Today environmental, social and governance (ESG) priorities require significantly increased attention from procurement and supply chain leaders. In fact, climate and ESG rank third in regulatory challenges for 2021, according to advisory firm KPMG.
Unfortunately for most organizations, clear visibility into their supply chain’s ESG efforts and compliance is virtually non-existent. With regulators, policy makers, investors, boards and customers all paying more attention to ESG commitment and action, it’s critical for procurement and supply chain leaders to clearly understand current ESG risks that exist in their supply chains.
Beyond the Environment
Historically, the overwhelming focus on ESG has been the environment and climate change. This is understandable, as the future financial impact of environmental risks is staggering. Research by CDP shows that companies could face up to $120 billion in costs from environmental risks in their supply chains by 2026.
In a recent survey of 400 corporate executives from the world’s largest companies, 80% of multinational companies plan to cull high-carbon suppliers by 2025, and as many as 15% have already started. High-carbon emission offenders are low hanging fruit on the road to achieving a corporation’s zero emission goals. Securities and Exchange Commission (SEC) Chair Gary Gensler is getting closer to requiring carbon disclosures on Scope 3 emissions as well.
The Biden administration, the COVID-19 pandemic and a number of social justice movements have pushed ESG focus beyond the environment and climate change to social factors including racial and gender equality, workplace diversity and pay equality, workforce well-being, and human rights issues. The SEC’s anticipated workforce disclosure requirements are expected to provide greater visibility into a corporation’s “human capital” including diversity data, compensation and turnover.
Regulators will soon be turning their attention to governance to ensure commitments match actual practices. It’s not enough for your supply chain to have ESG policies — they need to follow through with action. Without good ESG governance, not only will reputation and disruption risks increase, but companies and their suppliers will fail to enable all the benefits of leading ESG practices and good corporate citizenship. This includes reputation enhancement, supply chain resilience, enhanced revenue, reduced costs and improved talent recruitment/retention efforts. In today’s tight labor market where companies are struggling to attract and retain top talent, companies need to be aware that their ESG profile is increasingly a consideration — especially for millennial and Gen Z employees.
Partnering with a supplier who doesn’t take an ESG-first approach could pose significant risks to a corporation’s reputation and business continuity. Poor supply chain ESG visibility could leave your organization blindsided by a third party’s previously unknown poor practices or compliance violations. With all of the increased attention, the truth has a way of coming out — and your brand reputation, operations and overall bottom line are all at stake.
Today companies with complex supply chains need to modernize their supply chain and supplier risk management programs to proactively manage the increased ESG risks. Data collected during the static self-report questionnaires that many organizations rely on to assess the ESG health of their suppliers is quickly stale. It can’t keep pace with the rapidly changing ESG risk landscape. Alternatively, a modern approach to ESG should:
- Be continuous and in real-time. Advancements in automation, artificial intelligence, machine learning and data analytics make possible true, continuous ESG monitoring. Tracking ESG risk exposures 24/7 provides procurement and supply chain teams with real-time alerts when ESG risks increase. This early warning enables proactive risk mitigation efforts.
- Extend beyond your suppliers. Your ESG risks don’t end with your suppliers. Visibility needs to go deeper to cover the suppliers of your suppliers (e.g., Nth parties) to give you adequate coverage across into your entire supply chain.
- Include location factors. It’s important to ensure that the countries from where services and products are being sourced also have good ESG profiles. Location ESG factors include pollution and emissions, climate risks, disease risks and healthcare access, human rights policies and compliance, gender and race equality, and economic factors.
- Align with standards. To reflect the rapidly changing ESG landscape, your monitoring program needs to be aligned with current global ESG standards, such as GRI Standards, ILO Labor Standards, WEF Stakeholder Metrics, Financial Stability Board TCFD, UN Global Compact & Sustainable Development Goals and ISO 26000 Social Responsibility Goals. Additionally, as standards evolve, your ESG monitoring must adapt to stay current.