“A business that makes nothing but money is a poor business.”
In the world of supply chain, where efficiency, speed and cost reduction are often the KPIs driving behavior, ethics can seem like window dressing. Rather than framing ethical choices as being the ones that cost us in time, expense and effort, acting ethically is how great companies last.
Ethical business has been a subject of discussion for generations. To my mind, an ethical company is one whose overall impact on its community, the world, and the people it influences is positive. That concept can mean very different things to different people, so there has been unification around the term “ESG” to guide ethics in business, especially as it relates to the supply chain.
ESG stands for “Environmental, Social, Governance” and allows organizations to create policies, procedures and reporting around various aspects of ethical performance. By the end of 2021, 86% of S&P 500 firms issued some form of ESG reporting, up over a third in ten years. Investment in the space is skyrocketing, with the centrality of ethics rising in importance. According to PWC’s recent investor survey, respondents overwhelmingly believe that ESG factors weigh on investment decisions, and support for measures that tie executive performance to ethical performance is rising. Investment in the space is soaring, with projections estimating triple-digit growth in the next five years.
So, let’s break it down. What is ESG, practically, and how does it impact supply chain and procurement?
Environmental guidelines assess the way in which an organization impacts sustainability, pollution, waste, deforestation, water consumption and climate change. These were once seen as ancillary, nice-to-have measures, but severe weather, drought, supply disruptions and carbon emissions are threatening growth and impacting real-money creditworthiness and long-term profitability.
Here, supply chain professionals are being asked to look down the line, beyond cost and availability, to the long-term sustainability of business practices. This may require far-reaching visibility, not just to immediate suppliers but to third and fourth parties, data that can be difficult to source. Savvy procurement professionals include the costs of waste and recycling as part of any major upgrade or change in a business case -- when considering replacing major hardware, what will happen with the obsolete equipment? Can it be reused or resold?
When considering a supply chain shift of direct or indirect goods and services, ethical organizations consider not only the cost and efficiency impact, but how that might relate to environmental issues. Quantifying this as part of RFPs and contract negotiations is key to reporting on the positive impact procurement has on environmental ethics.
The measure of social responsibility looks at how an organization handles its interactions with people - from ethical employee pay and benefits to how it interacts with governments and other organizations. To supply chain and procurement, this may mean ensuring that suppliers don’t participate in unethical labor practices, or that the products made are safe for consumer use. Most frequently for procurement, this is where various “know your third party” regulations and processes come into play.
Anti-Money-Laundering (AML) and red flags reviews of suppliers help to reduce the risk of accidentally being involved with less-than-ethical organizations. Anti-bribery and corruption (ABC) policies often focus on the importance of avoiding payoffs and unfair monetary arrangements, even in cultures where the practice may be commonplace or expected. Visible, documented sourcing practices can be a strong weapon in the quest for a more fair and equitable supply chain, making it easier to spot artificially-inflated prices on goods and services that could be linked to unethical practices.
Most supplier diversity programs now fall under the “S” umbrella, as organizations look to give smaller companies, women-owned, minority-owned and veteran-owned companies a seat at the table. There is a shift happening here as well, as companies go from a backward-looking “how much spend did we have” approach to one that is more focused on driving results.
The “G” in ESG refers to “Governance,” and may be overlooked compared to the clearer lines of social and environmental responsibility. Governance is the process by which companies make decisions, weigh risks and distribute authority. S&P Global assesses companies’ governance performance by assessing four factors: structure and oversight, code and values, transparency and reporting, and cyber risk and systems.
In procurement and supply chain, structure and oversight translates to how much influence or spend is truly under management, and how much oversight exists of third party activity. How much spend is rogue, versus well-governed and measured? How well do the strategic purchases of the organization align to its core values?
Transparency and reporting are key to ethics in governance. If all procurement happens in a “black box,” it is difficult to measure and improve. Systems that capture and enable reporting are vital to ensuring proper oversight and avoiding costly mismanagement.
Supply chain risk is a major consideration in appropriate governance, as a single major security breach or cyber incident can cripple an organization's operations and reputation overnight. With the increase of inexpensive SaaS solutions, breaches of confidential and personal data can be difficult to anticipate. Ethical organizations must safeguard their own data and the data that is entrusted to them by their customers -- and that means ensuring their supply chain takes risk seriously.
ESG in Action
One theme in all of the ESG elements is visibility. To properly measure, govern and ensure ethical activity, it has to be visible and accessible. Simply shining a light on unethical practices can often drive them away. Most people want to increase their own positive impact on the world, and understanding that impact as procurement professionals reminds us that we have the ability to drive positive change through simple actions.