In the last couple of years, we as a global society have faced unprecedented environmental, social, and economic challenges. The multifaceted impacts of the COVID pandemic, the environmental destruction from wildfires in Australia, and the Russian invasion of Ukraine are just a few examples. These events impacted every stakeholder, supply chain, and industry worldwide (2022 Accenture report). Our global citizens experienced empty shelves in grocery stores, a lack of critical medical equipment, and a shortage of daily necessities. These disruptions demonstrated the fragility of global supply chains and the need to develop a new model for sourcing and supply chain management.
In addition to operational disruptions, significant shifts in consumer preferences and employee expectations have encouraged companies to modify their supply chain management to comply with evolving human rights and environmental standards. Given the current volatility and associated risks companies are grappling with, it is crucial that organizations adapt their supply chains to reflect these new market realities and pressures. Integrating ESG into your supply chain management can bridge the gap between today’s stakeholder expectations and tomorrow’s market realities.
What is ESG, and why it is relevant to my supply chain?
The Environment, Social, and Governance (ESG) framework assesses how a company manages the risks and opportunities created by shifting market conditions and stakeholder expectations. Using ESG as a core driver of your business model allows you to create and sustain long-term value in a rapidly changing world. Operational risks can also be reduced while enhancing strategic and financial opportunities. ESG has become a necessity for public and brand-name companies as emerging ESG disclosure regulations are going into effect in all major markets worldwide. For this reason, ESG has become a leading priority for companies of all sizes, and in every industry. Supply chain management presents some of the most critical ESG risks and opportunities to navigate.
In their 2021 Annual Global Supply Chain Report, Intros found that, on average, organizations lose $184 million annually due to global supply chain disruptions. ESG aids suppliers in addressing these ongoing issues through strategic, financial, and operational lenses. The ESG framework emphasizes better monitoring and maintenance of environmental and social conduct along supply chains, mitigating associated risks and disruptions. Issues such as human rights adherence, labor management, as well as greenhouse gas emissions, and environmental performance are identified and addressed preemptively – reducing the likelihood of reputational and operational crises as it relates to your suppliers. This is just one of the many examples that demonstrate how ESG can help mitigate supply chain risks.
ESG and Supply Chain Management - The Three Things Every Supplier Must Know:
As mentioned above, supply chains represent the bulk of an organization’s emissions footprint as well as most of their associated environmental and social impacts. Supply chain leaders are in a unique position to leverage their ESG efforts as a tool in reducing the collective impacts of their downstream buyers while also standing out in the procurement process. Given the range of environmental, social, and governance risks and opportunities the supply chain presents, these are the three things every supplier must know in the ‘age of ESG’.
- New Regulation, New Normal In 2021, the United State Security and Exchange Commission (SEC) published its Proposed Rules for, The Enhancement and Standardization of Climate-Related Disclosures. Within these guidelines, both public companies and ESG funds must include clear and consistent disclosures on how they are integrating ESG into their strategies, risk management processes, corporate governance, and stakeholder management. As public companies look to quantify and disclose the environmental and social performance of their supply chains, suppliers with explicit ESG policies, practices, programs, and performance data will stand out to both investors and public companies looking to comply with emerging disclosure regulations.
- ESG is a Competitive Advantage in the Procurement Process According to a report by McKinsey & Company, as much as 90% of greenhouse gas emissions and other environmental impacts are the results of companies’ supply chains. Active supply chain management is an inherent requirement for reducing a company’s scope three emissions and achieving net zero. As companies begin to make audacious commitments to Net Zero, Net Positive, and other long-term ESG goals, suppliers who can actively support these efforts by minimizing their own emissions will have a competitive advantage as companies begin to integrate ESG criteria into procurement processes and RFP requirements.
Events in the past few years have revealed how social issues can influence stakeholder expectations of a company’s approach to human capital management. Movements like #Metoo and Black Lives Matter are just a few examples that have impacted the corporate world. These trends compel institutions to revisit and reevaluate their human rights and labor management practices. In other words, they are reassessing and reprioritizing the “S” in their ESG practice. Suppliers are not exempt from these efforts. Within every supply chain are some of the most significant risks regarding human rights violations. Child labor, wage rights, equitable hiring practices, and safe working environments are all challenges companies must account for along their value chain.Strong ESG engagement gives suppliers a license to operate and a competitive advantage when working with public-facing brands. It also helps limit harmful exposure from lawsuits and associated losses, as Nike experienced in the ’90s after being sued for child labor in their factories. Moreover, ESG is an essential component of modern corporate talent management. Millennials and Gen-Z, who will comprise most of the workforce by 2025, view ESG as an absolute necessity for becoming a customer or employee of a company. Employees indicate that they are more likely to stay at a company that is responsible and accountable for its impact. Suppliers, like all entities in ‘the age of ESG,’ should view ESG as a critical component of their talent engagement, retention, and effectiveness efforts.
ESG is the new normal of Supply Chain Management
Supply chain management presents one of the greatest leverage points for mitigating a company’s environmental and social impacts. It also offers one of the greatest opportunities for reducing costs, increasing efficiencies, and ensuring long-term stability in a rapidly changing world and marketplace. Focus on integrating ESG into your supply chain practices today so you can be prepared for the realities of tomorrow.