Organisations of all sizes need supply chain transparency so that they, and others, can track the sustainability of their suppliers
Sustainability isn’t just good for the planet (although that’s pretty important, of course). It’s good for business, too.
Consumers actively seek out sustainable companies, as do private investors. Meanwhile, most employees want to work for companies that are seen to be actively contributing to society, rather than damaging it. And the result of this is that companies that are good at sustainability do better financially than those that are not.
This has been proven in numerous research projects. For instance, according to Harvard University, sustainable businesses deliver an extra 4.8 per cent in stock market performance annually compared to low sustainability companies.
Why is this? One clear commercial advantage of sustainability is that it reduces costs: businesses that use recycled materials and reduce waste can bring down their overheads. But this isn’t just about saving money. It’s also about making money. Over three-quarters of consumers will actively change their purchase decisions based on environmental impact, social responsibility or inclusiveness.
These commercial factors have a strong effect on institutional and private investors who are increasingly seeking out sustainable companies. In fact, more than half of the investors surveyed in the BCG’s Investor Pulse Check said that it’s important for companies to focus on environmental and social outcomes, even if it means lower earnings per share. And governments are adding to the pressures. For example, the European Union’s €750 billion ($868 billion) COVID-19 recovery fund excludes environmentally damaging investments.
Supply chains and ESG investment
Some elements of corporate sustainability are very visible. Recycling practices, energy saving, diversity, charity – all these are well-established parts of corporate social responsibility. But for many industries (perhaps with the exceptions of fashion and grocery retail), the supply chain is not a significant part of sustainability thinking.
It should be. More than 80 per cent of environmental and social effects are in the supply chain. And increasingly the supply chain is a critical factor in environmental, social and governance (ESG) investing.
For investors, there are many benefits from good ESG risk management in supply chains. Perhaps the most obvious is better alignment with responsible investment policies. In addition, alignment with internationally accepted best practices will drive credibility. And supply chain management around sustainability can make assets look more attractive, which is important when investors look to exit.
The problem with ESG scores
For companies looking to attract investors, it’s important to know about the sustainability profiles of the suppliers who are bidding to be part of their supply chains. The problem is that this information cannot always be found easily.
The simplistic method is for investors to look at company ESG scores. But while these are often available for quoted companies, they are not available for private businesses. Instead, most ESG ratings are focused on a predetermined and inflexible list of suppliers.
In addition, current ESG rating systems provide incomplete insight. It isn’t sufficient to have a simple sustainability “credit score”: you need to look under the bonnet. Different aspects of sustainability will be of significance to different companies. A packaging company may be very interested in plastics and recycling, while a garment manufacturer may be more focused on slavery and a logistics company will most likely be focused on energy consumption.
To manage the sustainability in the supply chain properly, you need to go beyond simple scores and consider multiple issues in depth, including real impacts on pollution, natural resource management and the human rights of all stakeholders.
That isn’t just because private equity investors want this depth of information. It’s because there are important benefits to getting this right. A scandal about slavery or pollution will not only reduce the investment potential. It could also cause problems across the organisation – in finance, HR, marketing and sales, and even operations as suppliers back away.
Enhancing sustainable investment
Better decisions around ESG investments can be achieved if two basic requirements are met: better data and collaborative working.
Firstly, there is the requirement for complete and accurate measurement. One essential source of data is the suppliers themselves. Traditionally suppliers are sent sustainability questionnaires to complete. Unfortunately, supplier fatigue often sets in, driven by too many surveys and a lack of feedback that would help the supplier improve.
There is a need to promote a more positive supplier experience where answers are shared across many clients rather than the supplier having to address the same questions repeatedly. In addition, suppliers should be given proactive feedback with the procurement professional not just asking if they are sustainable but also how they can help them improve.
As well as external data from suppliers, there is a need for internal auditors to analyse exactly how supplier sustainability is impacting a business, so it can focus efforts on the suppliers, facilities and products that will have the biggest impact on sustainability. Without this insight, there will almost inevitably be a temptation to revert to the easiest course of action – the use of simplistic ESG scores.
Secondly, there is a requirement for collaboration around sustainability measures, with investors, companies and suppliers working together on sustainability information. All should be marching towards the same goal, with each entity creating pressure for the next to become more sustainable and providing resources to support them in that journey.
For collaboration to foster progress, both goals and performance should be shared transparently between each party. That way, the investor can point out that a company doesn’t have, for example, any policies around diversity in their supply base and offer support in creating these policies because it suits their ESG goals. The company in turn can then reach out to their suppliers, express the importance of implementing these goals and incentivise those suppliers to begin implementing sustainability initiatives, starting with the creation of policies.
Sustainability delivers corporate value
Promoting sustainability within the supply chain is an increasingly important strategic imperative for both large and small organisations. It is no longer sufficient to sign up to a code of sustainability good practice. Companies must be seen to be acting sustainability across all their operations, including their procurement and supply chain management.
As part of this, the procurement professional should ensure responsible sourcing by requiring prospective and existing suppliers to make sustainability an essential part of their pitch. By doing this, they will increase company valuations by promoting the attractiveness of their companies to investors.
SupplyShift is the supply chain sustainability platform for creating more transparent, lower risk, higher-performing supply chains. Assess suppliers, unify your data, uncover insights, and take action — all with one platform.
Join a network of over 90,000 businesses driving supply chain sustainability at supplyshift.net. SupplyShift will also be announcing a new suite of tools to deliver enhanced ESG insights for investors. Watch this space!