Environmental, Social, and Governance, or ESG for short, is not a new concept. You can think of it as a more evolved and measurable form of Corporate Social Responsibility (CSR). With growing pressure on businesses worldwide, developing an effective ESG strategy for your organization ensures that all transactions with suppliers are conducted in a way that aligns with these principles. It’s a top priority in high-performing organizations, and organizations across the globe are increasing ESG efforts.
The Environmental component covers issues surrounding carbon footprint and emissions, pollution, climate change, deforestation, etc.
The Social aspect looks at issues related to health and safety, diversity, human rights, equality, and community impact.
Governance is concerned with all-things business ethics and compliance. Issues to do with corruption and bribery, auditing and accounting, board composition, and executive compensation all fall within this realm.
Despite the increased focus, some organizations are wondering where to start and how to implement a solid ESG plan. We’ve outlined 4 foolproof steps you can take to start and grow an effective ESG strategy.
Why do I Need an ESG Strategy ASAP?
The regulatory landscape involving ESG issues is complex. Some require statutory and diligence reporting, while others impose sweeping bans from public contracts. Others impose significant punitive fines on global turnover.
ESG offers guidelines for the development of sustainable supply chain management strategies from the ground up. A 2020 survey by McKinsey & Company reveals that 83 percent of C-Suite leaders expect ESG programs to contribute significant shareholder value over the next five years. They further stated that they would be willing to part with a 10 percent median premium if it meant acquiring a company with a positive ESG record.
A solid ESG strategy for your company creates value in five critical ways:
1. Top-Line Growth
Implementing an ESG program will help your organization expand into existing markets and tap into new ones. Look at it this way. When a governing authority trusts a corporate actor, it is more likely to award them the licenses, approvals, and access required for fresh growth opportunities.
Case in point: The Long Beach, CA public-private infrastructure project that was supposed to replace the outdated, poorly functioning George Deukmejian Courthouse. The screening process for the firms picked to participate was based solely on their past performance in sustainability. They needed to demonstrate superior ESG execution.
A robust ESG strategy can also help influence consumer preference. A McKinsey research shows that 70 percent of customers are willing to pay more for “green” products.
2. Lower Costs
Executing an ESG strategy effectively can help your company combat the ever-rising operating expenses including raw material costs. Regardless of the industry you operate in, the correlation between financial performance and resource efficiency is undeniable.
Companies with a weak ESG proposition spend significantly more in packaging costs compared to those with effective ESG policies and procedures. They also generate unnecessary waste and end up incurring proportionately higher water-disposal costs.
3. Legal and Regulatory Interventions
A strong ESG strategy can help circumvent regulatory pressure, giving companies greater strategic freedom. It doesn’t just significantly reduce your organization’s risk of adverse legal and government intervention; it also engenders government support earning you subsidies as a result.
A weak ESG strategy or lack thereof might result in POS and advertising restrictions and may even cause your company to incur penalties, fines, and other enforcement actions.
4. Increased Productivity
There’s a positive correlation between employee satisfaction and shareholder returns. In a paper published in the Journal of Financial Economics, Alex Edmans found that companies listed in Fortune magazine’s “100 Best Companies to Work For” enjoyed 2.1 to 3.5 percent higher returns on stock compared to their peers over a 25-year period.
A strong ESG strategy can help organizations attract and retain top talent, boost employee motivation by giving them a sense of purpose and enhance their overall productivity. Workers with a sense of satisfaction and connection to the company’s mission have long been observed to perform better.
The stronger their perception of impact, the greater their motivation will be to perform in a “pro-social” manner. A weak ESG proposition can diminish productivity with the most notable example being labor actions, worker slowdowns, and strikes within your organization.
That said, it’s important to keep in mind that productivity constraints aren’t just limited to your company’s four walls. They can also manifest across the supply chain. For instance, it is not unusual for primary suppliers to apportion large orders to subcontractors or purchasing agents. These entities are usually managed loosely with little to no oversight as far as workers’ health and safety goes.
5. Asset and Investment Optimization
A robust ESG strategy allows firms to enhance ROI by allocating capital to sustainable and promising opportunities. Companies can steer clear of potential investments that may not pay off due to long-term environmental issues. As a result, you don’t have to suffer stranded assets stemming from premature write-downs.
The rules of the game have changed particularly for organizations in carbon-intense industries. The regulatory response to emissions will no doubt affect energy costs and subsequent balance sheets.
How to Get Started With an ESG Strategy
ESG strategies are good in theory but how do we get them out of boardrooms, off paper, and into practice? There are four main pillars where procurement can inspire change. And the good news is Arkestro can help with all four.
1. Create Transparency and Alignment
An effective ESG strategy must have an objective that’s well understood and that can be actively measured. If your organization is committed to using its spend in support of specific ESG objectives, these goals must be clear and the spend must be tracked.
The first step involves establishing clear measures. Think counting suppliers vs. dollars, critical vs. discretionary spend, etc. You then need to be able to track these metrics at the project level. It is the only true way of identifying what decisions and choices are being made, by whom, and when.
These insights allow you to pinpoint broken procurement habits or identify the lack of known suppliers in a specific category. Tangible changes to your company processes and policies can only happen once this information is uncovered and evaluated.
2. Remove Friction and Barriers from Sourcing Events
Identifying, vetting, and doing business with a new supplier is expensive for both parties. Often, the supplier onboarding process for large organizations puts an undue burden on suppliers. They usually have to demonstrate their abilities before the organization can make a significant purchase commitment.
Likewise, new suppliers expect some form of validation that the initial transaction will result in an ongoing relationship.
Additionally, sub-tier suppliers typically don’t have as much accessibility to the sourcing organization as the primary suppliers do. Unfortunately, it also means that organizations don’t get adequate visibility into sub-tier suppliers.
ESG systems and processes need to be put in place to address these obstacles to remove friction and barriers from sourcing events. They need to provide access to and visibility into all supplier tiers and support fluid engagement and incremental relationship-building between all parties. They need to allow suppliers to participate in sourcing events without requiring the use of new tools, systems, or burdensome processes.
3. Make Sure Policies and Incentives Support ESG
Your organization’s existing policies and incentives need to align with your ESG-prioritized strategy. If the requisitioner is only focused on price it becomes difficult for the procurement team to select an environmentally-friendly business if it is not the lowest cost provider. Factor in other subjective variables such as “past performance” or “historical quality,” and you move farther away from an ESG-focused procurement process.
All constituents of the purchasing side need common measures and objectives if they are to truly impact the diversification of corporate spend.
4. Use Multi-Level Line Item Awards
Cost isn’t the end-all be-all, and procurement needs to be able to add weight to other line items that support ESG. Managing every supplier on your roster has a cost component associated with it. It creates an additional level of complexity when managing contracts, products, and services, not to mention everything involved in data entry, manual reviews, and meetings.
While the solution may lie in consolidating suppliers by moving to bigger suppliers and minimizing sourcing events, it disadvantages several smaller, more diverse options. It also results in a knock-on effect of sub-optimal pricing.
Replacing legacy tools and techniques and leveraging processing automation allows an organization to award spend on multi-level line items, including ESG and supplier diversity datasets.
Take the First Step
To initiate and execute an effective ESG strategy, you need the right tools. Arkestro provides unlimited control and real time visibility into your supplier base. It allows your organization to align its policies and incentives with your ESG-first strategy. Predictive Procurement Orchestration embeds human science + game theory + predictive learning into your existing process to help companies predict and recommend the best buying outcomes faster across all spend. There is no software to install, no training required, and no login for suppliers.
Want to learn more about Arkestro’s Predictive Procurement Orchestration platform and how it can support your ESG initiatives? Predict outcomes, orchestrate action. Book a demo today or message me on LinkedIn to learn more.