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ESG transformation driven by procurement
Sustainability is often regarded as an environmental issue that is far away from day-to-day business. But it is a lot more. It is a way of thinking, in which we strive to balance economic, social, environmental, and ethical values. By now it is common knowledge that sustainability is a key decision criterion for customers. Our recent survey puts tangible numbers behind this facet of sustainability and outlines the advantages of sustainable products from a customer’s perspective. Especially Millennials demonstrated significant above average approval rates among all respondents. Implying that the future generation of buyers will resist paying for non-ESG products.
In addition to the customer’s demand for increasing transparency and lower impact products, regulators increase ESG targets and invest into enforcement. Furthermore, capital markets consider ESG criteria for capital allocation.
All this is forcing ESG on the CEO agenda across industries. Procurement, managing 50-80% of the CO2 footprint of any manufacturing company and orchestrating the ecosystem of partners and suppliers will have to be in the driver seat for sustainability. Currently 25 of the 30 leading DAX companies have a separate sustainability report but only five companies dedicate at least a chapter in this report about the importance of ESG in procurement. Our approach towards the transition of procurement is to create sustainable supply chains that meet the needs of the present, without compromising the ability of future generations to meet their own needs. Beyond ESG reporting it will be necessary for companies to incentivize their suppliers – and their Procurement departments – to make ESG a “hard factor” when it comes to awarding new business. Currently we see only a few frontrunners starting to think in that direction. But without a paradigm shift, to walk away from pure cost orientation, there can hardly be the change in supplier ecosystems that is needed. ESG as the next disruption is already gaining momentum and will create new ecosystems and change existing ones.
This is the moment companies need their Chief Procurement Officer to take ownership by following 5 key steps:
- No compromise on full ESG transparency
Impose ESG transparency not only to tier 1 suppliers but also to 2nd tier and lower tier suppliers – be prepared to offer something in return – e.g., better transparency on demand data or link transparency to business awards - Incorporate ESG as key factor in category strategies, supplier management and most importantly in sourcing decisions
Anchor ESG along the category management lifecycle from RfPs, bid evaluation, sourcing decision, supplier performance management and development. Essential pre-requisite is that the frame conditions allow for this – which puts the legislator in the position to ensure this - Be the enabler for the company’s ESG transformation
Show commitment to enhancing the supplier base and bringing innovations to the company (e.g., new suppliers with new technologies & situations, investment in supplier development) - Foster a global-regional operating model
The new global supply chains and strategies will evolve into “global network of regions”, with a set of regional supply chains and strategies - Dedicate resources following the motto “go big or go home”
Be prepared to invest a disproportionate amount of time and resources in the beginning to get it going (e.g., enhancing reporting, auditing, and supplier risk profiles)
The time to act is now!
The linkage of ESG to value creation and the fact that ESG focused companies are best-positioned for the future has proven true especially during Covid-19 times. Driving ESG out of procurement is a must and will put the company in the top of the performance charts.
Li Zhang and Pascal Miehe also contributed to this article.
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