Sustainability in Procurement: ESG-compliance for a More Resilient Supply Chain
Feeling overwhelmed by keeping up with the continuous changes, updates, and new regulations in sustainable procurement? You are not alone!
The topic of environmental, social, and governance issues (also known as ESG) is increasing in popularity in the procurement field. The reason for this is clear: two-thirds of a company’s ESG footprint sits with suppliers (McKinsey, 2021). In addition, up to 90% of emissions from a company come from the supply chain, which is 11 times more than the company’s direct emissions (CDP, 2022).
“A company’s sustainability performance can only be as good as those along the entire supply chain.” - Dr. Detlef Tietze, Co-author of “Responsible Procurement: Leading the Way to a Sustainable Tomorrow”
How should procurement leaders approach the topic, and are there any ways to ensure a fully integrated sustainable procurement strategy? Read on to find out more…
Sustainability in procurement: pressure from all sides
Even though some might think that sustainable procurement only affects environmental criteria (the E in ESG), it actually has an impact on all ESG dimensions. Its focus is not only on carbon emissions and climate change, but also on how a company uses energy and resources, and how this affects the environment.
Therefore, sustainability in procurement is interconnected across all ESG dimensions and it can no longer be seen in isolation. Moreover, it is no longer considered a “nice-to-have”, but it’s now a basic requirement for most companies.
The procurement department has a crucial role to play in shaping the organization’s ESG footprint through purchase decisions and working with sustainable suppliers. The pressure often comes from all sides - be it consumers, investors, regulators, or employees.
Consumers
For one, consumer sustainability expectations are rising. Consumers today are voting with their wallets - they are willing to pay higher prices for more sustainable products from companies with sustainable practices. This trend applies across generations, with numbers steadily increasing year over year. For example, in 2022 Forbes reported that ~90% of Gen X consumers are willing to spend an additional 10% or more for sustainable products, compared to just over 34% two years ago.
Regulators
Regulators are another important stakeholder, as many upcoming regulations (e.g. the [Supply Chain Act] (https://www.lhotse.de/blog/the-supply-chain-act-will-push-your-companys-esg-standards) in Germany, which comes into effect on 1. Jan 2023) increase the urgency to become compliant and more transparent. Companies are facing increasing pressure not only to meet regulatory criteria in their own operations but also to ensure they are working with suppliers or contractors across their entire supply chain who also meet those ESG requirements. Otherwise, they can face fines of up to 2% of the company’s annual revenue!
Regulations remain a complex topic but ultimately aim to give guidance to companies so that they can meet the needs of their markets and stakeholders. Nevertheless, keeping up with the latest requirements and laws could be challenging for organizations that don’t have a dedicated sustainability team, and the consequences of non-compliance could dramatically change the course of the company’s growth ambitions.
Investors
Last but not least, a lot of the rising pressure to act in a climate-positive way comes from investors. Product quality or financial performance are no longer enough to convince investors - showcasing tangible progress towards meeting or exceeding ESG objectives is essential.
In their Sustainability Report (2022), Deloitte found out that 71% of business leaders feel pressure from investors to act on climate change. Working with sustainable suppliers signals to investors that the company is environmentally conscious, future-forward, and therefore a stable investment. It also makes financial sense: analysis from McKinsey (2022) shows that top ESG performing companies have faster growth and higher valuations by a margin of 10-20%.
Common pitfalls of sustainability in procurement
One of the biggest challenges of driving sustainability in procurement is undefined ownership. This means that a company wants to be proactive, but doesn’t have the capacity or skillset to do so. This often leads to a lack of focus, unclear roles and responsibilities, and low engagement.
Another common pitfall is not committing to sustainability until a company has everything right. In reality, sustainability is a new topic to many organisations and it’s more important to make a start than to be perfect at it. Sustainability knowledge in procurement is still very fragmented and it will take a lot of research and working together with suppliers to make a lasting difference.
Niklas Stappenbeck, Senior Consultant Sustainability Strategy & Human Rights at Accenture Strategy, shared this advice with Lhotse:
“Think of sustainable procurement as an iterative process that needs to be continuously implemented based on risk and impact prioritisation, and that will gradually become more refined.”
A prerequisite for sustainability to be prioritised is support from leadership. This means that the management board and the C-Suite take it upon themselves to drive sustainability in all areas and don’t treat sustainability as just another hype (or even worse: a PR stunt!). The German Supply Chain Act also requires senior management to issue a policy statement on the company’s human rights and environmental issues strategy, thus making top-down advocacy on those issues essential.
Dr. Detlef Tietze, Co-author of “Responsible Procurement: Leading the Way to a Sustainable Tomorrow”, shared his views on the topic with Lhotse:
“Procurement organisations have the ability and responsibility to turn ambition into action: sustainability is a new playing field for procurement to deliver value by aligning the supply chain on higher environmental, social and economic impact.”
Finally, sustainable procurement is a process and seeing results takes time. This is why long-term commitment is necessary to meet (or even exceed) targets. Setting realistic expectations when implementing sustainable practices in procurement is the only way to guarantee long-lasting success.
How can procurement leaders drive sustainability: tips from experts
Sustainability is still a topic that many business leaders find difficult to prioritise. After all, there are so many other topics that also need to be pushed further, such as inflation, cybersecurity, unstable market conditions, changing workforce, etc. So how can you as a procurement leader drive sustainability in your organisation? Here's what the experts have to say...
Be strategic
One tip is to be strategic with the sustainability initiatives you are advocating for. Think about what projects have the highest impact in your industry and should therefore be prioritised. In that way, your organisation will see the value in sustainability as not just something that is done to tick a box, but something that positively affects procurement and the overall business.
“Start small. Define tangible targets (for all three ESG dimensions), develop a strategy and roadmap, and run first pilots. With this approach, you will build the case for change and for scaling up sustainability in your organisation. Throughout this journey, search for allies within the company and in the wider ecosystem of suppliers to work jointly on solutions.” - Dr. Detlef Tietze, Co-author of “Responsible Procurement: Leading the Way to a Sustainable Tomorrow”
Collaborate with other departments
Any organisation that is serious about sustainable procurement needs to encourage and enable close collaboration between departments. For example, targets are often set by Corporate Affairs who might be pushed to agree to conditions that the business is not ready to meet. However, if procurement takes a more proactive role and is part of the discussion from the start, it can give insights into the “how” and not just the “what”. The procurement department can also validate the costs associated with those initiatives and bring practical knowledge into the conversation. This inter-departmental collaboration will increase the visibility of the procurement department, but only if procurement experts are able to back up their sourcing decisions with data.
Risk management
The pandemic uncovered a series of weaknesses in the supply chains of organisations that relied too heavily on single-source or overseas suppliers. Therefore, another advice for procurement leaders who want to drive sustainability in their organisations is to focus on risk management and future-proofing their supply chain. As Niklas Stappenbeck, Senior Consultant Sustainability Strategy & Human Rights at Accenture Strategy, recommends:
“Try to integrate the risk dimension and build the risk case for sustainability internally: demonstrate how sustainability in procurement can contribute to the overall risk management of the company, e.g. by making supply chains more resilient.”
Thus, companies can use sustainable procurement to identify problematic suppliers and protect their reputation, mitigate risks from scarce supply, ensure compliance and protect the robustness of their supply chain.
Future of sustainability in procurement
Procurement is best positioned to drive a systematic change towards more sustainable practices, as it is the only company function that has an extensive overview not only of suppliers but also of internal structures, workflows, and assets. An enterprise that aspires to have high sustainability standards can only do so if the standards across its entire supply chain match the same quality.
“Sustainability is not just another hype. Attitudes about sustainability, and its increasingly prominent role in procurement, will change dramatically in the next years. Therefore, sustainability aspects will be an inherent part of all procurement core processes like Category Management, Supplier Management, Selection and Awarding. Procurement’s new normal will be to create value by focusing on resilience, sustainability, and appropriate cost levels.” - Dr. Detlef Tietze, Co-author of “Responsible Procurement: Leading the Way to a Sustainable Tomorrow”
Procurement needs to move away from “price” or “proximity” as the only factor when considering the best supplier offers. By taking the initiative to work with more sustainable suppliers, a company can improve its procurement operations and risk management, have stronger supplier and stakeholder relationships, cut costs, create value, and future-proof their positioning.
“It is not the proximity of the supplier to the company that is decisive for making procurement sustainable, but potential social, human rights and environmental risks, and impact of the supplier.” - Niklas Stappenbeck, Senior Consultant Sustainability Strategy & Human Rights at Accenture Strategy
Procurement needs to (and has the responsibility to) drive sustainability transformation, and requiring suppliers and business partners to meet specific sustainability criteria is only the first step towards this. Technology will be the best tool for procurement on the journey to drive this change.
“The future of sustainability in procurement is tools that make supply chains visible and create “live” supplier networks which inform procurement about suppliers’ sustainability performance, changes and requirements.” - Niklas Stappenbeck, Senior Consultant Sustainability Strategy & Human Rights at Accenture Strategy
Next steps: How to use technology to ensure ESG compliance
While sustainability and supplier diversity are overarching concepts, ESG brings down the topic to the actual practicalities. However, the biggest blocker for the majority of Chief Procurement Officers to implement ESG criteria (especially in indirect procurement!) is the lack of the needed tools and data.
In fact, research by Coupa (2022) found that 65% of businesses cannot tell if their closest supply chain partners are meeting any ESG standards. The solution is simple: technology has the power to integrate ESG supplier data into your existing procurement workflows so that you don’t need to deal with fragmented information across different departments. So, if you have made it this far into the article, we want to leave you with one tangible next step you can take today to embed sustainability metrics into your sourcing processes.
At Lhotse, we are on a mission to make it as easy as possible for CPOs and procurement experts to make a decision when choosing sustainable suppliers. A huge concern is often the lack of comparable data between suppliers, as well as unanswered questionnaires or missing ESG credentials. This, combined with a lack of transparency and siloed knowledge, forces decision-makers to lose agility and speed when choosing the right suppliers. At Lhotse, we want to change this.
Lhotse showcases sustainability ratings of suppliers so that you have all the information you need to make the best sourcing decision for your organisation and fulfil your sustainability procurement targets. You can easily select “sustainable” or “regional” supplier filters to select suppliers who fulfil your specific criteria, as well as get their certificates or climate-relevant data. Moreover, Lhotse increases transparency in an organisation and acts as a single source of truth, so that all stakeholders involved are always on the same page when the case for a sustainable supplier is made.
If you wish to find out more about how Lhotse can help you to improve your procurement processes, book a demo with us today!
