What is an ESG-centered supply chain? And why should you care?

Environmental, Social, and Governance (ESG) has emerged as a key framework for business sustainability and resiliency—especially during the economic and systemic crisis brought about by COVID-19. 

The pandemic has disrupted the entire global supply chain, and businesses have been challenged to remain fully operational through this disruption. While some could not recover quickly from the sudden turmoil, growing evidence proves that companies with high ESG ratings successfully outperformed other businesses in their respective industries.

Harvard Business School reported that companies operating responsibly during COVID-19 gained more positive returns than their competitors. Even the US mutual fund industry study showed that “4 times more sustainable funds finished in the best quartile than in the worst quartile of their categories” in the first quarter of 2020.

The picture has never been clearer: an ESG-centered supply chain directly impacts the success of your business. With stronger governance, robust supply chain management, and established relationships with all suppliers, companies that prioritise sustainability can thrive even in an economic and social crisis.

Let’s dive into the details of how you can do this for your business, too.

Why is ESG important in an organisation?

ESG holds significant operational and reputational risks for your business. These statistics show the strategic impact of ESG programmes and sustainability efforts:

  • The World Economic Forum reports that a sustainable supply chain can potentially reduce costs by 9% to 16%, while increasing brand value by 15% to 30%.
  • According to a study by the NYU Stern Center for Business Sustainability and EcoVadis, companies that have mature sustainability programmes enjoy risk mitigation, improved procurement metrics, and progressive innovation.
  • Morgan Stanley disclosed that “88% of studies found that companies that adhered to social or environmental standards showed better operational performance, and 80% of studies showed a positive effect on stock price performance.”

The business returns are clear. For procurement professionals who have been in the loop, these data points are not new. Consultants have been raising the benefits of sustainable sourcing and ESG programmes for years, and the general public are applauding any company that implements them.

How can ESG be managed in the supply chain?

ESG is a set of objectives that have to be implemented by both internal and external stakeholders. Internally, ESG goals are closely aligned with the sustainability goals of your supply chain. Across most industries, the environmental impact of a business is largely located in the supply chain:

Source: Principles for Responsible Investment

Supply chains are often highly complex, spanning multiple countries and tiers. Because suppliers can be geographically distant from your core base of operations, they are at risk of behaviour that harms EGS objectives. Examples of this include irresponsible use of natural resources, human rights abuses, and corruption. These issues can harm both the operations and reputation of your business and its stakeholders.

Given the role and potential of ESG in the supply chain, procurement managers need to make sure they work with like-minded suppliers and implement policies that align with the company’s ESG objectives.

Apart from the traditional considerations in the supply chain (e.g., technical quality, cost-effectiveness, speed of delivery, and reliability of sources), these are examples of what ESG principles should dictate:

Environmental Factors

  • Use and source renewable energies that emit fewer greenhouse effects, produce less pollution, and contribute less to climate change.
  • Manage waste responsibly in the production process, such as adopting circular economy principles that recycle existing materials to extend its life cycle.
  • Completely avoid any sourcing or production practices that are harmful to the environment, implementing policies against deforestation, animal welfare, and the like.

Social Factors

  • Implement policies that support diversity and inclusion without any discrimination.
  • Ensure safe and decent working conditions for all employees.
  • Observe labour standards across the supply chain, guaranteeing fair wages and protecting human rights.
  • Maintain healthy relations with the local communities where factories or offices are located.

Governance Factors

  • Follow proper tax strategies.
  • Have corporate risk management in place.
  • Offer executive compensation and fair distribution of wealth.
  • Establish a board structure with brand independence.
  • Protect the interests of shareholders, aligning them with the management.
  • Have complete visibility and accountability of all ESG practices being carried out.
  • Avoid and eradicate any corruption, bribery, and other similar practices

By no means is this list exhaustive, but it should give an idea of what your ESG efforts should include. 

All of these principles should apply to both your business and the suppliers you work with. Suppliers are an extension of your company and should be aligned to the corporate ESG principles. 

Supply chain managers and procurement officers can see ESG as an opportunity to optimise costs, reduce waste, and ultimately generate more profits for the business.

At Good for Life, we’ve developed a list of priorities for evaluating materials and suppliers. We have a strict criteria in choosing suppliers because they are, arguably, the most crucial step towards better ESG in the supply chain. Our Sustainable Procurement Policy details our supplier selection process.

Good For Life has also developed the oFlow system for agile supply chain management. oFlow reduces the friction of managing multiple projects, such as taking a brief from a client, briefing the supplier, creating the pricing quote, and following through to shipping. oFlow allows you to oversee all stakeholders and suppliers from a single dashboard, ensuring that they are aligned with the ESG objectives of your company.

Case Study: Sourcing Single-Use Plastics

In recent years, the public has been increasingly conscious of single-use plastics. They exchange plastic straws for metal ones and ditched plastic grocery bags for reusable, eco-friendly ones. Modern conveniences are drowned out by the persistent and steep environmental price that comes with it.

However, while consumers are resoundingly aware, companies are lagging behind on this initiative. The Stockholm Environment Institute reported that companies are responsible for more than 50% of single-use plastics that end up as unusable waste worldwide. These “throwaway plastics” account for a third of plastics produced annually, with 98% of them being made with environmentally-harmful fossil fuels.

If you’re a business that’s still sourcing and producing products with single-use plastics, consider implementing an ESG program to change that. 88% of US and UK consumers want brands to help them be more environmentally friendly—you could be one of them.

Companies can do the following steps to reduce plastic in their supply chains:

  1. Audit your supply chain for any single-use plastic packaging being used. Identify and quantity the total amount with your suppliers. They should have the information in their Packaging Recovery Note (PRN) data.
  2. Tackle “low-hanging fruits” first. Consumers may be pointing out the plastic bottles you use, but your biggest problem might be the polystyrene packaging that protects your equipment. From your audit, you should be able to prioritise according to plastic contribution.
  3. Look to remove or reuse the plastic materials that you use. Perhaps there are items in your supply chain that the production process can do without, or can repurpose and reuse (e.g., reusable crates and bottles).
  4. Ask your suppliers for recyclable options, such as recycled plastic packaging or cardboard. If they can’t provide these options, ask them to take back the materials and be responsible for the end-of-life scenario. They may be producing enough volume to rethink their packaging choices.

If your company can get behind this worldwide concern, you will effectively position your supply chains as sustainable and environmentally-friendly to all of your stakeholders and consumers alike. After all, the last thing you want to do is prioritise convenience at the expense of consumer purchase and loyalty.

This case study is just an example of what a company can achieve with relevant ESG programs that increase productivity and brand reputation. There are plenty of other ESG and sustainability efforts that your company can do.

ESG-Centered Supply Chain for Overall Success

Consumer preferences are shifting towards sustainability in every field. Integrating ESG into your long-term plans should be a top priority if you want to quickly adapt to this sentiment.

A robust ESG framework is a logical extension of your company’s risk management activity. Identify all the emerging risks in the industry and any changes in regulations surrounding environmental and labour concerns. You can then position your business to handle economical, social, and environmental risks proactively.

Ultimately, an ESG-centered supply chain will provide a wide variety of benefits for you, from improved performance with an increasingly mindful market to better risk management doctrine.

At Good for Life, we help companies improve their supply chains, one supplier at a time. With our vast experience in sustainable sourcing, decentralised supply chains, and agile technologies, we can be your partner in innovating your products to the highest environmental standards, and drive a massive market demand for them. 

Sounds good? Contact us to learn more and get a quote today.