How To Mitigate ESG Risk In Your Supply Chain
Businesses today recognize the importance of impacting the world in a positive way and are embracing a social purpose beyond simply generating profits. It is not only the right thing to do, but it is how organizations are responding to increasing pressure to improve environmental, social, and corporate governance (ESG) objectives.
The pressure is coming from multiple sources: employees wanting to work for companies that are “doing good,” customers who are buying from businesses that align with their values, and investors and financial institutions that now judge and invest in companies according to their performance on ESG measures, in addition to their product quality and financial metrics. ESG is unquestionably an important element of investor relations and brand messaging.
We are also seeing increased legislative pressure regarding ESG from governments and international entities. New laws are pushing businesses to reduce greenhouse gas (GHG) emissions and prevent environmental degradation or ethical misconduct, not only within their own operations, but also with their direct and n-tier suppliers and subcontractors throughout their supply chains.
Global regulations present opportunities to make ESG impact
For example, in March of this year the U.S. Securities and Exchange Commission (SEC) proposed new reporting rules on climate disclosure1. In January 2023, the Germany Supply Chain Due Diligence Act will come into effect, requiring businesses to monitor supply chains for human rights violations and compliance with environmental standards. In February, The European Commission adopted a proposal for new rules on corporate sustainability due diligence2. Moreover, there is already the UK Modern Slavery Act3, as well as similar legislation in Australia4, which requires companies to prevent and mitigate modern slavery and human trafficking within their supply chains and to publish statements on what actions they’ve taken to achieve this.
While it is important for businesses to think about how they will comply with this new and emerging legislation, they should also see it as a major opportunity. For companies that are serious about meeting their own ESG goals, assessing and reforming their supply chains will have the greatest impact because most of a business’s ethical risk and carbon footprint lies in its supply chain. According to a McKinsey Sustainability report on supply chains5, a typical supply chain generates far greater social and environmental costs than a company’s own operations, accounting for more than 80 percent of greenhouse gas emissions and more than 90 percent of the impact on air, land, water, biodiversity, and geological resources.
Assessing the ESG credentials of direct and n-tier supply chain partners must become a priority for all companies, especially those that must comply with Germany's imminent regulation. (Here are four best practices to adopt and ensure compliance for those organizations that need to do so.)
Current data blind spots are impeding ESG progress
Are companies aware of this opportunity? Are they prepared for the coming legislation? In order to find out, Coupa commissioned a survey of 800 business leaders in organizations with more than 1,000 employees across Australia, France, Germany, Singapore, the UK, and the US; and the survey results are now available.
Here are some of our top findings:
- It’s clear that the vast majority of companies are taking ESG seriously. Nearly all (94%) said that improving energy efficiency was important to them, as was cutting emissions (91%), eliminating modern slavery (89%), and improving supply chain diversity (89%).
- Most companies are “putting their money where their mouths are” and investing towards achieving ESG goals, including buying or building new technology (64%), improving and expanding their legal and compliance capabilities (62%), or acquiring new tools for measurement and analysis (59%).
- Nearly all of the businesses surveyed (97%) recognize it’s important to be able to accurately assess the ESG risk and compliance of supply chain partners to comply with any future legislation.
- However, about two-thirds (65%) of businesses cannot determine whether their closest suppliers comply with ESG standards, while 57% don't have a system in place to manage risk associated with the ESG integrity of their supply chains. For companies that need to comply with the German Supply Chain Act and future ESG legislation, this is a major issue.
Moreover, as many decision-makers are aware, black swan events can wreak havoc on a supply chain, forcing businesses to find alternative partners at short notice. With this in mind, we asked businesses how quickly they were able to find or replace a supplier that matched up to their organization’s ESG values. The results were disappointing, as more than two fifths (42%) of respondents said it would take them at least a few months, if they were able to do so at all.
This inertia when it comes to replacing a supplier — especially one that has been found to be violating human rights or causing environmental degradation — leaves companies heavily exposed. It places them at risk of non-compliance with regulations that carry hefty penalties including fines.
How you can mitigate ESG risk in your supply chain
So how can companies manage this risk? In our survey report, we explore several options, including the need to build resilience into supply chains and identify capability gaps during the supply chain design process.
One of the most important elements is to start collecting data on suppliers' environmental, social, and governance credentials. Performing this efficiently at scale and ensuring that data reaches decision-makers quickly are both challenging. Fortunately, Coupa's community.ai can help us all achieve this. We believe that none of us is as smart as all of us, and industry-wide collaboration and data sharing avoids duplication of efforts, saving everyone time and money.
A community-based approach to data sharing helps businesses scale their ESG commitments by providing insights on how to optimize their supply chain design in order to reduce CO2 emissions and quickly assess the ESG risks of suppliers. Almost all (99%) of the companies surveyed admitted that open and transparent data sharing would allow them to more accurately assess the ESG risks and compliance of their supply chain partners across the globe.
You’ll find a wealth of additional insights from the survey data in our report, which you can download today.
1SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors, SEC.gov, 14 Mar 2022
2 "Corporate sustainability due diligence," European Commission.
3 "Modern Slavery Act 2015," legislation.gov.uk, 26 Mar 2015.
4 "Modern Slavery Act 2018," Australian Government Federal Register of Legislation, 2018.
5 "Starting at the source: Sustainability in supply chains," Anne-Titia Bové, Steven Swartz, McKinsey Insights, 11 Nov 2016.