Considering ESGs in key decision making is becoming more and more prevalent internationally. By ESGs, we mean environmental, social, and governance standards. The ESG market is rapidly growing and evolving. It is placing more responsibility on supply chain management as well as ethical company practices in the process.
Companies who are aware and are implementing ESG criteria within their businesses are the ones paving their way to strong success. By the beginning of 2018, the US SIF Foundation proclaimed that at least $11.6 trillion in investment assets were chosen based on the different companies’ ESG standards. In short, investment teams and management boards care about ESGs and their ability to drive their stock price and long term value.
The reason that ESGs are growing in popularity within the business world is that it’s a multi-dimensional approach that recognizes the triple bottom line. With a focus on a moral balance of people and planet, it’s only inevitable that profits will follow. After all, trust and a good reputation have always meant more than just dollars.
With this in mind, as a new generation of selective investors and customers come of age, organizations lagging in this area will feel the negative effects. Companies who are making these necessary changes within their supply chains are seeing consequent increases in their valuations. Those who are not hitting their ESG targets are becoming less relevant in today’s economy and being punished at the investor level.
It is clear that there are practical advantages to making changes beyond fiduciary duty and compliance with government regulation. It also means that companies should consider re-evaluating how to do procurement. So, let’s break down the pillars of ESGs to help you start integrating your company’s risks and opportunities in a more ethical supply chain environment.
Asset managers, analysts, and ratings agencies look at a number of local and global factors when assessing a company’s integration of ESG risks and opportunities.
When it comes to the environment, the focus could be on climate change, waste, pollution, nature conservation or a poor record with animal welfare. Cruelty-free should be the norm and going green is the way of the future.
Solid procurement strategies take sustainability seriously for long term returns and growth prospects. Is a company working on reducing greenhouse gas emissions? Is its product or service at risk of becoming obsolete due to limited raw materials? How do companies punish or reward suppliers in their supply chains for taking these factors into consideration?
Climate change strategies that include sourcing from more innovative cleantech business where possible is always a solid option. Companies that see environmental solutions as a way to save money is where we will see more sustainable and long term changes.
There are even companies who are seeing this as an opportunity to grow their business offerings, such as Lockheed Martin’s Energy Division. This business provides its clientele with services that range from energy management to bio-energy.
Social capital can drive value. When human resources are diversified, companies are better equipped to innovate and attract more customers. Companies that are better to work for also make more money - they attract talented people and improve productivity and efficiency.
Social issues can include anything from child labour, slavery, occupational hazards, gender equality, the effects a company has on local communities and consumer protection. Lawsuits cost money and so does bad press.
Making sure that a company and its suppliers don’t infringe on human rights is central to mitigating risk. This doesn’t just apply to your tier 1’s but to your lower tiers too.
The same goes for companies operating in regions or countries with oppressive policies. Corporate social responsibility also extends to doing more than the bare minimum. Actively improving the communities producing and using a companies products and services, reflects favorably on a company.
Corporate governance concerns revolve around transparency and organizational culture. Corruption and collusion are labels best avoided. An investor might ask the following questions:
- Where does this company stand in terms of stockholder, stakeholder and employee relations?
- Is this company’s accounting above board?
- Do executives get bloated bonuses?
- Are there conflicts of interest at the management level?
- What about gender pay equity?
All of these factors are apparent throughout the supply chain and are fundamental in setting up a successful company-supplier framework.
Supply Chain Management
Improvements in the areas discussed above builds more value into the supply chain, even if it means higher outsourcing costs in the short term. Failing to do so may lead to a scenario as we saw with the 2013 Savar building collapse.
The Savar building collapse had ramifications all the way up the ESG market pyramid. Companies, asset managers and investors have been exposed to risks they were not aware of or prepared for. This fact has encouraged the growth of supply chain sustainability assessments. Avoiding general risks down supply chains is one motivator for driving ESGs in the supply chain.
However, action should be taken even when there’s no stakeholder demand or a PR crisis to prompt it. Driving your supply chain management strategy with the “carrot” of ESGs is one way to successfully achieve such a feat. This concept revolves around the investor belief of companies who have a strong handle on the wider positive environmental, social and governance benefits that their suppliers bring. In turn, this would act as an indicator of how innovative and “high quality” suppliers may be.
Checking company and supplier compliance is complicated. At present, the process is subjective due to a lack of comparable data. For this reason, buying companies need to work with sector-specific KPIs and metrics and often that means developing their own indicators and frameworks by which they measure, track and analyze suppliers.
The Bottom Line
The best advice we could give to bigger, global, and publicly-traded corporations is to start by strategically looking at your corporations ESG goals and seeing how you can use this as an opportunity to improve your procurement practices. Use data to collect supply chain data and scores, and measure yourself year over year against those targets.
You could push your own internal goals down the supply chain and provide an evaluation criteria to suppliers that incentivizes them to meet those same objectives. By doing so, you could land yourself with a win-win situation that drives your own company’s growth and those of your suppliers. Whilst achieving this win-win situation, you will be driving maximum equity returns for shareholders too. In other words, a better world means better business. It’s a virtuous cycle and the time for action is now.