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With two-thirds of the typical company’s environment, social and governance (ESG) footprint resting with its suppliers, procurement is in a good position to make a real difference across all three of these initiatives. Where environmental criteria refers to how a company performs as a steward of nature, social criteria examines how that organization manages relationships with employees, suppliers, customers and its communities
Governance focuses on a company’s leadership, executive pay, audits, internal controls and shareholder rights. These three pillars have become a focal point for investors, clients, consumers and other important stakeholders.
“Even before COVID-19 upended business and society, the ESG movement was gaining steam,” PwC points out. “Then the global pandemic heightened awareness of how interconnected we all are, how rapidly external shocks can work through the global economy, and how central trust and transparency are to the economy’s operation.”
Steps to Success
There are different reasons for focusing on ESG. Some companies may want to satisfy their consumers, who are increasingly choosing brands with strong ESG credentials, even if the prices are higher. “Or they may be seeking to stay ahead of ever more stringent regulations,” McKinsey points out in “Buying into a more sustainable value chain.”
“Others react to pressure from banks and investors, want to improve employee engagement, or feel a need to better attract and retain talent,” McKinsey adds. “For most organizations, the answer will be a combination of these factors, which together add up to a need to understand and manage environmental impact through every part of the business—in real time.”McKinsey sees procurement’s role in ESG as nothing less than crucial and notes that, as the primary interface with the upstream supply chain, procurement has a “decisive role to play in shaping an organization’s ESG footprint, both directly through purchase decisions and indirectly by influencing product design.” Among the steps that procurement organizations can take to build out ESG-focused data, processes and capabilities:
- Determine the baseline and how far to go. “Understand and quantify the organization’s current ESG footprint,” McKinsey says. “Identify the most significant risk areas and improvement opportunities. Determine what matters most in the context of the company’s overall ESG agenda. And set goals and targets for sustainable procurement.”
- Establish the core and drive value-creation initiatives. Procurement should identify the ESG metrics and policies to integrate into their companies’ standard supplier selection, procurement and supply-management processes. It says the next step is to select a number of top-priority ESG themes and address them via in-depth cross-functional innovation and improvement initiatives (i.e., collaborating with value-chain partners to decarbonize emissions-intensive areas of the supply chain).
- Shift the organization. Finally, scale up and roll out successful initiatives, and integrate sustainable purchasing practices into the organization. “Continuously train the procurement community on sustainable procurement principles and their application,” McKinsey advises. “Track performance against targets.”
- Build sustainability as a standard. Including “sustainability as standard” in procurement processes is an effective way to reduce ESG-related risks and spot opportunities for incremental improvements. “It can also help to ensure that procurement teams and their internal customers are aware of the environmental and social impact of purchasing decisions,” McKinsey adds.
- Integrate ESG procurement practices into existing processes. When procurement leaders understand the ESG footprint of their organization’s value chain, McKinsey says they can begin to implement new practices that address risks and capture value-creation opportunities. Many of these procurement practices can be integrated into the organization’s standard sourcing and supplier-management processes.
As companies find new ways to reduce the negative environmental and social impact of their activities, many are finding that the biggest risks and opportunities are located in the upstream supply chain. “That puts the procurement function at the front line of the transition to sustainable business models,” it concludes. “Ambitious CPOs should act now to ensure they have the tools, data and capabilities needed to support this shift.”
