ESG 101: 5 Key Factors for Integrating ESG Into Your Supply Chain
In today’s climate, a company’s position on environmental, social, and governance (ESG) can be just as important to its stakeholders as the services it provides.
In today’s climate, a company’s position on environmental, social, and governance (ESG) can be just as important to its stakeholders as the services it provides.
In fact, ESG has become such an important part of today’s economic landscape that more than $649 billion was contributed to ESG-focused funds worldwide in 2021.[1] Yet 61 percent of Veriforce survey respondents reported ESG data collection as a major gap in their operations.
Investment in programs such as waste management, human rights, pay equity, and carbon footprint reduction are positive for society at large, and for many companies, ESG programs help lessen the overall business risk by attracting talent, reducing costs, and simplifying entrance into new markets.
ESG criteria are also an increasingly important factor for investors to evaluate companies when considering investment, as ESG is the lens through which capital markets evaluate the non-financial risk of their investment.
As ESG’s broader principles become central to organizational success, they are extended into the supply chain, creating unique risks for those that interact with a growing list of third-party vendors and contractors.
ESG compliance in the supply chain quickly becomes a complicated web. While your smaller organization might not submit an annual sustainability report, you have ESG requirements to meet for your stakeholders. You expect the vendors you work with to also meet these requirements. On the other hand, the 20-30 organizations you work with have their own ESG requirements that you must meet as well. The web grows.
Insufficient management of these risks can seriously impact your operations and disrupt an already fragile supply chain.
How to address ESG risk within your organization
While many large organizations have a team dedicated to ESG, small and mid-sized businesses are less likely to have the same resources. The more tools leaders provide to their supply chains to collect and interpret data, the greater insight they will have as they mature in their ESG model.
Here are five questions to ask yourself when evaluating your supply chain for ESG risks and opportunities.
1. What are our risks and opportunities?
ESG is expansive so it’s important for your organization to determine which components are relevant to your business. Think of it as a principled approach to risk assessment. Each industry and region of operation has inherent ESG elements that are more significant than others. For example, net zero emissions is important in the oil and gas industry while workforce equity is more prominent in fashion. On top of your own priorities, remember that each of your clients has the same external pressures to meet ESG goals. Consider how their priorities will impact your own. Explore how ESG opportunities can be met in such a way as to maximize the benefit to your organization. This process is also called a materiality assessment.
2. Have I taken steps to control risk and maximize opportunity?
Your stakeholders will be interested in the steps you take to control the risks identified. There is no one-size-fits-all approach, and communication here is key. Make a list of all controls you’ve established and how these controls are being implemented. Focus on opportunities that will benefit your organization and build a growth strategy to achieve objectives.
3. What metrics are we collecting?
The metrics of how you implement and control ESG initiatives will also be important to stakeholders. The metrics you focus on should make sense in relation to your risks. Going back to our oil and gas industry example, carbon footprint would be a key metric to track. Another example could be an organization’s goal of improving diversity in their hiring practices. In this case, you could track staff demographics.
4. Am I controlling the risk properly?
In other words, are the controls you have established working? Are the opportunities you pursue paying dividends? The answer is in your data. If you don’t find the answer you’re looking for, consider what you could change to make a great impact.
5. How important is ESG reporting?
One of the main objectives of implementing an ESG Program is to be able to report and show stakeholders how their expectations are being met. Companies have to satisfy the requirements of mandatory ESG Reporting requirements if any exist in their operational jurisdictions. Organizations have a choice how to report on voluntary ESG matters. Oftentimes ESG frameworks want completed questionnaires so they can use the data/information in their ESG data services they sell to their clients. The narrative put out by these frameworks is your ESG posture to the public. This is important because rating agencies — of which there are more than 140 — will use whatever publicly available information they may gather on your ESG performance to create a report or rating. This rating becomes your status in the market. When you don’t participate, this rating could be based on incorrect and outdated data. It’s best to control your own destiny here!
Getting started with ESG
Your organization has committed to moving forward with ESG practices but knowing where to begin can be difficult. To efficiently and effectively ramp up these initiatives, provide risk and compliance professionals more support to implement and understand ESG alongside their supply chain clients.
The great news is that your safety team already has the right methodology in place for these types of challenges. This risk-based approach is already embedded in the safety sector. You just need to empower them.
Additionally, a principle-based approach is key when starting your ESG program. Your first goal should be to appeal to the greatest number of businesses, covering the requirements of your clients, vendors, or investors. Keep your initiatives and goals broad. If you follow the majority principle at first, you can evolve into a more detailed ESG program over time.
[1] Reuters “Analysis: How 2021 became the year of ESG investing,” December 23, 2021.
