ESG (Environmental, Social, and Governance) is an investment and corporate philosophy built around sustainability and social responsibility. Procurement ESG programs have taken center stage over the last couple of years, as more and more countries are committing to climate legislation.
When looking at each of the categories of ESG, “E” covers areas like carbon footprint, energy efficiency, water use, and greenhouse gas emission. Under the “S,” you’ll find a range of issues. Typically under “S” you find pay equity, employee health and safety, company diversity, supply chain management, and social justice issues. The “G” is what we’re talking about today. ESG requires governance of the other two categories, including oversight and compliance. And that, it turns out, is a tricky part.
ESG Compliance Is More Difficult Than it Looks – Standing up an ESG Program
The idea of ESG sounds straightforward, but the implementation and the ability to generate reports showing ESG compliance can be incredibly difficult. Here’s a wake-up call for organizations that don’t currently meet ESG standards. This is no longer a bleeding edge movement; it’s a program that customers, investors, and employees increasingly demand. In a 2021 Harvard Business Review article on the importance of ESG, researchers noted:
“As evidence of the connection between a company’s social and environmental impact and its financial performance continues to grow, companies ignore these trends at their peril.”
If an ESG program is so difficult to implement—and govern—effectively, how can organizations make the necessary moves? A big part of the answer to ESG governance is through digital transformation and the adoption of a data-driven procurement ESG program.
Many companies that you would assume have airtight ESG programs still struggle to tick all the boxes. A perfect real-world example is Tesla. You think Tesla, and you think battery-powered EVs manufactured in state-of-the-art factories. It seems like ESG would be well-covered territory. But Tesla was recently booted from the S&P 500 ESG Index.
Why? Tesla clearly has the “E” down in ESG, but the “G” aspect was insufficient. It illustrates that even the world’s largest organizations struggle to implement and measure effective ESG programs.
ESG Reporting Driven by Data, Not Opinion
Before getting started with ESG, a company should do a materiality assessment. The assessment will target key ESG issues and opportunities for improvement. Not all of the findings will have the same priority even though all are important. Working on different areas of the business will cause an outward impact and an inward impact. Assessing how both will impact P&L but also external people and the environment is key.
Understand and analyze your baseline. Existing programs and data (we’ll get to that later) need to be looked at. Metrics are crucial and having a lens into existing programs and policies.
An ESG program can’t succeed without accountability. But that requires data. You can’t convince customers or investors that your organization is meeting its ESG goals based on the opinion of managers or even the CEO. Without hard data, there is no way to report on ESG compliance. There is also no way to establish metrics, set goals, or show improvement in ESG compliance.
However, that data must be reliable. A 2021 study published by MIT’s Sloan School of Management pointed out the challenge that occurs when companies try to manually mix and match data without a tool. When mixing data and weightings from various systems and combining them to come up with a report:
“A problem is garbage in, garbage out. The reporting is not complete, results are mostly unaudited, and they are not comparable, so ESG ratings often use bad data that’s unaudited, extrapolated, and interpolated.”
The first step toward implementing a successful procurement ESG program is digital transformation. This doesn’t mean having to throw away all the software, systems, and processes already in place. But an organization will need to supplement these with an advanced procurement platform that provides the data, tracking, and reporting capabilities that support ESG.
Make ESG Actionable Through Target-Setting
Organizations that have successfully implemented an ESG program point to the importance of making ESG actionable by setting targets. The idea is to ramp up, not try to go from zero to 100% compliance the minute a switch is flipped. The process has to be done as painlessly as possible and without completely disrupting the business.
A simplified checklist looks something like this:
- Learn the industry best practices for ESG metrics
- Create a reporting framework
- Set target goals to show improvement over time
With ESG-related data procurement’s success and shortfalls will quickly become apparent. Tracking and reporting are not just important at the individual supplier level. The procurement team should be able to report on ESG scores based on spend categories and sub-tier suppliers.
When you set your goals and make your checklist, consider if you need additional context. Decide how ambitious you want your goals to be and what the underlying impact of achieving those goals will be.
Aggressive ESG goals might have a huge impact on sub-tier suppliers, and supplier relationships must always be considered when looking at increased sustainability measures.
Arkestro Amplifies ROI of Existing Systems and Processes to Deliver Data-Driven ESG Reporting
One of the keys to successfully implementing an ESG program is to encourage supplier diversity. This is a strength of Arkestro. Our platform includes a Supplier Directory with profiles that make it easy to evaluate suppliers based on their diversity and/or sustainability. Arkestro is able to include ESG factors like supplier diversity as part of the bidding process.
Arkestro also offers the ability to evaluate, rank and track suppliers based on a wide range of sustainability-related criteria.
Existing systems do not need to be replaced, so there’s minimal disruption. Arkestro amplifies the ROI of existing systems and processes. An organization can use Arkestro to implement a data-driven ESG program in under two weeks!
You get visibility into your gaps so that you can develop a new plan and roadmap to achieve sustainability and ESG goals. Creating an action plan based on real-time data is much easier than pulling old stats and backward-looking information. Integrating into other revenue centers of the business requires reliable data, as does creating an action plan and ESG-related KPIs.
Next Step: Get in Touch with Arkestro to See Procurement ESG in Action
This step is important for any organization that has struggled to implement an effective procurement ESG program or has yet to begin the process. Sign up for a demo of Arkestro and see first-hand Predictive Procurement Orchestration in action. With behavioral science, game theory and machine learning, Arkestro helps enterprises predict and win faster value across every category of spend. Arkestro provides the framework needed for accurate, on-demand ESG reporting. It works without needing to log into an app and pulls data while you focus on other tasks (like reading ESG policies). Let us show you how.