Why ESG Needs to be on Supply Chain Managers’ Radar

This is the first of a series of articles about the connection of supply chain and ESG, written by Sean Harley CEO and co-founder, LUPR Inc., and Bahar Gidwani CTO and co-founder CSRHub. Originally published on Lupr's website.

There was a time when all shareholders really cared about was returns. Was it doing a good job serving its markets? Likewise, consumers had a narrow focus as well. Were they getting the best product for the price?

In recent years, though, shareholders, consumers and much of the rest of the public have begun to recognize that how a company operates is also vitally important. Is the organization harming the environment? Do they treat their employees well? Are they ethical and transparent? And so forth.

That movement led to focusing the effort on operations and inspecting the suppliers as well. And thus, these issues need to be on supply chain managers’ radars, too…and ESG addresses them.

What is ESG?

ESG stands for Environmental, Social and Governance. At its core ESG is a concept of sustainability and corporate responsibility. It comes from the idea that a company is more than “just” a business enterprise. Its actions impact a wide range of stakeholders, from shareholders, “rank and file” employees, managers and customers to the community and even the government.

ESG looks at a range of social behaviors to see where an organization stands in these areas. For example:

Environment

• What is the organization doing to help prevent climate change?
• What is the organization’s carbon footprint?
• How does the organization manage its resources?
• Is the organization being transparent about its challenges and goals in the environmental area?

Social

• How does the organization treat its employees?
• Where does it stand in areas such as diversity, training, safety and pay?
• How does the organization treat the community?
• Do the organization’s products help or hurt society?
• Is it philanthropic?
• Does it have a demonstrated commitment to human rights?

Governance

• What are the ethics of the organization’s leadership team?
• How is the board and leadership team structured?
• How honest and transparent is the company regarding things like proxy issues and shareholder requests?

All of this—and much more—plays into the question of if an organization is sustainable and responsible. ESG can be assessed through an SRM (Supplier Relationship Management) platform like LUPR through data and metrics. These assessments can then be complemented with ratings and reports available from existing ESG databases, such as those available at CSRHub.

Consumers, investors, employees and others care about ESG issues. Many organizations have launched internal ESG initiatives in which Boards and executives have committed to doing a better job of being a sustainable company and doing the right thing in terms of ESG.

After that, though, it becomes obvious that to be a truly sustainable company you must hold your suppliers to these same metrics, too. Many consumers and investors agree with this sentiment.

There’s a growing group of consumers who will go out of their way to do business with companies that shine in the ESG arena. They don’t want to support organizations that have what they see as harmful or inappropriate business practices, and they want to be sure that these organizations aren’t hiding their bad practices by shifting it into their supply chain.

Likewise, the field of ESG investing is skyrocketing. According to Pensions & Investments, “the value of global assets applying environmental, social and governance data to drive investment decisions has almost doubled over four years, and more than tripled over eight years, to $40.5 trillion in 2020.” There are now quite a few investors who will not be satisfied until both a company and its suppliers satisfy the ESG criteria.

Why ESG should matter to supply chain managers

There are a number of reasons why ESG should be on supply chain managers’ radar as part of the on-going supplier evaluation process:

• Satisfy the demands and expectations of consumers, investors and employees
• Improve the company’s overall sustainability
• Improve supply chain health
• Reduce risks
• Improve supplier relationships

In future blogs, we’ll delve into some of the details of ESG’s impact on a healthy and sustainable supply chain and how to implement them within your supplier base.