From Cost to Conscience: How ESG is Redefining Procurement

While the bottom line remains the main focus for procurement organizations, investments toward environmental, social and governance (ESG) goals are increasingly  becoming key components of corporate strategies.

ESG can be captured through a wide range of metrics and initiatives that are of growing focus for investors and consumers, who want to ensure the companies they support are operating in a responsible and thoughtful manner.

Driving Visibility and Change Through Procurement

A 2023 survey by the Index Industry Association found that asset managers’ projections of the future proportion of ESG elements in their portfolios is around half by 2026, 54 percent by 2028 and 62 percent by 2033.

Examples of ESG initiatives include: 

• Reducing environmental impact via consideration of carbon footprint, water consumption, land use and waste management
• Promoting social responsibility by considering job applicants from a diverse applicant pool, complying with labor laws, prioritizing employee health and uplifting local communities through philanthropy
• Upholding governance structures (such as board composition or corporate leadership) that represent a variety of internal and external stakeholders; promoting responsible and transparent policies, procedures and decision-making; and ensuring employees have avenues to raise concerns without fear of retribution.

Driving visibility and change with these ESG initiatives relies heavily on action from procurement organizations. The procurement function intersects with each component of the ESG framework through its influence over the supplier network, sourcing of raw materials and deciding the businesses to connect branding with.

Considering that ESG metrics capture not just a corporation’s in-house activities but also those of their Tier-1, Tier-2 and Tier-3 suppliers only adds to the challenge of ESG goal tracking and risk evaluation through data reporting and analytics.

A Five-Step Framework

These five actionable steps can elevate your procurement team’s ESG analytics.

Step 1: Define your source of truth. The first step a procurement team should take toward effective ESG analytics is defining a single source of truth data set from which to track these metrics.

If different geographies or business units are operating with their own assumptions on how to calculate these figures, or are generally estimating where they might stand, it will be very difficult to get a concrete assessment of current behavior or track actual progress. Aligning on a standardized set of definitions, calculations, and data sources will establish an agreed upon baseline from which to track and improve progress over time. 

Step 2: Align with data you can trust. A lot of ESG-specific data is not typically captured in an ERP and therefore requires additional effort to identify a trustworthy data source. For instance, from an environmental standpoint you may want to collect data from your suppliers to track their CO2 impact or water use. Consider the following possible data sources and the potential reliability of each.

Data sources with greater reliability: (1) corporate social responsibility (CSR) reports, (2) managed service partners that have a reputable knowledgebase and ESG expertise (such as IBM Procurement Analytics as a Service) and (3) other reputable online publications (such as NGOs).

Data sources that require further vetting: (1) questionnaires sent to the supplier for self-reported metrics, (2) direct data extracts from the supplier and (3) purchased information from a third-party ESG data provider.

While setting up your data consolidation structure, it’s vital to ensure the data you are collecting is trustworthy. Self-reported numbers should not be blindly accepted and validating this information, such as through regular audits, is imperative. Third-party data should similarly be evaluated for accuracy, with consideration given to the frequency of evaluations performed on suppliers covered.

Step 3: Know the needs of your procurement users. Once a data set is established, visualizing your data in a business intelligence tool will ensure decision-makers have visibility into the data they require for their respective roles. Different use cases should be established to meet the needs of different data users. Here’s what information different user groups might derive the most value from:

• The CPO and executive team might want to see high level diversity statistics of their supply base (for example, percent of diverse spend) and how these metrics are trending over time. These should be benchmarked against a company’s own goals over time and potentially the performance of other businesses in their industry.
• A category manager may be keen to evaluate a category’s ESG performance over time. There might be opportunities to incorporate category-specific standards to track compliance for specific environmental or ethical standards such as water use for a more manufacturing aligned category.
• Tactical buyers might have a target goal for spend with suppliers who meet certain environmental standards. These users could benefit from a dashboard showing their category’s supply base with supporting environmental data such as carbon dioxide (CO₂) impact that can be used when making purchasing decisions.

Step 4: Expand your program over time. Once an ESG program — and data architecture — is established, it can serve as the base for future program expansions and goals. Sixty-four percent of CPOs planned to expand their ESG programs in 2024, according to an Ardent Partners report, which emphasizes the need for a strong ESG baseline to build from.

A program initially focused on CO₂ impact could eventually shift to wastewater treatment or energy efficiency but maintain a similar tracking and reporting structure. It is also likely that as an ESG program grows, groups will identify gaps in a company’s existing data either by ESG area or geography that can be targeted for improvement.

As a growing field, it is expected that ESG goals and standards will continue to evolve in the coming years, so having the infrastructure built out to track them will be valuable moving forward. 

Step 5: Act swiftly to remove risky partners. Beyond identifying suppliers who meet diversity and environmental criteria and thus improve ESG ratings, this work is also critical in finding potential bad actors in the supply chain who could cause operational or reputational damage down the line.

By requesting environmental standard data or investigating the labor practices of suppliers, you can proactively identify suppliers who don’t meet the standards set by the business or may pose potential risk to the company’s ESG performance. Through early identification of these suppliers, alternative suppliers can be explored to shift business to if those with concerning behavior are brought to light.

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ESG analytics has the potential to put the right data in the hands of decision-makers so they can leverage it to achieve organizational goals. It enables users to see a clear picture of where an organization stands so it can better allocate resources and time where it will do the most benefit.

As a growing field, it is vital that companies give these analytics initiatives the resources and direction needed to ensure they drive value moving forward.

(Image credit: Getty Images/Lari Bat)