When procurement drives the ESG agenda

ESG (environmental, social and governance) strategies have become a boardroom priority. Companies are looking to forge a more sustainable future and do their part in an increasingly unpredictable world, especially in the wake of the pandemic. Business leaders are finding it opportune to reassess their business models, adapt new ways to thrive and be future-ready. With so much at stake, one function will be key in facilitating and accelerating ESG initiatives – procurement.

Sustainable procurement is where organisations transform the function of procurement that supports their sustainability goals. Two-thirds of the average company’s ESG impact comes from suppliers, and between 70 to 90 per cent of a company’s carbon footprint comes from its supply chain. Those in the procurement world could drive real change, and with that opportunity comes the responsibility for action.

Most of what companies do these days goes through procurement, which only means it has the most comprehensive overview of corporate ecosystems, including internal structures, suppliers, assets and customers. This also implies that the task to ensure that the business performs well and is socially and environmentally responsible lies within the procurement arm.

With procurement, aligning business strategies to these two pillars would be a great start – first, commit to doing things right by ensuring compliance with the growing volume of regulations on the environment and human rights. And then do the right things, which means that every purchasing decision should consider the impact on the environment, water quality and biodiversity.

Challenges that come with due diligence

Successfully adopting a sustainable agenda does not come without challenges. While organisations work on and adhere to their ESG principles, supply chain transparency and visibility are also of critical importance. Procurement is no longer just about getting the best price, but also about giving business to suppliers who are responsible.

The question is how far suppliers would go in terms of data transparency and sharing. This poses a challenge as businesses may not receive all the information needed to evaluate suppliers. There is basic information that organisations can keep a lookout for, such as the supplier’s locations, nature of their businesses and the workforce. There are available procurement systems that are equipped to virtually cover 85 to 90 per cent of the obligations imposed, but data privacy remains a hurdle for complete visibility.

Alternatively, working with reliable data partners to ensure the safest and most cyber-resilient data mart to store sensitive information from suppliers is a great option. This would assure suppliers that only authorised users can access classified information and at the same time, customers can conduct necessary risk analysis of their supply chain.

Transforming for sustainable procurement

Like any other transformation, working towards a more sustainable supply chain industry will not happen overnight. Establishing a programme with clear goals, application of the right software, a proactive approach to pursuing sustainability goals, and support from the public sector will result in progress. As for businesses, the time to integrate sustainable procurement with the company’s digitalisation efforts has come and should not be just an afterthought.

Take, for example, AstraZeneca, a global biopharmaceutical company that transformed its procurement strategy to be more transparent and sustainable. The company recognised the value proposition of procurement, such as optimising supplier collaboration to deliver goals that are aligned with the ESG agendas of AstraZeneca and its suppliers. AstraZeneca adopted a system that lays the foundation in providing insights for it to make better commercial decisions. As a result, it could monitor developments in specific categories and track the value it brings to the company. With a strong repository of best-in-class solutions, AstraZeneca managed to transform its procurement strategy to be more ethical while generating financial value, optimising supplier collaboration, enabling business agility and allowing it to achieve greater ESG impact.

Over-indexing on ‘E’ and under-indexing on ‘S’ and ‘G’

However, do ESG ratings deliver on the promise? Are highly-ranked ESG businesses more caring of the environment, more selective of the social ecosystems in which they operate and more focused on milieus with good corporate governance? Reducing ESG to a rating standard or treating a technology solution as a silver bullet to becoming a leader in ESG are easy pitfalls for companies to fall into.

Companies across all industries are rightly targeting the “E” in ESG. However, many under-index on the social and governance principles that are also a target of global regulators. Large multinational companies are being intensely scrutinised for, among a plethora of “S” and “G” criteria, their socially responsible behaviours, data, and consumer protection, alleged antitrust and monopolistic practices, workplace safety, DEI (diversity, equity, and inclusion), the independence of their boards of directors, and the quality of their public disclosures involving these and other issues.

Due to the very significant social and governance data vacuum as well as amorphous measurement standards, and the massive focus on collecting and analysing environmental data over recent years, many institutions have been left exposed in terms of the “S” and “G” performance reporting. Indeed, companies that fail to address human capital, data privacy and DEI issues may expose themselves to significant financial, reputational and other regulatory risks.

In a nutshell, a company may not be excused for its failings in the “S” and “G” by its relative successes in the “E”. So-called “virtuous” (high ESG) firms that rely solely on high “E” scores will inevitably get called out and caught out for not walking the talk of socially responsible corporate behaviour.

The bottom line

The triple bottom line – people, profit, planet – is a concept that has been around for nearly three decades. According to the Energy & Climate Intelligence Unit, 21 per cent of the world’s largest public companies have committed to meeting net-zero targets. But to achieve true sustainability, we must also improve the quality of life for the people who live on this planet. Marrying ready solutions like procurement technology and better “S” data for social impact measurement, with the indelible magic of human vision, will allow us to go from net zero to net impact.

The writer is director, South-east Asia, at Jaggaer.