With the supply chain of a typical consumer company, such as manufacturing or food, accounting for more than 80% of greenhouse-gas emissions and more than 90% of the impact on air, land, water, biodiversity, and geological resources , it shows that making supply chains more sustainable is becoming substantial. With that, the role of supply chain is becoming of a greater importance for the sustainability performance of companies. It can involve in fact risks that are not always easy to mitigate, especially when the supply chain is composed by critical suppliers or suppliers located in areas with different standards and laws on ESG criteria. From Finch & Beaks’ annual 2022 ESG Market Survey, Supply Chain Management resulted in the most challenging topic in ESG rating: 75% of respondents stated that collecting and managing ESG data across the value chain is the biggest implementation challenge. This trend will most likely increase with new reporting requirements resulting from the CSRD (Corporate Sustainability Reporting Directive) and the related ESRS (European Sustainability Reporting Standards).
A question addressing ‘workers in the value chain’ is one of the four elements composing the social part of the new ESRS standards and requires, among others, companies to disclose information on their processes for engaging with suppliers about impact, the targets related to manging material negative impacts, and the actions taken on material impacts on value chain workers and effectiveness of those actions. At the same time, these elements are also reflected in the updated ‘Supply Chain Management’ criterion of the CSA (Corporate Sustainability Assessment) 2023 questionnaire which went under important changes that impact all industries. Compared to the previous questionnaire that concentrated on scrutinizing suppliers to identify risks, critical areas and evaluating the presence of ESG requirements in the supply chain strategy, this year’s survey puts more emphasize on the measures that companies are taking after identifying critical suppliers and sustainability risks. S&P Global has introduced new questions to evaluate whether companies are implementing actions to ensure the effectiveness of their ESG supplier program, conducting screening programs to identify suppliers’ sustainability risks, and implementing assessment and development programs.
As embedding ESG elements in the supply chain becomes increasingly relevant, this article provides a guideline on the main actions’ companies can take to accelerate the sustainability of their supply chain.
¹ According to a study conducted by McKinsey
To improve the sustainability of a company’s supply chain, the first step is to map the company’s suppliers. This means gaining an understanding of suppliers’ activities and their (negative) ESG impact. It is important to assess the type and size of their impact through supplier assessment and identify their sustainability risks through screening to propose mitigation actions and monitor progress made. Mapping suppliers can take place in different ways. One of the most common methods is to classify suppliers based on spending. This perspective, however, is not able to represent the environmental and social impact of the supply chain. Another approach is therefore to assess suppliers for instance on their carbon footprint and the risk of breaching ethical standards to capture both, the environmental and social impact. This approach will allow companies to compare suppliers with a common metric (emissions and risks) and determine therefore which are those with the highest impact. Best practice is to classify suppliers according to different impact categories such as emissions, energy, water consumption, labour standards, human rights, etc. To achieve this, extensive data on the supply chain would be necessary, but this approach would allow companies to have a clear picture of the negative impact generated, and consequently tailorize mitigation programs for each supplier.
Once all the information related to suppliers are collected, data must be analysed to determine the potential sustainability risks related to the supply chain according to ESG criteria. Through suppliers screening companies can identify and prioritize the most impactful and critical suppliers to develop mitigation programs.
At the same time, it is important to set thresholds and ESG criteria when engaging with new suppliers. ESG benchmarks, like EcoVadis, or a self-developed questionnaire are useful tools to use to assess the sustainability maturity of the supply chain.
Once the sustainability risks of supply chain are identified and the impacts are determined, the second step is to develop supply ESG programs that will allow a company to decrease its overall impact. These programs can vary from training programs to remote or onsite support. Along with development programs, it is also important to implement engagement initiatives and commitments with suppliers. These include initiatives like the adherence to the Supplier Code of Conducts, the participation to supplier’s ESG benchmarking and commitments to reduce the environmental impact and adhere to fundamental human rights principles and standards.
In this regard, ASML, a global semiconductor company, is a best-practice example that is engaging with its suppliers. ASML’s Supplier Sustainability Program requires suppliers to sign its “Letter of Intent”, which entails agreeing to adhere to the latest version of the Code of Conduct, collaborating with ASML and partners to maximize material re-use, measuring and sharing their CO2 emissions data while setting targets for reduction. These kinds of initiatives are beneficial for both the supplier and the business: suppliers can receive support and directing in establishing targets for their sustainability journey and the business will gain environmental data (such as emissions) on an ongoing base which will simplify the collection process needed for suppliers monitoring and Scope 3 calculations, among others. Moreover, companies can collaborate with suppliers that are investing in reducing their impact.
The third step of a sustainable supply chain is to monitor supplier’s performance and implement internal procedures to ensure the effectiveness of sustainability supplier program. Creating a sustainable supply chain requires more than just providing improvement programs and support to suppliers, as can be evinced in the newly introduced questions in “Supply Chain Management” criterion of the CSA 2023. It involves ensuring that suppliers are implementing the improvement actions proposed. To achieve this, it is essential to monitor supplier performance and establish internal procedures to ensure the effectiveness of sustainability programs, such as the creation of prioritization mechanism in the supplier selection which award suppliers with best ESG performance (see download). Chemical company Lanxess, to ensure compliance with relevant regulations, has established a collaboration between different departments (purchasing, production, technology, safety & environment) to purchase raw materials from non-European suppliers.
Do you want to get a better grip on knowing and actively managing your company's main impacts along the supply chain, and improve your ESG performance? Reach out to Gijs-Jan Groeneveld at email@example.com or at +31 628 021 880 to learn more.