Start Implementing Your ESG Strategy
Supply chains have always emphasized efficiency. “Lean and mean” operations, supported by a just-in-time delivery schedule, have been the order of the day for some time.
Then the pandemic hit, and the world changed. With no margin for error, supply chains were quickly and widely disrupted, causing havoc in numerous industries. One result was that companies had become increasingly scrutinized by consumers, stockholders, vendors, and even governments.
The term “perfect storm” has been used to describe the supply shortages brought about by the pandemic. With demand plummeting, companies purposely scaled back on production in the beginning. As the pandemic began to ease, pent-up demand led to scarce product supply and skyrocketing prices for raw materials. Companies have been forced in some cases to refuse orders because there is no way to fulfill them.
Global supply chains are so highly interconnected that few risks can be eliminated. However, risks can be managed and mitigated. Having learned many lessons from the pandemic, one chief conclusion is that adopting an Environmental, Social, and Governance (ESG) strategy will have greater supply chain resilience and long-term enterprise success.
The two essential components of beginning your ESG strategy implementation are traceability and transparency. Initial steps include mapping your supplier network and setting up performance metrics.
Supplier Network Mapping
One of the first steps in implementing an ESG strategy is understanding how your supply chain operates through your direct and indirect supplier partners. You can gain traceability into your supplier network by mapping it to at least the Tier 2 supplier level. Identify suppliers by tier: your direct suppliers (Tier 1), their suppliers (Tier 2), and the suppliers of your supplier’s suppliers (Tier 3).
Document the chain of custody as a product moves throughout your value chain, ensuring the authenticity of products and regulatory compliance at every stage. It requires collaboration with suppliers; educating suppliers on this and a willingness to be educated by your partners will reduce risks like counterfeiting and legal troubles.
Supply chain mapping can show weak points that were not readily identifiable. In a global supply chain, weak points can look like a supplier being in a geographic location that has environmental, geo-political, or regularity risks. For example, you may find that one of your most critical suppliers relies on materials sourced in Peru, which recently suffered a major earthquake (7.2 on the Richter scale).
How might this impact you down the line? By mapping your supply chain, you can better prepare for and mitigate the risk of disruption before it arrives.
You also have opportunities to optimize your supplier network by taking such actions as sourcing from responsible partners, selecting suppliers or adding distribution centers closer to demand areas, and leveraging technology to improve visibility and forecasting.
ESG Strategy Performance Metrics
Consumer demand for ethically sourced, eco-friendly products continues to grow. But how can you measure the ESG performance of your suppliers?
Audits and continuous improvement monitoring can be difficult to execute with in-house resources, so many companies have started leveraging ESG scorecard tools, like EcoVadis, to manage and benchmark their suppliers’ ESG performance and metrics.
RFPs and Contracts are Key
Supplier contracts can be critical tools in strengthening your supply chain and meeting ESG targets, which often starts during the RFP process. Working together to understand expectations up front and anticipate potential problems, is always best
Supplier contracts should then include those clear expectations for both parties to maintain good relationships. The process for resolving disputes with minimal disruption should also be outlined.
Agreements should include Key Performance Indicators (KPIs) that incorporate meaningful ESG metrics, possibly tied to incentives and benefits. ESG metrics can also specify requirements to do business in environmental compliance, human and labor rights, and abiding by relevant government regulations.
Monitoring the environmental impact of your supply chain includes emissions, water, air, and nature-based solutions from forestry and agriculture.
Scope 3 accounts for an estimated 80% of a company’s greenhouse gas (GHG) emissions, with the end-to-end supply chain representing a majority of those emissions. However, only 19% of manufacturing and 22% of service companies currently disclose Scope 3 emissions. While we are still in a pre-compliance environment, getting a head start during ESG implementation will put you ahead of the game.
Each company decision has a ripple effect on not only its employees but those of its supply chain partners. Employee well-being must be top-of-mind in the implementation of your ESG strategy.
Workforce requirements, labor dynamics, safety implications and even geopolitical considerations factor into the consumer and investor risk assessment of a company and may contribute to a positive or negative reputation in the marketplace.
Ultimately, employee resilience will either be an asset or a liability. Investing in culture, internal communication, and employee satisfaction surveys are ways to improve and monitor how you’re doing.
Companies that can prove ESG compliance are significantly more attractive to investors, mainly since it is reasonable to expect regulations to be enacted soon in the U.S., adding to regulation already in place in the European Union and the United Kingdom. This will put pressure on companies selling and sourcing in these markets by requiring it of public/large companies (varies per regulation) and will add competitive forces to private companies.
In the U.S. for example, the SEC’s climate disclosure proposal for public companies could add a significant level of scrutiny not only from government regulators but all stakeholders. Many countries are developing their own regulations, including the UK and China, which international companies should pay close attention to. Taking early action to prepare can give a company a competitive advantage.
Whether from consumer demand, investor requirements, or governmental compliance, companies will continue to face expectations to act responsibly meeting a raising bar of social equity. To be counted among the successful companies of the future: implement an enterprise-wide ESG strategy, integrate ESG standards throughout your value chain, and work with suppliers to meet business needs while also contributing to the greater good.