Some companies struggle to understand that sustainable procurement is not just about legal compliance. Procurement can play a key role in linking ESG efforts to business strategic goals, reducing operational risks and making sustainable procurement the path toward ESG progress. -BY Donna Benjamin

The principle of sustainable procurement has been discussed for years, and some businesses have established best practices. Like most new principles, ESG (environmental, social, governance) has been slow to mature and slow to be adopted by companies and many governments. Some reasons include a need for a standardized assessment and reporting framework, the challenge of achieving transparency in global supply chains, and lack of a sense of urgency in many areas of the globe. Now sustainable procurement is taking on new importance as more governments pass legislation supporting ESG and require reporting, and there is increasing transparency into environmental and social issues such as child and slave labor, and increasing global greenhouse gas emissions. These are huge issues, but one of the most effective strategies supporting ESG gains is sustainable procurement which promotes sustainable supply chains, creating a compounding effect. Procurement functions that embrace ESG in decision-making are establishing a sustainable future for the organization.

Start with ESG Compliance

Our World Data, a research and data organization, gathers and publishes data in the hopes that a centralized database will grow knowledge of the big problems facing people and businesses, including poverty, climate change, inequality, and existential risks. One of the charts is based on consumption-based accounting, which tries to capture a more accurate picture of CO2 emissions. These emissions are usually reported based on production-based emissions within a country’s borders, but CO2 is also emitted in the production of imported and exported goods. When the 2020 CO2 emissions in the U.S. are adjusted for trade, the U.S. emitted 5.2 billion tons of consumption-based emissions versus 4.72 billion tons of production-based emissions. When other countries are added, the bigger and more transparent picture of global greenhouse emissions makes it more apparent that increasing environmental and social sustainability in global supply chains can significantly impact the ability to meet carbon reduction goals.

Of course, there are more issues connected with environmental sustainability. Each procurement function can consider how suppliers source their materials, whether they are rare or nonrenewable, and how materials sourcing impacts communities. In the social area, various governments passed legislation focusing on child and slave labor, fair labor standards, working conditions, and human rights. For example, the 2015 UK Modern Slavery Act was early legislation that requires some companies to publish an annual statement that explains steps taken to prevent slavery and human trafficking in the supply chain - or to declare nothing was done. The Act is under consideration for updating. The 2017 French Law on the Duty of Vigilance took corporate governance and mandated reporting in the ESG arena a step further. Companies with more than 5,000 employees in France or 10,000 employees globally must enact annual vigilance plans that detail steps the company will take to detect risks and prevent serious violations of human rights, freedom, health, and safety of people and the environment. The point of the law is to require corporate transparency.

The Securities and Exchange Commission established mandatory reporting requirements for Scope 1 and Scope 2 greenhouse gas emissions. They are considering new climate-related disclosure rules that would strengthen the enforcement of ESG disclosures. There is also the Uyghur Forced Labor Prevention Act that prohibits importing products produced by Uyghurs in the Xinjiang region of China.

Sustainable Procurement Has Major Role in Global ESG Progress

Though there is a growing body of ESG compliance laws and regulations, they all have something in common: lack of compliance to some degree. There is also the issue of countries that still need to consider ESG a top priority. Yet ESG has enormous significance for companies because it embraces everything from air pollution to child labor, to scarce resources, to responsible operations in communities. Sustainable procurement is the best opportunity for achieving more transparency, compliance with existing laws and regulations, and protection of people and the environment, which leads to sustainable supply chains.

Ingo Steinhaeuser, Senior Account Executive at Thomson Reuters, points out that compliance can turn into box-checking, one of the reasons some laws have proven ineffective. However, sustainable procurement practices can deliver strategic benefits. Sustainable procurement practices include evaluating risks that suppliers present, and the supply chain risks can be assessed against a higher-level corporate risk assessment that has collected ESG data. This approach can help corporations avoid non-compliance with the laws and also steer buying to suppliers who support corporate ESG principles. Establishing sustainable procurement practices also relies on incorporating ESG goals and performance into long-term business plans.

Benefitting Society as a Whole Benefits Companies

It is proving difficult for many corporations to consider environmental and social factors equal to (and in some cases more important than) financial factors. ESG requires a more holistic perspective, and sustainable procurement offers holism. The things considered include the type of labor suppliers used, ethical sourcing of materials, greenhouse gases, the impact of supplier operations on communities, logistics, waste, materials sustainability, safety practices, and energy consumption. In some countries, supplier utilization of diverse suppliers is required. ESG is not a simple altruistic set of principles. Sustainable procurement can help companies lower costs. McKinsey’s research found that ESG can reduce operational costs by 5-10%, because there is a greater focus on waste reduction and operational efficiency. The study also found that “ESG performers enjoy faster growth and higher valuations than other players in their sectors, by a margin of 10 to 20 percent.”

Rethinking the Procurement Strategy

“The vast majority of a company’s environmental and social impact doesn’t happen in their factories, it comes through the supply chain,” said Marc De Schutter, Senior VP of Cycles and Procurement at Danone North America. “If you want to drive change in these areas, procurement is what has to change.”(8) Consultants agree that it is time to rethink the procurement strategy. “When supply chains were designed, we weren’t trying to create supply chains that were transparent. We just wanted a consistent supply of the commodities we needed to make our products,” said Kevin Rabinovitch, Global VP of Sustainability and Chief Climate Officer for Mars. “But if you have a different procurement objective—sustainability, say—you need to re-think your procurement strategy.”

Sustainable procurement is an opportunity to influence companies and suppliers worldwide, and it is the only way that real ESG progress will be made.