ESG strategies are mission critical for sustainability

Envi­ron­men­tal, social and gov­er­nance (ESG) cri­te­ria are fast emerg­ing as key indi­ca­tors adopt­ed by the invest­ment com­mu­ni­ty for mea­sur­ing and track­ing busi­ness sus­tain­abil­i­ty. As a result, dri­ving ESG through the sup­ply chain has become a prime focus for respon­si­ble busi­ness­es keen to man­age rep­u­ta­tion­al risk in the face of increas­ing share­hold­er and activist scruti­ny.

Brought togeth­er exclu­sive­ly for this spe­cial report, the round­table fea­tured a diverse mix of per­spec­tives drawn from across a range of indus­tries and busi­ness sec­tors: recruit­ment and employ­ment, health­care, soft­ware, indus­tri­al sus­tain­abil­i­ty, logis­tics and par­cel deliv­ery, and ethics and com­pli­ance.

While dri­ving ESG in sup­ply chains is doable and can be a dynam­ic force for pos­i­tive change and growth, it is still far from easy. The pan­el debate addressed six key areas of chal­lenge that are par­tic­u­lar­ly dif­fi­cult to tack­le, but crit­i­cal for suc­cess: gov­er­nance, scope three emis­sions, ‘walk­ing the talk,’ cul­ture change, part­ner­ships and com­pli­ance.

Governance: putting the ‘G’ in ESG

While all three ESG cri­te­ria are inevitably inter­re­lat­ed, for Karin Reit­er, glob­al head of ESG and sus­tain­abil­i­ty, at Adec­co Group, gov­er­nance is prob­a­bly still the bedrock on which sus­tain­able val­ue cre­ation is built. She says: “It is the ‘G’ in ESG that real­ly under­pins the abil­i­ty of a com­pa­ny to achieve its envi­ron­men­tal and social goals. The ‘G’ enables us to thrive from an ‘E’ and and ’S’ per­spec­tive.”

Giv­en the recent accel­er­a­tion in ESG-dri­ven leg­is­la­tion and reg­u­la­tion at a nation­al lev­el, but also a supra­na­tion­al lev­el, there has been a spe­cif­ic focus on human rights due dili­gence across the val­ue chain.

This has raised the stakes for risk, adds Reit­er: “For com­pa­nies, the risk of get­ting it wrong is increas­ing­ly rep­u­ta­tion­al dam­age, com­pli­ance costs, also the poten­tial loss of busi­ness, plus the ques­tion of your abil­i­ty to attract tal­ent, beyond the soci­etal impact.”

Tackling scope three is tough

When it comes to sup­ply chain ESG chal­lenges, though, they do not get much tougher than tack­ling scope three emis­sions, sug­gests Emir Sas­si, glob­al head of pro­cure­ment sus­tain­abil­i­ty, at Novar­tis.

Green­house gas emis­sions are bro­ken down into three groups or ‘scopes’. Scope one refers to direct emis­sions. Scope two refers to indi­rect emis­sions from the likes of pur­chased ener­gy gen­er­a­tion. It is scope three, how­ev­er, that cov­ers all oth­er indi­rect emis­sions from the com­pa­ny val­ue chain.

For a com­pa­ny like Novar­tis, which has a stat­ed ambi­tion to become car­bon neu­tral by 2030, Scope three is not just hard, but huge, explains Sas­si: “Why is it tough? The size of scope three as part of our total GHG emis­sions is more than 90%. It is by far the biggest por­tion. What we emit in from our fac­to­ries, offices and vehi­cles and from the ener­gy we con­sume is less than 10%; all the rest sits with our sup­ply chain. Scope three is tough because it’s big and we don’t man­age it direct­ly.”

Needing to ‘walk the talk’ on digital

All too often, it seems organ­i­sa­tions sim­ply talk of ‘going dig­i­tal,’ as if ESG data alone might some­how solve their sup­ply chain issues. How­ev­er, to ‘walk the talk,’ busi­ness needs for­mal struc­tures in place, argues Richard How­ells, vice-pres­i­dent, solu­tion man­age­ment for dig­i­tal sup­ply chain, at SAP.

“Sus­tain­abil­i­ty is a hot top­ic – great in the­o­ry, but hard in prac­tice. The key is bring­ing togeth­er the busi­ness process­es and sys­tems with the wealth of data that is now avail­able to help opti­mise sup­ply chain vis­i­bil­i­ty and dri­ve busi­ness deci­sions around sus­tain­abil­i­ty,” he says.

Ear­li­er this year, SAP con­duct­ed a sur­vey in con­junc­tion with Oxford Eco­nom­ics of a thou­sand sup­ply chain exec­u­tives from around the world, across all indus­tries. What the find­ings show is that while almost nine out of 10 (88%) firms have either cre­at­ed a clear mis­sion state­ment around sus­tain­abil­i­ty or are in the process of writ­ing one; bare­ly more than half (52%) have put these words into action to reduced ship­ping miles, for exam­ple.

When talk­ing about scope three emis­sions, the research revealed a drop down to lit­tle more than one in five (21%) respon­dents hav­ing com­plete vis­i­bil­i­ty into their sup­ply chain sourc­ing.

Mindsets matter for cultural change

Tools are vital for ana­lyt­ics around ESG. How­ev­er, for embed­ding cor­po­rate val­ues into best prac­tice and sup­ply chain behav­iours, mind­sets mat­ter too. The chal­lenge is not just know­ing that com­pa­ny cul­ture counts, but doing some­thing about it, argues Patrick Fet­zer, pres­i­dent and CEO, Cas­tolin Eutec­tic.

“Employ­ees make deci­sions every day. You can put a lot of poli­cies in place, but you can­not make each of these deci­sions your­self, and you can­not check them all the time. This is where cul­ture comes in,” he says.

For Fet­zer, send­ing the right sig­nals on cul­ture is not a one-off task. The tone needs to be set at the top, then devel­oped day-to-day. This is why, for instance, Cas­tolin Eutec­tic has signed up to the UN Glob­al Com­pact, to real­ly sub­scribe open­ly to its ESG com­mit­ments

Fet­zer says: “How do you dri­ve cul­tur­al change? It real­ly starts with the mis­sion and the pur­pose. Employ­ees, cus­tomers, stake­hold­ers need to under­stand what the com­pa­ny stands for and ESG and sus­tain­abil­i­ty is part of this sto­ry.”

Partnerships feed on open conversation

As a com­pa­ny that deliv­ers around 650m parcels for the top 80% of retail­ers in the UK, Her­mes Parcel­net is itself a big play­er in a lot of com­pa­ny sup­ply chains.

These sup­ply chains are com­pli­cat­ed, which is why col­lab­o­ra­tion is crit­i­cal, says Nan­cy Hob­house, head of ESG at Her­mes: “Where we are with ESG, whether you are look­ing at the E, the S, or the G, the whole point of it is that you can’t fix it all by your­self. Part­ner­ships are real­ly key. Unless you are work­ing with both your sup­pli­ers and also your clients, you are nev­er going to hit those tar­gets.”

Look­ing ahead, suc­cess in cre­at­ing this col­lab­o­ra­tive ethos behind sus­tain­able busi­ness will depend on bet­ter com­mu­ni­ca­tion, she adds: “We need to have a more open and hon­est con­ver­sa­tion across the entire val­ue chain. And we need to make that con­ver­sa­tion loud and intense; and have it with a lot of peo­ple, if we are to move for­ward togeth­er.”

Ethics: the supply chain is not faceless

Ulti­mate­ly, much of the chal­lenge of dri­ving ESG in sup­ply chains comes down to trans­lat­ing the absolutes of ethics into the prac­ti­cal­i­ties of com­pli­ance. This is nev­er an easy task, but, fun­da­men­tal­ly, you need to start with human­i­ty, says Karen Alonar­do, vice pres­i­dent of ESG solu­tions, at Navex Glob­al: “The bot­tom line is that the sup­ply chain is not face­less. Some­times we in com­pa­nies, or just as con­sumers, tend to for­get there are real peo­ple in the sup­ply chain, bring­ing these prod­ucts and mate­ri­als to us.”

For Alonar­do, though, change is in the air – as evi­denced by the emer­gence of state leg­is­la­tion to address inequal­i­ty and injus­tice in terms of work­ing con­di­tions and prac­tices.

Both the UK Mod­ern Slav­ery Act and the Cal­i­for­nia Trans­paren­cy in Sup­ply Chain Act, for exam­ple, have been around for over five years now. Ger­many has also just passed into law its Sup­ply Chain Due Dili­gence Act, which will come into effect in 2023.

With the spread of reg­u­la­tion, there­fore, wrap­ping eth­i­cal com­po­nents into com­pli­ance will become faster in future, espe­cial­ly if we har­ness the ben­e­fits of tech­nol­o­gy to estab­lish base­lines and start mea­sur­ing progress.

Alonar­do adds: “The human ele­ment is a crit­i­cal com­po­nent, but also I am a tech­nol­o­gist. Tech­nol­o­gy has a big play in this; bring­ing togeth­er ESG solu­tions that can help enable com­pa­nies and their sup­pli­ers to meet some of these eth­i­cal chal­lenges across the sup­ply chain. From human rights and child labour, to con­flict min­er­als and more, there is a still a lot of work to be done.”

---

How will supply chains change in the near future?

Karin Reit­er, glob­al head of ESG and sus­tain­abil­i­ty, Adec­co Group

We are mov­ing away from view­ing peo­ple as a mere resource, so tak­ing a tru­ly human-cen­tric approach that pri­ori­tis­es invest­ments in peo­ple. Peo­ple and the skills they offer need to be at the heart of the green tran­si­tion. We need a new social con­tract, that ensures all forms of work across the val­ue chain are secure and sus­tain­able.

Emir Sas­si, glob­al head of pro­cure­ment sus­tain­abil­i­ty, Novar­tis

Five to 10 years can make a big dif­fer­ence. We all know the dead­line of 2050 and the need to lim­it glob­al warm­ing to below 1.5C, but many still think we have 30 years to go to start act­ing on it. Real­i­ty is we haven’t. The ‘E’ in ESG is not just an ambi­tion; peo­ple need to under­stand the urgency. We can all suc­ceed togeth­er. Every­one has a role to play.

Richard How­ells, vice-pres­i­dent, solu­tion man­age­ment for dig­i­tal sup­ply chain, SAP

The real­i­ty is that whether we are talk­ing about cli­mate change, or the cir­cu­lar econ­o­my, or any­thing sus­tain­abil­i­ty-relat­ed, our sup­ply chains sit right in the mid­dle – both as a major con­trib­u­tor to the prob­lem and a focus for action. We need to lever­age the pow­er of the net­work, to pro­vide improved vis­i­bil­i­ty and col­lab­o­ra­tion, trans­paren­cy and reg­u­la­to­ry com­pli­ance, to hold every­one account­able to the high stan­dards of ESG.

Patrick Fet­zer, pres­i­dent & CEO, Cas­tolin Eutec­tic

ESG offers a real com­pet­i­tive advan­tage and is becom­ing more and more impor­tant – not only for our investors and stake­hold­ers, but also for our cus­tomers. Our cus­tomers are look­ing to us to be more ESG-com­pli­ant and to help them meet their tar­gets. So, we are talk­ing to our own sup­pli­ers and our cus­tomers are talk­ing to us. This has momen­tum.

Nan­cy Hob­house, head of ESG, Her­mes

ESG is not going to be a nice-to-have; it is going to be an essen­tial. At present, it might be a com­pet­i­tive advan­tage, but in five or 10 years it will be life of death for your busi­ness. You will not be able to get the finance you need, or the con­tracts you want, unless ESG is inte­grat­ed into your busi­ness. Every­one needs to start now.

Karen Alonar­do, vice-pres­i­dent of ESG Solu­tions, Navex Glob­al

What I see in the future is that ESG becomes part of our DNA, oper­a­tional­ly inte­grat­ed, just com­mon prac­tice. With every­one doing the right things for the right rea­sons, we are build­ing val­ue cre­ation across the whole sup­ply chain. ‘E’, ‘S’ and ‘G’ are not indi­vid­ual silos. Com­pli­ance is a col­lab­o­ra­tive expres­sion of what we believe will help dri­ve things for­ward in an eth­i­cal man­ner, includ­ing all ele­ments of ESG.

For more infor­ma­tion vis­it navexglobal.com/esg

---

Pro­mot­ed by Navex