previous sourcing of original materials. It also risks driving up the prices of recycled alternatives, further moving their priority down the business agenda over time. As one recent example, growing demand for greener plastic has pushed the prices of some types of recycled plastics much higher than the prices of virgin resins derived from fossil fuel extraction.
Forward-thinking procurement teams are already working to avoid the disruptions that they know will come from reduced supply availability in the short to medium term, building capabilities that will ensure consistency and quality. The most mature procurement organisations are going one step further, and harnessing the power of supplier innovation and open innovation to transform unsustainable categories into brand new opportunities for both their own business and the wider market.
The good news is that the sheer demand for these increasingly scarce materials is a good sign, and with increased and extensive Supplier Collaboration and Innovation across the stakeholder network, companies with one eye on sustainable sourcing and procurement will be the first to lock in the best prices for existing solutions, and to develop the new generation of products and services that will shore up their longevity.
But how do we evaluate supplier performance across all these dimensions?
Having said all this, I know what you’re thinking. “But Mike, it’s all well and good knowing that we should be doing all these things, but how do we get started?”
It’s a great question. The first thing to say is, starting out with a truly holistic approach should encompass 19 different areas across all of ESG, as outlined by Gartner in their most recent research report on the subject:
Once you’ve added all these metrics to your prospective supplier sustainability performance evaluation, you then need to create a methodology for each one, standardising all the definitions so that you can apply them equally to each supplier you’re going to assess.
It sounds difficult, but help is at hand - because the aforementioned Gartner research is available to you, right now, courtesy of Vizibl. An, end-to-end report on how to truly evaluate supplier sustainability performance, including advice on how to approach all 19 suggested metrics, plus notes on how to apply the methodologies and a handy glossary to help you get to grips with any new terms.