In the context of mounting environmental and social challenges affecting our entire globe, many enterprise organisations are embedding sustainability at the heart of their strategic goals. And as the funnel through which most of a large business’s spend will travel, procurement has an enormous role to play in embedding sustainability into its day to day practices and across its supply chain. Indeed, with most of our impact on our environment and our communities sitting in our value chains, it is clear that we cannot become sustainable without our suppliers.
In recognition of this fact, sustainable procurement is an approach to the procurement process that embeds ESG (environmental, social, & governance) issues and corporate social responsibility (CSR) practices at the heart of its specifications and its process.
This approach to procurement factors the effect that our business practices have on the planet and its people alongside procurement’s usual concerns around compliance, cost, and quality, seeking to embed sustainability across the entire life cycle of a business’s products and services from raw material extraction through to transportation, distribution, and eventual recycling or disposal.
Key sustainable procurement themes
Scope 3 emissions
According to CDP, reporting companies’ scope 3 or emissions are 11 times greater, on average, than emissions resulting from their own operations. So when it comes to climate and carbon, the vast majority of corporate impact sits not within a business’s own ‘four walls’ but in their value chains both up- and downstream.
Without reducing these emissions, very few organisations will have any chance of achieving the goals of the IPCC Climate Change Report or the Paris Agreement. It’s imperative that we do. Failure to keep global warming to below 2°C will expose billions of people to extreme heat waves, drought, storms, and increasing flood risk, with recent Climate Central research calculating that some 150 million people currently inhabit land that will be below the waterline by the 2050s due to rising sea levels.
As most of our impact sits in our value chains, procurement has an enormous role to play in reducing climate-changing greenhouse gas emissions from its place at the interface between the business and its supply chain. Beyond making smart choices in the sourcing phase, working closely with existing supplier stakeholders is the only way procurement functions can meaningfully reduce scope 3 emissions.
Child labour & modern slavery in the supply chain
In the world’s least developed countries, around one in four children (aged 5-17) are subject to child labour – defined as doing work that deprives children of their childhood, the chance at schooling, their development, their well-being, or their dignity. Around 70% of these children are coerced into dangerous agricultural work, and it is estimated that as a result of growing poverty in the wake of the initial waves of the COVID-19 pandemic, an additional 8.9 million children are at risk of being pushed into child labour by the end of 2022.
Additionally, it’s estimated that over 40 million people worldwide are victims of modern slavery – 25 million of them exploited for forced labour. The pervasiveness of these issues means that the likelihood of businesses and governments across the world purchasing goods and services derived in some part from modern slavery or from child labour is very high. Few can forget the BooHoo scandal from 2020, when it emerged that a company in the fast fashion giant’s supply chain was paying their Leicester garment workers as little as £3.50 per hour, well below even the UK’s minimum wage.
In the UK, despite the introduction of the Modern Slavery Act in 2015, around 40% of expected respondents still don’t comply by producing a statement outlining their commitment to eliminating forced labour from their business practices. It’s crucial that businesses work closely with their suppliers to eliminate both child labour and modern slavery in their supply chains, so that the practice can be eliminated everywhere over time.
Fair living wage
A fair living wage is defined as the pay required to cover the true cost of living of a worker and their families. This includes necessities such as shelter, food, healthcare, clothing, transportation, and education, in addition to buffer money for emergencies and the preservation of dignity.
It is important to note that a supplier meeting minimum wage requirements in their given country is not a marker of fair living wage progress. Even in the UK, for example, the Centre for Research in Social Policy at Loughborough University found that in 2021 the very minimum acceptable salary for a single person to secure an ‘acceptable’ standard of living was £20,400, commonly referred to as the ‘Real Living Wage’. The government’s National Living Wage for the same year was £17,400.
Understandably, this situation is worse in developing nations where factors such as the fiscal and cultural legacy of European colonialism, non-existent wage legislation, and limited employment options leave workers with no choice but to accept poverty wages from employers, trapping them in a cycle of employment that cannot support them, their families, and their livelihoods.
Large global enterprises have a huge role to play in the shift towards true living wages by using their buying power to incentivise companies to pay their workforce enough to meet the regional cost of living.
Gender & race pay gap
In 2020, full-time working women in the USA made 83 cents for every dollar earned by men, according to the US Census Bureau, with black men earning 87 cents on the dollar compared to white men. The picture is even bleaker where race and gender intersect, with Black women being paid just 64% and Hispanic women 57% of what white non-Hispanic men earned that year.
Though adjusting for factors such as education, location, or even industry paints a slightly more complex picture – and it is important to note that some historical gender and race pay gap shrinkages can be accounted for in the stagnation in (white) men’s wages – no adjusted methodology returns pay parity. 68% of the gender pay gap in American college graduates, for example, would be closed if gaps between women and their male counterparts within the same occupation were closed (i.e. if women software developers were paid the same as male software developers, etc.). Over the past twenty years wages have grown faster for white and Hispanic workers than for Black workers, with the Economic Policy Institute finding that the black-white wage gap has grown from 10.2% at the turn of the century to 14.9% in 2019.
Wage gaps mean that women and people of colour lose out on hundreds of thousands of dollars in earned wages over their lifetimes. By committing to stamping out gender and race gaps in remuneration within both their own operations and across their supply chains, large enterprises have the potential to make considerable difference in marginalised communities across the globe, and to increase the buying power of those whose compensation has been historically capped.
Reducing raw material extraction
In 2017, global primary materials usage hit 89 gigatonnes – 89 billion metric tonnes, or the equivalent of 890,000 fully-loaded US aircraft carriers. The Organisation for Economic Co-operation and Development estimates that this figure will double by 2060 in the absence of new policies, to 167 gigatonnes, with the impact on our planet and its people increasing disproportionately quickly due to the impact of extraction methods, processing, and disposal on our environment and our health outcomes.
Though the ‘materials intensity’ of the global economy is anticipated to decline more quickly than in recent years, the projected 1.3% annual decline in this figure is not enough to offset the accelerating removal of natural resources from our planet.
The OECD counsels a move towards resource efficiency and a circular economy in order to ‘address the wide range of environmental consequences linked to materials use, as well as policy objectives related to security of resource supply and creating jobs’.
Procurement & colleague functions in R&D and product design have an enormous role to play here in ensuring that their organisation’s dependence on raw materials in a linear supply chain system is replaced, where possible, with the more efficient circular principles of reducing, reusing, recycling, and remanufacturing.
A ‘diverse’ supplier is an organisation that is majority owned and operated by an individual or individuals who are part of a marginalised or minority group – including but not limited to women, people of colour, LGBTQIA+ people, and people from ethnic minorities.
Large enterprises pursuing a supplier diversity programme uplift communities that have been historically underrepresented in the business world. In addition to supporting CSR goals and allowing organisations to better serve minority communities in their consumer base, a commitment to supplier diversity can ensure more agile and resilient supply chains. What’s more, more diverse spend in the supply base is associated with higher market share.
Benefits of sustainable procurement
The benefits of sustainable procurement are interrelated but can be broadly distilled into a few key examples:
Reduce risks & preempt possible issues
Proactively pursuing supplier sustainability allows organisations to increase their awareness of possible risks – be that to their brand, to stakeholders in the upstream supply chain, to customers, or to their bottom line.
A more sustainable supply chain is also associated with improved continuity of supply as a more diversified supplier base reduces depending entirely on individual suppliers.
At Vizibl we associate effective sustainable procurement with ‘customer of choice’ status, which we will cover in more detail in the second article in this series. Customer of choice status is a marker of effective Supplier Collaboration on issues including sustainability. This close relationship between buyer and supplier forms the basis for increased transparency and visibility, in addition to more effective communication, all of which can help pre-empt and mitigate any risks to the business originating in the supply base.
Future proof the business in changing legislative & regulatory environment
As we covered in the wake of the Shell ruling in 2021, large organisations are increasingly being held to account by courts and governments for the sustainability credentials of their supply chains.
The Shell ruling saw the energy giant compelled to step up its emissions commitments dramatically from their previous pledges – not only was an absolute (rather than relative to a previous financial year) reduction demanded of them, the Dutch court system made this reduction applicable not only to their own operations but also to ‘the customers and suppliers of the group’.
As pressure increases on governments and regulatory bodies to come down harder on organisations that do not act sufficiently to protect our planet and our communities, the likelihood of such incidents increases. Businesses who take pre-emptive action now to expand their sustainability efforts will, therefore, be future-proofing their business against the rising tide of fines, regulatory changes, and legal rulings.
In addition to the Shell ruling, May 2021 also saw Chevron shareholders vote majority in favour of a proposal to cut scope 3 emissions at their AGM, signalling frustration with the company’s dilatory approach to climate change; Chevron has thus far failed to match its competitors’ net zero targets with any of its own.
The energy industry has seen further strife in recent times as an activist investor staged a coup in Exxon Mobil’s board over the strategic direction the company was taking in regards to sustainability. Hedge fund Engine No. 1, arguing that the climate crisis poses “an existential threat to the [Exxon] business” that the board had been reluctant to confront, began to oust sitting board members, accusing them of “obfuscating rather than addressing long-term business risk”.
Exxon lost three board seats to Engine No. 1, garnering the support of BlackRock, Vanguard, and State Street against Exxon’s leadership. The market responded in kind, with Exxon’s share price rising 1.2% on the day after trailing petroleum peers for the previous five years, and seeing overall growth of 45% over the six months following December 2020 when Engine No. 1 began its campaign.
The top of this year also saw asset manager Aviva Investors promise further scrutiny, incentives, and sanctions for the companies they invest in around their social and environmental impact, giving yet another sign of growing investor expectations. As the climate crisis worsens, this pressure will grow, and meaningful action on sustainability will continue to become increasingly key to satisfying investor demands.
Brand differentiation & revenue growth
Very simply, consumer brands that demonstrate a commitment to sustainability outperform those who don’t, per Nielsen. Sustainable brands enjoy more rapid sales growth, and the majority of consumers are willing to pay a premium for sustainable products and solutions, allowing organisations to offset any increased costs of development.
Young millennials and Gen Z are ageing up into considerable buying power. As they do so, they in particular are voting with their cash in favour of brands which make a commitment to protecting the environment and advancing social causes. Organisations which fail to respond to this wave will risk considerable damage to their brand amongst their fastest-growing subset of consumers.
Per Nielsen: “social responsibility is a critical part of proactive reputation management” and “Commitment to social and environmental responsibility is surpassing some of the more traditional influences for many consumers. Brands that fail to take this into account will likely fall behind.”
Finding time & cost efficiencies
Though increased sustainability is frequently assumed to mean higher costs, McKinsey put forward that ‘ESG can also reduce costs substantially’. Executing effectively on environmental programmes can “help combat rising operating expenses (such as raw-material costs and the true cost of water or carbon), which McKinsey research has found can affect operating profits by as much as 60 percent.
What’s more, Oxford University research shows that in the vast majority of cases, solid ESG practices also boost efficiencies and result in better operational performance. When factoring in the possibility for revenue growth from new markets, new products, and new consumers, combined with new process efficiencies and reducing drains on operating profits, the return on investment of sustainable business practices begins to look much more appealing.
Securing business longevity
The combination of the above five key benefits adds up to one thing: increased competitiveness. The lifespan of an S&P 500 company is dwindling fast as enterprise organisations attempt to meet increased challenges posed by new business models, rampant technological development, changing consumer demand, and increased pressure around ESG issues. The climate crisis in particular is not going away. Securing new customers, revenue growth, cost reductions, and investor satisfaction – whilst pre-empting risks to the business posed by new regulation – will support those large businesses in outperforming their peers.
Click here for part two of What is Sustainable Procurement?
To learn more about how Vizibl is helping large enterprises with their Sustainable Procurement efforts, visit Vizibl Supplier Sustainability Management.