ESG vs Sustainable Sourcing and Procurement
Ecovadis defines Sustainable Sourcing as “the integration of social, ethical and environmental performance factors into the process of selecting suppliers.”
Although stated rather differently, these three factors echo the ESG parameters highlighted by McKinsey. According to Ecovadis, Sustainable Sourcing has become even more important as companies – looking to cut costs and boost production – include developing countries in their supply chains, especially for food and clothing. In these nascent economies, non-local companies may be exposed to various risks, such as supply disruption, cost volatility, compliance with local laws, community relations and other potential pitfalls that could hurt their brand reputation.
“Companies must meet the growing expectations of stakeholders (including customers, shareholders, employees, NGOs, trade associations, labor unions, government observers) to take responsibility for their supplier’s environmental, social and ethical practices,” Ecovadis explains. “The ultimate goal of Sustainable Sourcing is to build strong, long-term relationships with suppliers. Improving performance in environmental, social and ethical issues is becoming a major part of the overall process. Working toward this has become an extension of the company’s commitment to corporate responsibility and as such becomes a part of the overall business structure and model.”
Focus on Sustainable Procurement
Digging deeper, Ecovadis zeroes in on Sustainable Procurement, where Corporate Social Responsibility (CSR) principles are integrated into procurement processes and decisions, without ignoring the requirements of the company and its stakeholders. “Sustainable Procurement is not simply about not using child labor or illegal chemicals that can damage the environment and peoples’ health,” Ecovadis clarifies. “Policies and strategies for Sustainable Procurement developed by companies are based on the need to future-proof themselves primarily around scarcity in supply and ability to cope with the demand of emerging markets, cost pressures, and ability to reduce this through reductions in energy consumption and waste reduction.”
Further buttressing the importance of Sustainable Procurement is the finding of the HEC Sustainable Procurement Benchmark for 2020 that 91% of companies take sustainability criteria into account in purchasing decisions.
Crucially, outsourcing companies that take Sustainable Procurement seriously can protect their brand reputation through detailed risk management and by fixing weak areas that could fuel scandals and bad publicity. If done properly, Sustainable Procurement can help companies rise above the competition through the development of innovative products and services preferred by their markets and customers. If done wrong, it can prove disastrous, because “as much as 90% of a company’s environmental impact may be caused by the supply chain, putting people, communities, and brand reputation at risk,” according to an Ecovadis.com report in April 2021.
Back To the Essence of ESG
As far as McKinsey is concerned, Sustainable Sourcing and Sustainable Procurement are part and parcel of the ESG-driven business model. In this blog post, ESG and Sustainable Sourcing are used interchangeably, given the near-universal overlap of the two concepts.
The Environmental criteria cover energy usage, waste discharge, use of other resources for production, and the overall impact not just on humanity but on every living creature. “The Environmental criteria encompass carbon emissions and climate change,” McKinsey adds. “Every company uses energy and resources; every company affects, and is affected by, the environment.”
Oftentimes, when assessing their sustainability performance, manufacturers focus on their operations. In fact, according to a June 2017 report by McKinsey Quarterly, supply chains typically represent the largest opportunities for environmental improvement, accounting for 80% of a consumer business’s greenhouse-gas emissions and more than 90% of its impact on air, land, water, and biodiversity.
According to McKinsey, the Social criteria cover the relationships and the reputation a company has with the public and the institutions in its host community. “This includes labor relations and diversity and inclusion. Every company operates within a broader, diverse society,” McKinsey adds.
Finally, McKinsey defines Governance as “the internal system of practices, controls, and procedures your company adopts to govern itself, make effective decisions, comply with the law, and meet the needs of stakeholders.” In short, as a legal entity, every company requires good Governance.
A good example of a collective industry response to the ESG imperatives is the Responsible Beauty Initiative (RBI) that includes some of the world’s leading beauty and healthcare brands. The RBI has been working with its partners on key issues, such as labor and human rights, the environment, and prevention of corruption. “Within the RBI … we are willing to help our suppliers improve on their sustainability journey,” the group told Ecovadis. “The focus should not be put on monitoring the risks but on driving improvement towards a more sustainable value chain. We want to help our existing and future suppliers understand not only what can be improved but also how it can be improved.”
In the next post in this series, how Sustainable Sourcing can help generate wealth for businesses and what makes it tick as a business and production model.
More about Sustainable Sourcing
Increasing awareness worldwide of the impact of climate change and preserving the environment has thrust sustainability to the forefront. More and more companies are now implementing sustainable practices and innovation into their business. In this Buyer Fireside Chat, learn everything you need to know about sustainable sourcing – from the challenges and opportunities to the advantages of building sustainability in your supply chain and what lies ahead.