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A concept that spun out of the investment world, where investors began seeking out companies that were operating responsibly on three distinct levels—environmental, social and governance—ESG has since evolved into a catch-all acronym for organizations of all types.
At its core, ESG cover three bases: Environmental is about how a company safeguards the environment, including corporate policies addressing climate change; social criteria examine how it manages relationships with employees, suppliers, customers and the communities where it operates; and governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder rights.
When bundled together, environmental, social and governance criteria can be used to measure an organization’s progress toward achieving social goals while also creating shareholder value. While investors are often still the drivers behind an organization’s ESG initiatives, business partners, employees and end customers are also demanding that the companies they work for and buy from operate more responsibly as a whole.
“In recent years, as millennials and even Gen Z have asserted their influence over the global economy, there’s been increased scrutiny on the impact companies have in the world,” McKinsey points out. “Creating value for shareholders may still be a company’s raison d’être, but other stakeholders, including investors and employees, are increasingly concerned with whether their company is a net positive for the world.”
The Right Choice
As the corporate department charged with obtaining the goods and services necessary to support an organization’s daily operations, procurement selects suppliers, negotiates contracts and places orders for those items. It may also receive and inspect and maintain accurate records across all aspects of the procurement process. These and other responsibilities make procurement a perfect candidate to help advance a company’s ESG goals.
To learn more about the procurement-ESG connection, Efficio Consulting recently surveyed 1,000 business leaders and CPOs. “We sought to understand the true state of the ESG agenda and its relationship to procurement and procurement professionals,” the company points out in its report, Bridging the Gap: Procurement’s Vital Role in Making ESG Strategy a Reality. “We wanted to know if we are set up for success and, if not, what is going wrong and what needs to change?”
The consulting firm says that the survey results reinforced its belief that procurement, alongside board-level commitment, is the key determiner for organizations to successfully achieve their ESG objectives. However, there’s still work to be done in this area in order for companies to reach a state of “true alignment” between ESG and procurement.
Stepping up to the ESG Plate
According to Efficio’s survey, environmental sustainability is the second most important strategic project that businesses are investing in right now (47%), after digital transformation (49%). Of those companies that have established targets to reduce their greenhouse gas emissions (GHGs), just 33% are “very confident” in their organization’s ability to meet those targets.
The survey also found that 67% of business leaders believe overpromising on sustainability-related goals can present major reputational risk for their organizations. Put simply, the act of “greenwashing”—when a company purports to be environmentally conscious for marketing purposes but actually isn’t making any notable sustainability efforts—can cause more harm than good.
For procurement to play a leading role in driving ESG improvements going forward, it will need to overcome several challenges, according to Efficio. Here’s why:
- Fewer than two in five (38%) procurement teams capture sustainability metrics.
- 50% of CPOs identify recruiting and retaining people with the right knowledge and skills as key challenges.
- 69% think procurement should be ensuring good governance and 67% believe procurement should be delivering on sustainability.
- Yet just 35% of procurement professionals think that it is within their team’s remit to shape organization-wide strategy.
Hidden in Plain Sight
According to Efficio, understanding the problem, gathering data insights, defining and delivering value and obtaining the skills to deliver all require business-wide support and collaboration.
The good news is that procurement is well positioned to assume the role of key ESG driver within their companies, particularly when given the opportunity to fulfill that task. “In each case, procurement is either a key enabler of change or the driver of the change,” Efficio points out. “Procurement is the solution CEOs are looking for, hidden in plain sight.”
