ESG Compliance in Procurement: Paving the Way for a Greener Future
Learn how your company can reduce emissions, stay in line with environmental laws, and reach your ESG compliance and sustainability goals.
What is ESG compliance?
Environment, social, and governance (ESG) refers to laws and standards created by regulatory bodies that govern a business’s environmental actions. ESG compliance refers to a business’s adherence to those standards. If a business is not in accordance with ESG regulations, there can be severe implications for the business and those who do business with it.
Yes, environmental concerns are important for our planet and our duty as citizens of the world. But why does ESG compliance especially matter to those in procurement?
Procurement’s role in achieving ESG compliance
Procurement is uniquely positioned to influence their organization’s approach to reducing and offsetting their company’s carbon footprint. The challenge we face with climate change requires a unified effort across your supply chain, and it won’t be solved without professionals becoming very serious about optimization and environmental KPIs.
Be the driving force for change
Using your leverage in the procurement space to create impact is essential. Procurement can influence the internal business and the supplier to track and reduce emissions to achieve resource efficiency while still helping the business meet its profitability goals.
Help suppliers and stakeholders identify the benefits
Change happens more rapidly when it benefits the companies in question. Suppliers know that if they follow ESG compliance guidelines, they are more likely to become a preferred supplier to potential buyers. This incentivizes companies to reduce their environmental footprint and creates a market signal that ESG compliance is both important and necessary for other companies.
Why focus on ESG compliance now?
ESG compliance is especially important because legislation around environmental issues is rapidly increasing. There isn’t a developed country in the world that doesn’t have some form of climate legislation– in fact, countries including China, the United States, and the European Union are stating they’ll be carbon net zero by 2050. The upcoming carbon taxes, which the EU is rolling out in 2024, will drive any importer to the EU to measure the carbon impact of their products.
In addition to complying with legislation created by regulatory bodies, customers increasingly demand that businesses take responsibility for their environmental impact, offering a competitive advantage to businesses focused on improving their ESG initiatives. Companies that fail to align their priorities with the needs and wants of their customers will likely cost their business money and customer loyalty. So, businesses must consider the FULL cost when purchasing carbon-intensive products.
What ESG factors should I measure?
When measuring a company’s carbon output, there are three “scopes” you’ll look at in calculating the company’s total environmental impact. The Greenhouse Gas Protocol defines this method of measuring:
Scope one: Direct Emissions.
This includes any burning of fossil fuels as part of the company’s business. For example, a gas-fired boiler, driving trucks, or burning coal would all fall under scope one. These emissions are directly within the company’s control.
Scope two: Imported Energy
For most businesses, this means electricity. They might buy electricity from the grid, and that grid may have been produced using coal. The emissions associated with that import are also part of the business’s emissions.
Scope three: Purchase of Goods & Services
This accounts for up to 95% of a company’s total carbon footprint for most businesses, likely making it the most significant factor in emissions. Understanding this metric is also very important as a procurement professional, as it puts your accountability for the business’s emissions and energy consumption into perspective.
Just measuring these three scopes and looking at them separately isn’t the best way to come to an actionable conclusion when calculating a company’s emissions. Instead, look at the carbon intensity of the whole organization.
Carbon intensity is simply carbon emissions divided by revenue. Carbon intensity allows businesses to see emissions per dollar spent on any particular supplier.
Although this is not a perfect way of calculating emissions, it is a fair way of understanding how carbon-intensive your suppliers are and where your supply chain’s most significant ESG performance issues lie.
Transitioning to sustainable procurement
When you start looking at more ESG-friendly suppliers, you may run into more expensive suppliers, illustrating the need to start small and build ESG investments, or “green premiums” into what you’re doing.
For example, if a supplier can meet your needs in a carbon-neutral way and in a price range your business can afford, that may be an excellent option. However, if the suppliers with lower emissions present a 60% higher cost for your specific purchasing need, you could make that change at a future time and start somewhere else for now.
Communicate ESG compliance initiatives
It’s also important to openly communicate your sustainable procurement initiatives with your suppliers. When you find a supplier you’d like to do business with, but their carbon intensity is too high, talk to them about it! This will encourage them to look for ways to adopt sustainable practices to reduce their emissions and potentially gain you as a customer in the future.
Incorporate ESG compliance into contracts
There are also ways that you can negotiate ESG compliance frameworks in contracts. For example, negotiate utility bills or consolidate deliveries so there are fewer journeys and, therefore, reduced emissions. Simple things can save you and your suppliers money while allowing you to have a positive environmental impact.
Look at Your ESG compliance data
First, you should look through your own ESG data, and identify your most significant problem areas. When you know the areas you want to tackle, start a conversation with those suppliers. If those companies are already significant partners to you and you’re already engaging with them frequently, ESG compliance is another item you can discuss and review.
When you’ve done that, it is essential to remember that these changes will take time. It can be easy to get discouraged or frustrated when changes don’t happen quickly, but you can’t switch out your key packaging supplier tomorrow because they no longer meet your ESG compliance standards. Push forward conversation by conversation, change by change, and the impact will come.
Working with smaller suppliers can also move the needle toward lower environmental impact. These changes can happen more quickly, but their contribution to reducing your total carbon numbers will also be less drastic simply because they are smaller. These small changes can add up over time, however.
Align on corporate messaging
Another great place to start is aligning on corporate strategy and messaging about becoming ESG compliant. Ensure your company has carbon policies and goals known by all employees rather than just those within procurement.
Getting executives and key decision-makers sold on why the company-wide ESG goals are essential will make your job much easier. If no one but procurement cares about proper ESG practices, making any changes will be like pushing a boulder uphill. But, if the company and executives buy-in, you will have fewer obstacles.
Make sure that your corporate message is based on concrete data and strategy. Otherwise, your procurement goals may fail to hit the mark or be too outlandish. Come to your executive team with a plan and evidence as to why it is a good idea for the company to focus on ESG strategies.
When crafting the company message, make it clear that your business cares about carbon output and that you will be making decisions based on lowering that total. Then, you can communicate that message internally and to your suppliers. A robust communication strategy will help you set expectations far in advance.
It’s important to consider both the upstream environmental impact and the downstream disposal and reusability of your business’s products and services when crafting a strategy to become ESG compliant. There are so many places to improve your strategy for recycling and reuse.
Consider, for example, the carbon cost of shipping recyclable items from one place to another. There may be more efficient ways to bring that carbon cost down. Or, there may be sources of locally generated electricity, which is much more environmentally friendly.
If you have food waste, you can likely dispose of it better. Perhaps you’re ordering an excess of something you can reduce rather than sending it to a landfill where it will produce tremendous amounts of greenhouse gas.
You’ll have to figure out what you can do for your business, but many opportunities exist. Recycling and reuse have quite a long way to go in efficiency. Your company can help push some of those ESG compliance initiatives along.
Most purchasing organizations need tools for managing ESG data to establish useful compliance frameworks across their supply chain. Businesses can easily access the carbon data necessary for ESG reporting and analysis with DitchCarbon data integrated directly into Graphite Connect.
With access to this data, businesses can more concretely factor ESG-compliant guidelines and policies into their decisions. You can build intelligent strategies to make an even more significant impact with data.
If you’re looking for a solution to help your business understand its carbon footprint and begin increasing sustainable practices, look no further.
Graphite Connect allows procurement teams to access DitchCarbon data, making it simple to understand where your business should begin with ESG compliance initiatives. Graphite can also help you simplify supplier intake, onboard new suppliers, and even keep track of key success metrics.