The focus on environmental, social, and governance (ESG) is now no more a concept and has become an integral part of any business model.
Where environmental goals refer to how a company contributes to save and conserve the nature, social criteria manage an organization’s relationship with its stakeholder — employees, suppliers, clients, and communities. Governance-related aspects focus on a company’s leadership, audits, and internal controls. These three pillars are the focal point for all stakeholders, including the organizations own staff, investors, clients, consumers, and suppliers. These three pillars (E+S+G) form the core of sustainability which is the foremost challenge for today’s organizations due to multi-directional pressures. There is pressure not only from consumers where sustainability features have taken prime slots of consumer agendas making them demand more and more sustainable products but also from governments that are imposing increasingly stringent ESG regulations.
The procurement function’s comprehensive overview of corporate ecosystems, including an organization set up, business units, suppliers, and customers put procurement in a unique position to make a real difference across all the three pillars of ESG, and can best support an organization’s ESG agendas.
The following five procurement mantras define a systematic approach and can accelerate the pace of achieving an organization’s ESG goals:
- Align procurement goals and objectives to the organization’s ESG goals
- Develop a robust baseline for ESG
- Re-visit your spend category, category strategies, and supply base
- Engage and innovate with your suppliers
- Embed sustainability in core procurement processes
1. Align procurement goals and objectives to the organization’s ESG goals
It’s important that the procurement function must align its goals and objectives with the organization’s ESG goals. The right way for this alignment is to set up the precise picture of the target ESG goals, decide specific objectives to achieve the goal, build focused procurement activities, and decide on key performance indicators (KPIs). These ESG goals for organizations can differ from industry to industry. As an example, a CPG (Consumer packaged goods) company can have a goal of becoming carbon neutral in 10 years. For this, one of the goals for procurement (aligned with the organization’s goals) can be to achieve zero plastic packaging over a period of 10 years. Procurement then needs to create specific procurement objectives and corresponding activities for ensuring zero plastic packaging, like including this as one of the selection and award criteria for sourcing and set a KPI to monitor it.
2. Develop a robust baseline for ESG
It’s important for the company to be aware where they stand today with respect to their ESG goals and hence, developing a well-defined ESG baseline is even more critical for procurement to start with. Constituting a cross-functional team to analyze the company’s data from multiple sources (purchasing, contracts, accounts payable, etc.), creating an ESG baseline and building KPIs on that, such as spend per category or spend per supplier. It’s also important to get a clear picture of the ESG impact along the entire supply chain and for that, it’s important to focus on all suppliers in the supply chain ecosystem, including not only tier 1 suppliers but also tier 2, tier 3 and others.
3. Revisit your spend category, category strategies, and supply base
Traditionally, the sole aim of category management was to deliver the most cost-efficient goods and services with no supply chain disruptions. There was almost zero/ minimum consideration for ESG and its impact in category management. Now, with the global focus on ESG, there are stringent sustainability guidelines and regulations like renewable energy directives, carbon border adjustment mechanism, emission trading schemes etc., and these have a high degree of impact on a company’s supplier base and category management strategies. The procurement team needs to revisit it’s spend category, category strategy, and supply base against a broader spectrum of criteria and must include ESG metrics so that it can be towards a more local and a more robust supply base. The ultimate target should be to integrate procurement into the circular economy to mitigate risk and avoid unnecessary costs.
4. Engage and innovate with your suppliers
To make ESG a successful program, it’s imperative for the procurement unit to engage with one of its most critical stakeholders i.e., suppliers. For this, there needs to be consistent messaging to all suppliers regarding the organization’s sustainable procurement objectives and this should be two-way, to get a buy-in on the goals. But an organization can have hundreds of suppliers and practically, it is not possible to engage with each supplier to achieve the ESG goals. The best approach would be to categorize the suppliers into relevant categories and then define relevant targets for each category by supplier (or supplier group) based on where the largest impact can be achieved. This will ensure that the initial efforts are oriented towards the areas of business where the maximum impact will be delivered. Sustainability should be on the agenda of every supplier interaction, project review, and business review stages.
5. Embed ESG in procurement processes with the help of source-to-pay technology platform
To achieve integration of ESG into the procurement processes, it’s important that all the core procurement processes are ESG-driven. A technology powered source-to-pay platform can certainly help in embedding ESG in the procurement processes. For example, during supplier onboarding, while sourcing goods and services for the organization, the sourcing manager can include a section on ESG or sustainability and request suppliers to provide the data. New age sourcing platforms provide pre-configured, industry-specific ESG questionnaire templates with an option for multiple choice answers, yes or no type questions, allowing multiple attachments for certifications, date picker features, and many more features and functionalities that allow the sourcing manager to quickly create ESG-related sections in their RFPs. Assigning weightage and auto-scoring with built-in AI models help in assessing suppliers and providing the right ESG and sustainability score for the suppliers. There are third-party, ready-to-use databases in the market that help an organization to know a supplier’s ESG scores. Such databases can be easily integrated with source-to-pay platforms. One can consider a sustainable supplier while awarding the RFP to the best value suppliers. Even in a downstream process like purchasing, requisitioners can easily view the ESG score of the suppliers while raising the request for buying any goods for their requirements. There are multiple use-cases in source-to-pay where ESG can be embedded in procurement processes and technology is a great enabler for achieving it.
ESG is the way forward for organizations and the procurement function has no other option but to adopt these mantras to accelerate the organization’s journey towards achieving its ESG goals