Over the past few years, the decision to embrace Environmental, Social, Governance (ESG) management principles has for many companies gone from being largely optional to obligatory.
Increasingly, investors and customers want to support companies that take the ideas of environmental sustainability and workers’ rights seriously. Employees want to work for companies that are governed with a larger universe of stakeholders in mind. And many governments—particularly in the United States and the European Union—are passing legislation that requires companies to manage their supply chains “sustainably” and “responsibly,” particularly in the areas of environmental impact and worker exploitation.
ESG and the supply chain
To help companies committed to these principles achieve their ESG goals, Thomson Reuters recently sponsored a webinar discussion with several global trade experts including Virginia Thompson, Senior Product Manager, ONESOURCE Global Trade, Thomson Reuters
Find out how companies can help can help meet their ESG requirements by creating more transparent supply chains, especially when it comes to sourcing and procurement in this recent on-demand webinar
“The vast majority of a company’s environmental and social impact doesn’t happen in their factories, it comes through the supply chain,” said Marc De Schutter, Senior VP of Cycles and Procurement at Danone North America. “If you want to drive change in these areas, procurement is what has to change.”
For the procurement process to change, however, companies need to change their thinking about supply-chain design and management, several of the panelists insisted.
“When supply chains were designed, we weren’t trying to create supply chains that were transparent. We just wanted a consistent supply of the commodities we needed to make our products,” said Kevin Rabinovitch, Global VP of Sustainability and Chief Climate Officer for Mars. “But if you have a different procurement objective—sustainability, say—you need to re-think your procurement strategy.”
From cost center to profit opportunity
According to De Schutter, one key shift that needs to happen is for companies to stop thinking of ESG as a cost center, and start thinking of it as a profit center full of interesting opportunities. “As long as we see ESG as a cost center, we will be afraid to do things,” De Scutter said—but recyclability, regenerative agriculture, sustainable sourcing, carbon neutrality, and a host of other ESG ideas can all yield a profit, he said, it’s just a matter of seeing the opportunity and taking advantage of it.
For example, panelist Matt Priest, President and CEO, Footwear Distributors and Retailers of America (FDRA), explained how his organization taught shoe factories in Southeast Asia to make a profit from leftover shoe scraps by collecting and selling them to a recycler. IT may not be the height of excitement behind the scenes, but Priest said of the shoe-waste recycling program, “it is pragmatic and it is impactful, and more of our companies are starting to talk about the program publicly“.
Obstacles to supply-chain transparency
Implementing ESG principles isn’t always easy, however, because there are still so many obstacles to supply-chain transparency. For example, the US’s Uyghur Forced Labor Prevention Act prohibits US companies from using any goods or products in their supply chains that are made using forced labor. But in China and some other countries it is illegal to provide information about forced labor to companies asking for it, so achieving anything close to supply-chain transparency in these areas is extremely difficult.
The panelists identified several other obstacles to ESG compliance in the supply chain as well:
Total supply-chain visibility: Most companies know who their Tier 1 and Tier 2 suppliers are, but the difficulties mount further down the supply chain with Tier 3,4,5 suppliers and beyond.
Realizing the role technology can play: Global trade management technology can certainly help companies create more traceable, transparent, and sustainable supply chains, but expecting technology to solve all a company’s ESG issues is unrealistic, the panelists agreed. Rather, supply chains need to be re-designed with transparency in mind, using technological tools—e.g., supply-chain mapping, questionnaires, entity screening, content updates—to achieve it.
Regulatory interference: As more companies embrace ESG principles, there was universal concern among the panelists that policymakers do not understand the complexities of supply-chain procurement enough to craft helpful legislation, and that too much emphasis on the “E” (environmental) could hinder efforts at the “S” (social) and “G” (governance) parts of a company’s ESG initiative.
Lack of technical standardization: Though many GTM tools are available, all the panelists agreed that improvements in system interoperability and data standardization across the supply chain would go a long way toward solving many supply-chain transparency issues.
Planning for long-term success
In the long run, these experts said, seeing ESG as a profit center rather than a cost center, and as an opportunity rather than a burden, is going to require some persuasive rhetoric on the part of those who want to lead the charge.
“It’s important to emphasize that this is a new problem,” said Mars’ Kevin Rabinovitch, “one that requires planning around alignment not just for short-term success, but over the long term.” Ultimately, he said, the project is “to build a supply chain that is consistent with how the world should work and consistent with how you want your business to work for generations to come.”
For companies that want to get serious about implementing ESG principles in their supply-chain operations, the panelists offered these helpful tips:
- Pursue senior-executive buy-in and engagement
- Integrate ESG into the brand’s communication efforts
- Consult an industry trade association for guidance, best practices, legal advice, etc.
- Create a team dedicated to ESG
- Invest in new talent and training
- Develop employee engagement on ESG issues
- Choose a technology provider that can bring together data, automation, and creative-thinking skills
Browse our resources to say up-to-date on ESG and supply chain management:
- ESG and the global supply chain
- How global companies mitigate supply chain disruptions
- Flanked: Climate change is a threat and a solution for the global supply chain