- Point of view
Businesses are at a tipping point in terms of their adoption of environmental, social, and corporate governance (ESG) standards. ESG considerations for supplier selection, hiring, and building brand reputation have been in play for a while, but the shift toward more sustainable practices has skyrocketed over the past couple of years. Regulators, investors, and consumers are all demanding that businesses meet their responsibility to improve their impact on the planet and society.
Chief procurement officers (CPOs) can take center stage in creating more ethical companies. The actions of a single CPO can have a positive ripple effect on millions of suppliers across the world, and organizations won't meet sustainability goals without responsible sourcing. But this doesn't mean sacrificing profit – strong ESG practices can attract investors and unlock competitive value.
Clouds on the horizon
As ESG climbs the corporate agenda, procurement's outlook has quickly shifted from within the four walls of an organization to deliver end-to-end value across supply chains.
We're seeing more high-profile incidents of harmful working conditions, as well as projects derailed for not prioritizing sustainable sources. For example, the UK government recently rejected plans for the ambitious Tulip Tower in London, in part because of its lack of sustainable materials. With the building industry accounting for 40% of all carbon emissions, rulings like this one will have major implications for both business and the planet.
Consumers, investors, and employees increasingly scrutinize companies' actions on ESG issues. In addition, the COP26 summit highlighted the need for business to help propel humanity forward to meet the goals of the Paris Agreement. The companies that fail to meet this moment with transformative action will face real consequences – such as penalties and fines, tarnished reputations, decreased profits, and stagnation.
UN Sustainable Development Goals: a framework for change
There's no question that CPOs face increased expectations in this fluid environment, but with this pressure comes a valuable opportunity. To seize it with both hands, start by refocusing your procurement policies on ESG.
The United Nations Sustainable Development Goals (SDGs) are a call to action on the most pressing issues we face as a global community. But they also illustrate a new way for CPOs to think about sustainability in procurement operations. When making sourcing decisions, CPOs should evaluate their options based on the three broad categories of the SDGs: environment, community, and business.
Balancing the planet and profits in sourcing decisions
Forward-leaning CPOs are taking the plunge by reframing their sourcing strategies and making sustainability of equal importance to price and quality. Sourcing decisions should embrace all three sustainability categories:
- Environment: Take a holistic view of safeguarding the environment, including measuring carbon emissions and water consumption. CPOs must also be on guard for new under-the-radar risks, such as rare-earth metal mining and the environmental impact of railroad freight
- Community: Verify that your suppliers have good labor practices, diversity and inclusion initiatives, and anti-corruption policies
- Business: Evaluate whether your sourcing makes sense and is sustainable from a business perspective. Identify the factors that contribute to your costs and how to manage them
CPOs must decide how to onboard only suppliers with scrupulous sustainability practices and then conduct regular due diligence to make sure they're living up to agreed standards. If they've slipped, CPOs need strategies that weigh the relative risks and immediate dangers on a case-by-case basis.
The details of these changes will look different depending on the industry. However, a two-pronged approach will help CPOs address the whole picture:
- Internally consumed goods and services: Consider critical areas such as fleet, travel, and facilities management
- Goods and services with customer exposure: Goods and services that represent the external face of your organization, from the direct materials that make up the products your organization sells to its marketing, conferences, and events
Partner up for bigger payoffs
Beyond business as usual, CPOs should also aim to drive impact outside their own organizations. By building on the buyer-seller power dynamic, groups within an industry or buying community should come together to create a collaborative ecosystem to tackle pressing issues and effect greater change.
For example, in the pharmaceutical industry, members of the Pharmaceutical Supply Chain Initiative (PSCI) work to promote responsible supply chains and better business conditions. The Sustainability Consortium seeks to transform the consumer goods industry through the collective power of a wide range of stakeholders, including manufacturers and retailers.
The networking and knowledge-sharing in groups like these are a catalyst for faster change.
Embedding operational rigor to meet sustainability goals
It's easy to acknowledge the value of more sustainable procurement. What's more challenging is embedding these values into sourcing strategies and decision-making and consistently. Best practices in this area are still taking shape, but a structured program will make it easier to manage the details of curbing costs and streamlining complex processes across large organizations.
Four steps to ESG-focused procurement operations
1. Build transparency into your supply chain
- Implement tools such as Coupa's Business Spend Management suite to report consistently and transparently to clients, investors, regulators, and non-governmental organizations
- Create a supplier code of conduct and establish baseline supplier performance measures
- Eliminate blind spots using assessments, auditing, and monitoring. For example, at Genpact, we screen all of our suppliers based on several factors, including social and environmental criteria. Our digitized onboarding process and remote monitoring of suppliers ensures better compliance with our code of conduct
2. Tap into new data sources
Tie your spend to environmental impact data sources. At Genpact, we automate data collection and analysis and use predictive analytics to make sure we're on target to meet our sustainability goals. EcoVadis, one of the world's largest providers of business sustainability ratings, rated Genpact in the top 3% of organizations in its 2021 report.
3. Prioritize sustainable suppliers – and track compliance
Make sustainability a key assessment and one of your main selection criteria alongside cost and quality in the buying process. When you do, you'll need to come up with an action plan for suppliers who are slipping on the sustainability front. Options include severing ties, transitioning spend away from the supplier, and offering support to help them meet your standards. Communicating the value of what you're trying to accomplish will help get them on board.
4. Measure impact with digital and analytics
How do you monitor tens of thousands of suppliers across a wide range of ESG criteria in a cost-effective way? You need digital tools and platforms that ensure you have rich metrics to support your goals. Collecting sufficient data points can also help eliminate difficulties with monitoring and enforcing standards. CPOs can boost sustainability by using predictive analytics in a variety of ways, including maximizing transportation efficiency.
Companies can face rising costs when introducing ESG policies in under-regulated areas or when policing suppliers. Analytics can help with that, too. For example, CPOs can focus efforts on suppliers where procurement can drive bigger improvements. This means investing time and effort where you have greater spend leverage rather than on a higher-risk supplier where there is little influence.
Fortune will favor the brave
As CPOs move toward adopting responsible sourcing, it's not simply a case of tweaking the current way of doing things. Rather, it means embedding ESG into your company's DNA and a wholesale re-evaluation of your approach to procurement, with long-term implications for managing suppliers in the future. Organizations have no choice but to act now, but the return is significant. When done right, a global ESG-driven value chain can deliver significant benefits to companies, such as:
- Improved customer perception
- Access to niche markets
- Reduction of costs in the long term
- The ability to charge premium prices
Ultimately, making your operations ESG-compliant can prove highly profitable by increasing your access to capital and talent and giving you a competitive advantage over industry peers.