Have ESG concerns emerged as a central focus for companies today?
Certainly, yes!
Employees, consumers, and investors alike are extra sensitive to matters such as ESG and sustainability — these are table stakes.
Businesses are motivated to win consumers who prefer brands with strong ESG standings. Factors like navigating stringent regulations, responding to investor demands, enhancing employee engagement, and attracting top talent create the need to manage the environmental impact across all businesses, in real-time.
By bringing ESG factors into the procurement process, businesses can nurture sustainability, reduce risks, and boost transparency in their supply chain. Think of it like choosing suppliers who are not only eco-friendly but also practice ethical conduct – it’s a win-win! Plus, this approach lets companies show off their values, create a positive brand image, and stay ahead in the game.
What is the NEED for ESG to Power Social Responsibility and Brand Awareness?
Research shows that top ESG performers experience faster growth and higher valuations, with a significant 10 to 20 percent gap. Strong ESG credentials also lead to cost savings of 5 to 10 percent through improved efficiency and waste reduction.
Of course, meeting ESG goals helps organizations perform better and often, they allow businesses to reap tangible benefits!
Not only that, focusing on social responsibility and brand awareness through ESG considerations offers several significant benefits.
By considering factors such as labor standards, human rights, diversity, and community engagement when selecting suppliers, businesses can ensure that their supply chain contributes positively to society.
Practices that disregard social responsibility can lead to negative publicity and reputational damage. For instance, if a supplier is involved in unethical labor practices or environmental violations, the company’s reputation could suffer.
Additionally, consumers and stakeholders increasingly expect businesses to demonstrate commitment to social responsibility. Incorporating ESG factors into procurement not only helps build a positive brand image but also allows companies to differentiate themselves from competitors.
Not to forget, ESG regulations are becoming more stringent in many regions. By integrating ESG factors into procurement, companies can ensure compliance with evolving regulations related to labor practices, human rights, and environmental sustainability.
Here are the key points for the upcoming ESG mandates for 2024
The US Security and Exchange Commission (SEC) has set a deadline for mandatory ESG reporting in 2024. This means that public companies will be required to disclose their environmental, social, and governance practices.
Likewise, the International Sustainability Standards Board is considering the enforcement of compulsory global sustainability reporting regulations for companies, beginning in fiscal year 2024. This indicates a potential shift towards standardized ESG reporting on a global scale.
Lastly, newly appointed Chief Sustainability Officers (CSOs) face numerous challenges in creating an ESG function and formalizing the role. Successful ESG reporting requires a concerted effort from the C-suite executives to the individual stakeholders.
Addressing social responsibility means engaging with suppliers who champion fair labor practices, uphold human rights, and promote diversity and inclusion. Remember, companies are increasingly evaluating suppliers’ ethical conduct based on their impact on local communities.
Scope 1, 2 And 3: Emissions from Business Owned Operations and the Supply Chain
Social responsibility and carbon emissions are important considerations in modern procurement practices. Beyond solely focusing on cost savings and operational efficiency, businesses are now expected to align their procurement strategies with broader environmental and ethical goals.
Sustainable sourcing is a key part of a company’s ESG plan. What’s often missed is that a big chunk of a company’s carbon footprint actually comes from its supply chain. So, if companies want to do their bit in reducing greenhouse gases, they have to think about sustainable sourcing too.
Businesses often miss considering their supply chain’s role. Tackling emissions directly linked to their day-to-day operations, like greenhouse gases from their factory are usually easier to track and calculate.
But what’s often ignored is emissions tied to everything a company buys – basically, its supply chain.
That’s where Scopes 1, 2, and 3 come in – the toolkit for organizing the types of carbon emissions a business generates within its operations and its larger network.
The Greenhouse Gas Protocol corporate standard classifies a company’s greenhouse gas emissions into three scopes, with Scope 1 and 2 being mandatory to report, while Scope 3 is voluntary and the hardest to monitor. Here is a breakdown of each scope:
- Scope 1: Direct emissions that are owned or controlled by a company, such as emissions from burning fuel in owned or controlled assets like buildings, vehicles, and equipment.
- Scope 2: Indirect emissions that are a consequence of the activities of the company but occur from sources not owned or controlled by it. For most organizations, electricity will be the unique source of Scope 2 emissions, which covers the electricity consumed by the end-user.
- Scope 3: The upstream and downstream emissions that occur within the value chain of a company are indirect emissions. These emissions are not the direct result of the company itself — that is, the emissions are not due to the `activities from assets owned or controlled by them. To point out, Scope 3 emissions are emissions from transportation, suppliers, product use and disposal.
Challenges in Managing Scope 1, 2, and 3 – But Particularly Scope 3
Often, it is within the control of an organization to reduce Scope 1 and 2 emissions. However, Scope 3 emissions are often the largest contributor to a company’s carbon footprint. To reduce or eliminate its carbon footprint, a company must address all three scopes and pay particular attention to Scope 3. Here are some of the key challenges:
- Scope 3 emissions are often challenging due to their indirect nature and the various complexities involved in the value chain. These emissions include supplier emissions to customer use and even disposal of products.
- Even more, aggregating accurate data can be difficult. Especially, if it is for scope 3 as it requires collaboration and data sharing with every stakeholder throughout the chain.
- As scope 3 emissions occur outside direct operations, businesses tend to have limited control. The value chain requires engagement with suppliers, customers, and other stakeholders to influence reduction in the emission but, dealing with a large and diverse supply chain can be laborious.
- While measuring emissions accurately can be complex, scope 3 emissions can be extra resource intensive.
- It is also worth mentioning that businesses need to define which activities and emissions sources to include and exclude from the calculation while determining the boundaries. Let alone scope 3, as relevance with consistency across the value chain must be diligently considered.
Even though it’s tough, handling scope 3 emissions is a must for companies serious about shrinking their carbon footprint and battling climate change. It means taking charge in a team effort, using technology, sharing data, and harnessing eco-friendly plans to cut emissions all along the supply chain.
Because ESG Always Matters — Discover Your Excellence in ESG
Once your procurement leaders grasp the ESG impact throughout your organization’s value chain, they can initiate innovative approaches towards social responsibility. This positions the procurement role at the forefront of shifting towards sustainable business models. Smart CPOs should act now, get essential tools, data, and skills to make this shift happen.
What would it take to achieve that impact?
At Gainfront, we manage and drive ESG compliant supply chains. Our AI/ML enabled approach enables faster advancements in ESG initiatives, driving positive impacts across the supply chain.
Elevate your organization’s sustainability with our all-inclusive tools for monitoring social responsibility, and minimizing carbon footprint, for a greener tomorrow.
Rahul Asthana has a PhD in Operations Management from the Anderson School at UCLA. He has 25 years of experience in supply chain management, starting his career in IBM working in supply chain operations. He then moved into product management and product marketing of supply chain software while at SAP and Oracle. He manages product strategy and product management at Gainfront. In terms of hobbies outside of work, he really enjoys tennis. Follow Rahul Asthana on Linkedin!
