Build responsible, sustainable supply chains
Tackling the challenges There is much uncertainty, but what is known is that organisations have to adapt to remain resilient. There are three lines of defence against ESG risk, says Lai, namely: front line (own and manage risk directly); functional (policies set by procurement and other business units); and scrutiny (internal audit and independent assurance). Steps taken at each stage can help to shield organisations from risk and lead to ESG improvements. “We need to consider if we have the right people with the right skills and mindset, as well as the right processes and systems in place to address ESG risks,” says Lai. “Businesses require a solid foundation to tackle these challenges. They need appropriate senior executives engaged in driving this agenda; ensuring there is alignment across the organisation, so everyone understands what they are doing and why; and that they have the right tools for the task.”
Customers, shareholders and investors increasingly expect organisations to prove their credentials in this area, and a heightened awareness of the importance of mental health and community that followed the pandemic has pushed social factors up the agenda. It impacts talent too – companies trying to have a positive impact on people and the planet are more likely to attract and retain the best staff. Barriers to improvement The motivations are many, but the challenges are many too. During the pandemic, about half of the disruption suffered by businesses came from tier two suppliers or beyond, but most have no visibility of providers beyond the first tier. And where businesses have collected information on their supply chain, they often don’t do enough with it, says Lai. Furthermore, procurement and supply chain functions are traditionally structured around reducing costs, maximising profit and improving operational efficiency. That way of working has been embedded for decades in global supply chains. Some chains have as many as 30 tiers across multiple countries and rely on legacy systems for data. So, it’s a tough ask to reorder supply chain infrastructure around ESG considerations. While some businesses are trying to shift from strategy to execution phase, and go beyond routine compliance and the identification of risk to acting to prevent it, a lack of knowledge holds them back. “From the wider ESG issues, we lack the science and framework to always know precisely what to do,” says Lai. “The importance of carbon reduction and how to approach it is one of the better defined areas, but in other cases, organisations don’t know what targets and timelines to set.”
recognise investment may depend on their record in this area. “Procurement can do much to influence this agenda by favouring suppliers who are more focused on doing the right thing and helping them to do so through communication and incentives,” adds Lai. “We can slowly make the shift to focus not only on the financial cost of doing business but the cost to holistic sustainability as well.”
Stark statistics
The number of organisations collaborating with suppliers to improve sustainability has declined. Conversations on the subject have dropped from occurring among 31% of respondents to just 16% . (page 102 – Collaboration pillar) Most companies are focused on cyber attacks, natural disasters and a long-term labour shortage (page 30 – resilience research feature) as the biggest future threats to supply chains. Our research shows that only 6% of companies ranked ‘helping achieve sustainability goals’ as their top three business drivers for supplier management; and only 5% were advanced in making it part of their supply chain management. More than 4 in 10 businesses (43%) do not include the achievement of ESG goals in their supplier management programmes. For those looking to their SM programmes to help with responsible business goals, 40% report it as a benefit. (page 42 – Value pillar) There has been a drop in the use of bespoke technology as an enabler to improving sustainability, innovation or relationship management. A modular approach to investing in new tools may help the business case because it will enable functionality to be added over time. (page 92 – Technology pillar)
ESG considerations need to be embedded in business-as-usual
processes, so it is simply incorporated into everyday thinking and company culture and doesn’t feel like extra work. Procurement and supply chain professionals need senior leaders to buy into these changes in order for them to make improvements, and they require tools that can monitor and demonstrate progress. “People need a success story to tell, to gain support and momentum. If the c-suite and stakeholders see the impact and recognise tangible benefits, it makes it much easier to move the whole organisation towards a future state,” says Lai. Organisations are trying to pivot. Industries, including automotive, energy, retail and fashion, are cognizant of the risk and seeking to respond to it. They can see the benefit of differentiating their products according to their ESG performance and
Boosting sustainability in your supply chain enhances resilience. Procurement helps to make it happen. Anywhere risk may be introduced, so might resilience be improved. This applies to
“A lot of organisations focus on this subject internally but there is opportunity to do more work with their suppliers on it,” says Dr Frank Lai, Global Head of Sustainability at State of Flux. “That’s a challenge when you consider the massive footprint of these organisations. The direct impact they have is small compared with the rest of their supply chain.” For instance, food and beverage, banks, retail, real estate, can only directly impact around 10-
environmental, social and governance (ESG) considerations as much as any other part of procurement’s remit. Failing to protect the environment and society, as well as failing to adhere to legislation, presents multiple potential risks, including loss of reputation and revenue. And while many organisations are seeking to make direct improvements, fewer are asking their suppliers – and those in the broader supply chain – to make the same changes. This is a missed opportunity that could impact resilience because for most companies the largest chunk of their annual spend – and therefore impact – happens in their supply chains, and much of the risk resides there too.
20% of their own footprint, he adds. Doing the right thing is a motivator for
organisations aiming to achieve sustainability goals, but there are other factors too. There is mounting legislation and regulation in the field of ESG, around transparent supply chains, modern slavery, human rights, carbon emissions and broader environmental protections.
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