The gradual impact of ESG

Environmental, social and governance criteria (ESG) are becoming increasingly important when it comes to buying goods and services and assessing suppliers. But knowing where to focus – and how to deliver tangible impacts – can be difficult.

For all the pressures that procurement professionals have faced in recent years, it is the ongoing challenge of meeting environmental, social and governance (ESG) requirements and aspirations that is likely to be the defining issue of the next few years.  

This is now starting to get the attention it needs. According to the 2024 Indirect Procurement Report, produced by RS in conjunction with the Chartered Institute of Procurement & Supply (CIPS), just over half (52%) of procurement professionals responsible for supplies supporting maintenance, repair & operations (MRO) say ESG is important to the delivery of their company strategy. This is also starting to filter through to procurement practice; 71% rate ESG criteria as an important factor when buying products and services, and 82% say they would be prepared to pay a premium for a more sustainable product.  

Yet there is concern that organisations may not be clear about what they can do to influence their company’s ESG performance. Only 37% say they are confident they can execute ESG plans, and one in five (20%) go so far as saying they are not confident they can deliver on this. There also remains significant pressure to reduce prices, which means paying a premium for more sustainable items could be difficult.  

“There is a slight dichotomy here,” says Helen Alder, Head of Knowledge & Learning Development at CIPS. “Prices have gone up and organisations are doing everything they can to get them down again. The whole ethical, sustainable piece is the longer-term plan but there’s been a bit of short-term upheaval.” Implementing effective measures, though, can lead to reduced costs in the long run, she adds, as well as reducing the risk organisations face from their supply chains.  

Michael Lewis, Professor of Operations and Supply at the University of Bath School of Management, says that, while awareness levels around the importance of ESG are high, this doesn’t necessarily mean companies are acting on it. “If customers are demanding it, then companies will be doing something about it,” he says. “But there are profoundly diverse levels of engagement.”  

He gives the example of LEGO as an organisation that has thought about this seriously for the past decade. “Think about its recent announcement that making its bricks from recycled drinks bottles rather than plastic would lead to higher carbon emissions over the product’s lifetime,” he says.  

“This means that 10 years ago they were having serious conversations that they’ve been tracing through with procurement’s support. And they’re now being transparent about not only positive but also negative news stories. That’s a good proxy; if a company is just saying they’ve got a badge, then they’re probably still at that surface level.” 

Supplier strategies  

Andrea Barrett, Vice President, Social Responsibility and Sustainability, at RS Group, says there are several strategies that procurement functions should be adopting with suppliers, across all three elements of ESG. “The governance bit is the basics; the minimum entry requirement, which is knowing that your supplier is ethical and doing business responsibly,” she says.  

“The starting place is to have a strong ethical trading declaration, outlining the code of conduct that your suppliers must adhere to. You can then run checks on suppliers, do risk surveys or in-person audits to make sure that partners are meeting your minimum standards and compliance areas.”  

Standardised practices and tools specifically geared towards supplier assessments, such as Sedex or Ecovadis, can help make life easier too, she adds, as these mean suppliers can complete one ESG assessment, which they can share with all their partners, rather than multiple individual questionnaires and audits.  

Some suppliers might be higher-risk due to the type of product or service they offer or where they are based in the world. It’s a good idea to conduct audits or ethical inspections with these suppliers, either through a specialist organisation or in-person visits.  

On the social side, the biggest issue is often worker welfare. “That goes back to the screening and assessments, to make sure that there are more than good practices in place,” says Barrett. “For some organisations and nations, the other thing is around the diversity of the supply chain; making sure you’re not just working with global brands but giving smaller, minority ethnic or female-owned organisations an opportunity to be part of the supply chain.” 

With the environmental element, there are many elements to consider but the key aspects tend to be whether a supplier has a proactive sustainability action plan for its products, operations, logistics and packaging. “Are they offering you products that are made more sustainably or have an eco-design that helps the end-customer reduce their resource use?” she asks. “Or are they looking at packaging or how products are distributed to you and working together on initiatives that can actually reduce that?” 

Even within this, there are decisions for procurement professionals to make about how they approach the different issues, says Lewis. “There’s a lot of discretionary activity in there,” he says. “Do you go to a supplier that’s 100% transparent on its own supply chain? That’s a very different question to which option meets your quality and cost criteria.” This can mean choosing an option that isn’t the best economic choice today, he adds, but which could lead to better outcomes in future. 

 

Team approach 

These are not easy issues with which to grapple, and it’s important that organisations adopt a company-wide approach, even if that is initiated by those in procurement. “Procurement can’t do it by themselves, but neither can an ESG team,” says Kate Davies, Global Head of Commercial Services at RS Group. “Procurement has to get involved. They also have to be quite resourceful about upskilling themselves to deal with the challenges that are either unique to their category or to the processes they’re undertaking.” 

Being able to demonstrate progress is vital in ensuring others in the organisation play their part in the journey. “That’s when the magic starts,” she says. “Having targets and clearly showing the step-change that you’re expecting to deliver over time is the context that’s often missing. Otherwise, it just feels like another thing that you’ve got to comply with. You need a consistent theme running throughout the organisation, from the person on the ground who is managing the budget to the C-suite and procurement.” 

Honest external communication is also essential, says Barrett. “When you come to report on these issues to your stakeholders, communicate what you’re doing in a way that’s transparent but balanced and be open about the challenges that exist,” she advises. “Sometimes you might make a change at one stage of the product lifecycle and then find that has a negative impact later on. You can only understand that through trialling and testing.  

“We have to create an environment in which partners up and down the value chain openly share learnings, so we can all make positive progress together. We can’t do it alone.” 

For more insight on how procurement professionals are facing up to the environmental, social and governance challenge, download the 2024 RS & CIPS Indirect Procurement Report here.