Analyst Insight: As mandatory greenhouse gas (GHG) reporting requirements become more prevalent, corporations must prioritize sustainable sourcing to manage their Scope 3 emissions.
As the world reckons with the consequences of climate change, sustainable sourcing has emerged as a vital strategy for managing Scope 3 emissions — those produced by supply chain partners over which a purchasing company has no direct control.
Corporations must now address the economic, policy and competitive drivers pressuring them to manage Scope 3 emissions. Among them is a forthcoming rule by the U.S. Securities and Exchange Commission, requiring public companies to report Scope 3 GHG reduction strategies. As a result, any company that does business with public companies will be compelled to track, report and address its Scope 3 emissions as part of its supply chain.
The conversation around implementing ethical and sustainable sourcing initiatives has been going on for the last several years. But, with the exception of for a handful of large corporations such as Mars, HP, Unilever, Ford, JLL and Walmart, there has been limited progress in this area to date. These leading organizations have the scale to address Scope 3 emissions, but most organizations lack the necessary resources. Frequently, these initiatives land on the desk of chief procurement officers (CPOs), who must take on the new responsibilities.
Procurement teams need a clear framework for implementing and advancing ethical and sustainable sourcing programs. Following is a six-step process to achieve that goal.
Align with the organizational vision and commitment to ESG compliance. This may include specific goals and targets (such as net-zero carbon emissions by 2030, 100% clean energy, or 50% reduction in GHG intensity). Only then can procurement teams obtain the necessary resources to succeed. This also ensures that ethical and sustainable sourcing initiatives are structured to contribute to the organization’s overall ESG goals and business strategies.
Assess the current state of the supply chain. The key here for COPs is gathering all supplier data in one location, then evaluating the maturity of suppliers' sustainability policies and practices. Review their public statements, quarterly and annual reports to identify suppliers that need further scrutiny. Use technology to screen manufacturers and monitor supplier compliance. Supplier-based dashboards and databases can collect critical data, enabling organizations to detect potential risks and ensure compliance with ethical standards.
Assess spend categories and build a decarbonization opportunity map. The essential step here is to conduct an initial GHG emissions assessment based on spend data. This will identify which spend categories account for the most emissions. In addition, a category-specific strategic assessment will determine how much leverage an organization has to include spend and GHG emissions in each category. These two elements together — the GHG emissions estimate and the leverage assessment — enable the creation of an opportunity map that will prioritize ethical and sustainable sourcing efforts.
Develop sustainable sourcing policies and guidelines. Next, CPOs need to identify high-priority spend categories that align with the organization's goals and priorities. These should outline suppliers’ expectations regarding environmental performance, labor practices, human rights and other ESG elements. CPOs should also ensure that these policies are communicated clearly to procurement category managers for implementation. Category managers can then communicate with suppliers and integrate them into procurement processes.
Engage with suppliers and undertake policy-based sourcing. CPOs need to convey expectations, provide resources and training, and establish open lines of communication. All requests for proposals and quotes should be issued following category-specific ethical and sustainable sourcing policies. Supplier selection — and the identification of alternative suppliers, where appropriate — should be conducted with consideration of ethical and sustainable sourcing policies as well as traditional key performance indicators such as cost, quality and reliability.
Measure and report performance. This involves setting KPIs, regularly collecting data from suppliers, and conducting audits to verify compliance with established policies and guidelines. By tracking progress and analyzing data, CPOs can identify trends, uncover issues and develop targeted strategies to drive continuous improvement. Transparent communication and reporting are also essential for demonstrating the effectiveness of sustainable sourcing initiatives to stakeholders, including investors, customers and regulators. CPOs should develop a comprehensive reporting framework that communicates progress toward sustainability goals and the impact of their efforts on ESG performance.
The call for sustainable and ethical sourcing initiatives is more than a passing trend; it’s a new reality for businesses worldwide. As climate change and its consequences become increasingly apparent, organizations must take responsibility for the environmental impact of their operations and supply chains. CPOs play a vital role in this transformation, leading in implementing sustainable sourcing practices. By following the six steps outlined above, procurement managers can bolster the company's reputation and brand value, while contributing to a more sustainable and equitable global economy. The time for action is now.
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