Supply chain ESG is an important part of the broader carbon issue.
Demands from customers, employees, and investors for greener operations and supply chain are coming at businesses from all angles. In addition to the environmental benefits of a green supply chain, potential environmental, social, and governance issues posed by suppliers can increase reputational risks to an organization, so understanding the ESG of the supply change is smart businesses.
Latham Watkins shined a light on the global nature of this issue in this post:
“Concerns over ESG supply chain issues are trending globally, and jurisdictions outside the United States have even more stringent disclosure policies. For example, the European Union requires companies based in the EU with more than 500 employees to disclose corporate policies on environmental and social issues, including due diligence processes on relevant supply chains in order t identify, prevent, and mitigate existing and potential risks. In 2017, France enacted a law requiring certain large companies to establish and implement a plan for conducting ESG diligence in their supply chains. China, too, recently mandated ESG disclosure obligations.”
The carbon issue is important regardless of your organization’s size, either because of the complexity of your supply chain, or because of your company’s participation in an organization’s supply chain. Climate change requires big moves by industry to be effective.
Corporate supply chains generally include every direct and indirect supplier, manufacturer, distributor, and retailer that interacts with a product or service, and include every step and process in the production and/or distribution of goods and services.
Some organizations defer to corporate industry groups that have set supply chain standards. There are also legal compliance mechanisms that can drive standards within the supply chain. And we also see private environmental governance emerging as a driver of supply chain management. For example, some large retailers require their suppliers to meet ESG metrics to address human rights and social sustainability issues by using their own sets of standards and conducting supplier audits.
Large organizations can have incredibly large supply chains – consider the supply chain of a manufacturing giant like Boeing or a global logistics force like Amazon – their supply chains look very different from each other and from smaller businesses – and their influence is immense. Their supply chains may not look anything like yours, but small and mid-sized businesses are just as important as mega supply chains. Companies of all sizes are demonstrating leadership by setting sustainable sourcing goals, initiating collaborations and partnerships, and aligning carbon emissions with science-based targets.
How to start greening your supply chain:
The way ESG is managed is shifting – while we often observe silos between sustainability and EHS groups within organizations, businesses are learning that ESG is a collaborative effort that requires cross-functional participation. If your organization is new to the ESG effort, you may need to upskill your leadership team on two fronts: How to track and manage ESG; and how to work with siloed teams to progress the effort.
You don’t have to assess or improve your entire supply chain at once. We encourage clients to start with quick wins, your largest suppliers, and suppliers that illustrate partner-level participation. You will have a sense of what your business produces the most of, and whatever you produce the most of is a smart place to start. For instance, if you operate a consultancy like Paladino, you probably generate most of your carbon through air travel. If you are a property management firm, you probably generate most of your carbon through building operations. You don’t have to work very hard to find your biggest carbon contributor.
You may want to start with a materiality analysis to understand what is most material to your organization or your carbon footprint. Understanding your supply chain contributors is the first step to understanding the carbon footprint of your supply chain but be aware that the carbon footprint supply chain is not as obvious as your product supply chain. Additional analysis will be warranted to understand which supply chain vendors warrant the closest attention.
Buildings are often a priority because energy use is easy to spot in a building thanks to the monthly energy bills. Once the buildings are operationally connected it’s easy to spot the carbon implications. If you are looking at the impact of buildings on your supply chain carbon footprint, there are two things to look at: How much energy does the building use; and how are people getting to and from the building?
Consider using a simple revenue threshold to trigger outreach to a vendor, and as the process matures, the revenue threshold can shift lower. Paladino Managing Director, Katie Rothenberg has experience responding to supply chain questionnaires, and she says, “Organizations would request ESG information even if they weren’t participating in formal CDP reporting. Just being asked about carbon in our processes drove innovation around improved carbon performance. If businesses continually ask their vendors to account for their carbon impact, they will naturally start looking for ways to improve, including by adding dedicated staff and resources.”
According to Paladino Senior Manager, Hanna Swaintek, “If you are using a travel vendor like Concur or Expensify, understanding the carbon footprint of your corporate travel is relatively easy.” This Inc.com article has simple tips that could be incorporated into company policy to reduce the carbon footprint of your company’s travel.
In addition to legal compliance mechanisms, private environmental governance has also emerged as a distinct driver of supply chain management. Some businesses use their own sets of standards and conduct supplier audits as an alternative to using the supply chain standards set by corporate industry groups.
Take the first step:
A supplier ESG audit can start with an act as simple as asking your suppliers about their ESG activities through a simple survey. Additionally, adding a carbon question to your template RFP will raise awareness among current and potential vendors.
The questions you ask may be driven by a corporate reporting framework, or by your organization’s mission and values. Questions can address factors including environmental practices, energy usage, social responsibility, human rights, working conditions, child labor, trade security, anti-bribery, health and safety, conflict minerals, and product quality assurance.
If you are participating in a reporting process such as CDP, GRESB, or GRI, the questions that you include in your questionnaire should align to the requirements of the reporting frameworks. If you are following a private environmental governance structure, questions that you ask may include:
And here’s the one powerful action that many brands miss: After you receive the survey response, thank your vendors! Close the communication loop with a simple message that recognizes the efforts that they are making to improve their carbon footprint, the effort it takes to respond to your questionnaire, and the impact that their greener supply chain participation has on your business.
In conclusion, greening the supply chain isn’t just about improving ESG and CDP scores. A greener supply chain reduces exposure to negative publicity, improves operations, reduces costs, and helps the C-suite to manage climate risk and financial risk. The less a company understands about its supply chain, the riskier their business strategy is (and investors know it!).
Greening the supply chain is a process of continual improvement. No business can shift to a completely sustainable supply chain with one survey or initiative. Every company can do more, and every company should do more as they get smarter and more sophisticated in their supply chain strategies.
How Paladino can help:
Paladino’s sustainability consulting team works with brands on links in the supply chain to improve carbon strategies and outcomes. We can help your executive team to craft a clear and actionable vision for your carbon goals that is linked to your business goals. We can also guide the team through the survey process, developing the questions and processing the responses. And of course, if corporate reporting through a framework like CDP, GRI, or GRESB is of interest, we can manage your corporate reporting efforts. Contact us to learn more.
Want to learn more?
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