Navigating ESG, Supply Chain Risks & Polycrisis
Procurement and supply chain executives face a complex landscape of polycrisis: resource scarcity, disruptions resulting from geopolitical tensions and climate change, rising ESG due diligence and reporting requirements, and looming corporate net zero commitments. As value chain sustainability rises to CEO and board-level visibility, CSCOs and CPOs are expected to mitigate risk, ensure compliance and deliver on corporate goals. The EcoVadis 2024 Sustainable Procurement Barometer identified five critical factors that are expanding the role of sustainable procurement in organizational success and can accelerate your program’s trajectory toward sustainable value creation. The Barometer is a biennial benchmarking joint study, undertaken this year in collaboration with Accenture, and covering 600 procurement teams and 1,087 suppliers that has ben running over the last 17 years.
Prioritizing environmental, social and government (ESG) issues not only doesn’t compromise financial performance – it enhances it. This has been known since 2015, at least, when an article in the Journal of Sustainable Finance & Investment published the aggregated empirical research of 2,000 studies, which showed that 60 percent of respondents were positive about the financial impact, and only eight percent negative. Or more recently in 2023 by Capgemini Research Institute where 63% of executives agreed that the business case for sustainability is clear, triple the number who believed that to be true just one year earlier.
Fast forward to our 2024 Barometer and we see a small but significant change in the drivers and desired outcomes from sustainability programs since the previous survey in 2021, which you will not need reminding, was at the height of the pandemic. The study showed a shift from a risk focus to “delivering on corporate sustainability goals” (up from 63 percent to 71 percent), a significant move away from a focus on reducing cost (down from 36 percent to 25 percent), and a pivot away from compliance with external regulations (down from 68 percent to 59 percent).
Today, there is a lot of pressure to make progress on ESG. It comes from consumers, investors and competitors as well as the regulators. But the main development in recent years is that sustainability is no longer a voluntary matter, a ‘nice to have’ or best practice. In many parts of the world, regulators have powers of enforcement. Notably, the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) imposes obligations on companies to identify adverse human rights and environmental impacts across the value chain, inside and outside Europe. These obligations are now a ‘given’ and this gives organizations the need to act. They will be enforced through administrative supervision and civil liability, i.e., EU Member States will ensure that victims of abuse will receive compensation.
The Barometer study uncovered five critical factors that companies must confront to accelerate procurement’s embrace of ESG.
- Gaining greater n-tier visibility:
The study revealed that only a quarter of companies have more than 50 percent visibility into Tier 2 suppliers, and only a fifth have visibility beyond that. But CSDDD requires transparency and visibility to the n th tier – which could be very far away. Typically companies either have visibility at scale but not to a very deep level, i.e., across many categories but not beyond Tier 1 or at best Tier 2, or else they have depth of visibility but only in one or two categories. However, it is clear that many companies have been investing heavily in supply chain mapping and EcoVadis expects solutions to emerge soon. - Building core sustainability skills in the procurement team:
Driving a shift in mindset and adoption in procurement is a major challenge. 61 percent of respondents see supplier relationship management and engagement as most valued skill over the past two years. Procurement leaders are ensuring that their organization has a core understanding of sustainability. Not just individual ESG ‘experts’ or ‘specialists’ but the entire team. It’s a new skill set that needs to be acquired and of course, with so many other pressures on procurement, this is not going to happen overnight. - Engaging suppliers on the journey:
Any organization looking to succeed needs to engage its suppliers to accelerate adoption and manage ‘sustainability fatigue’ (especially among small to medium sized businesses). The Barometer indicated a sharp division in suppliers’ perceptions of their buyers’ commitment to sustainability. As many as 45 percent say that sustainability is ‘top of mind for our buyers and they actively partner with us, link sustainability to our commercial relationship, and engage and incentivize us to improve practices’. But the same percentage feel that sustainability is important to their customers on paper, but it is not integrated into the relationship.So, what should buyers be doing to engage suppliers? The majority (56 percent) are building sustainability into contract terms – but that’s only a start. It is setting an expectation, but it is not true engagement. Just under half (45 percent) actively collaborate with suppliers to improve sustainability strategies, for example by identifying major risks and agreeing ways to address them. Some 37 percent of organizations set sustainability targets for their suppliers and a similar percentage have education programs in place around best practices on ESG. It’s worth noting here that there is now a whole ecosystem to support supplier engagement and education efforts in this area – and EcoVadis is a key player here. - Integrating sustainability data into procurement processes:
This is essential for achieving efficiencies at scale but fewer than 25 percent of companies say they have integrated ESG data into procurement processes. ESG data is complex and difficult to manage, not least because it is highly diverse and comes from multiple sources, both internal and external. You need to identify those sources and then take a whole raft of decisions on what level of granularity is needed in order to drive meaningful analytics and reporting. For example, what Scope 3 emissions data do you need to get from suppliers? Some can provide activity-based emissions data and others cost-based. How do you resolve the two? And so on. However, it must be done and not merely as a check-the-box exercise. The point of collecting the data is to use it to provide insights in order to improve performance. The data quickly becomes outdated – it needs to be refreshed and enriched, which is why companies like ours provide it on a subscription basis. Digitally embedding sustainability insights into engagement, monitoring and analytics tools is key for developing the level of performance management needed to build resilience across the value chain. And this is where JAGGAER can play a huge role in bringing together all the relevant data and integrating it into procurement processes from source to pay. - Strategic engagement of C-suite executives:
This is really critical to supporting program expansion and realizing the benefits. As mentioned above, 71 percent of survey respondents say that delivering on corporate sustainability goals is a key driver. Making and expanding the business case to champion responsible procurement initiatives and allocate resources must come from the top, and it remains a persistent challenge for organizations because there are many competing priorities and a diversity of viewpoints at the C-suite level. For this reason, it makes sense to talk about the different stakeholders and the extent to which they are engaged with ESG integration in procurement. The Chief Sustainability Officer, assuming there is one, is obviously likely to be highly engaged and leading the way – although not always. For the Chief Financial Officer, engagement is largely driven by investor pressure. It’s becoming more of an issue as institutional investors in particular increasingly want to invest in companies that perform well on ESG. A third stakeholder is the Chief Product Officer whose design teams will be engaged on with procurement to the extent that this can help drive competitive advantage through supplier innovation and collaboration efforts around sustainability. But the most engaged C-level stakeholders to date have tended to be, unsurprisingly, the Chief Risk Officer (or whoever else is responsible for risk and compliance). Their teams have been involved every step of the way and regulation has been a true catalyst of progress.
So to summarize, the key takeaways from this research are to get visibility, engage deeply with suppliers, build skills across the entire procurement function, digitalize and integrate data, and get executive buy-in – use the data you have and make the case for investment.
Nicole Sherwin is Chief Impact Officer – Executive Customer Advisory & Strategy at EcoVadis.
Nicole recently took part in a joint webinar on this topic with JAGGAER, which is available here.
If you want to download the EcoVadis Barometer report, it is available here.
Do you want to know how JAGGAER approaches and acts on ESG? Download JAGGAER 2023 ESG Impact Report
