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Jun 02, 2021
ESG is becoming a critical component in the Supply Chain. Are you ready?
Social and Governance in the supply chain
The focus on non-financial, Environmental, Social and Governance
(ESG) data and metrics continues to increase across all industries
and regions. Both public and private companies are under increasing
pressure from investors, civil society and governments to make
ambitious public commitments covering all aspects of ESG, but
especially carbon emissions which are directly linked to climate
change and its threat of global systemic disruption.
As a result, companies are required to simultaneously demonstrate
compliance with an ever-increasing raft of legislation and
regulation (e.g., Modern Slavery Act (MSA), German Supply Chain
Law), while also and demonstrating delivery against targets to
dramatically minimise their impact on the environment and make
positive contributions to diversity and inclusion.
The Role of The Supply Chain
Firms must master overall Supply Chain Management and incorporate
ESG into their overall supply chain strategy if they are going to
succeed in their ESG efforts. Consideration should be given to an
integrated approach between ESG strategy, process, technology, and
data across the supply chain to ensure alignment across the
organization.
A recent survey of
global supply chain leaders conducted by IHS Markit in early
2021, suggests a significant gap between having an ESG strategy in
place, and the ability to execute: 51% of respondents claim to have
a mature ESG strategy in place, yet only 36% have access to the
required technology and data to drive their ESG strategy, with only
10% giving themselves the top score for having access to integrated
technology and data.
Based on these results, many of these leaders are not prepared
for the role of supply chain within ESG.
Furthermore, the amplifying effect of supply chains impacts both
the opportunity to improve and the risk of noncompliance, with even
medium size firms potentially having hundreds or perhaps thousands
of suppliers. Each of these suppliers can have a complex enterprise
with many employees located within facilities operating across the
globe. It is also probable that each of these suppliers has its own
matching footprint, such is the interconnected and globalised world
of today. Therefore, an organisation's extended ESG footprint can
grow exponentially in size, reach and complexity. This makes
failure at some point almost impossible to avoid and very difficult
to monitor.
Procurement and Supply Chain teams are having to rapidly evolve
beyond the traditional contract and performance management
techniques such as those used for materials sourcing (Identity
Preserved, Segregated, Mass Balance, Book and Claim). In addition
to these and other obligations, there is now a growing focus on
tracking and monitoring how staff are treated within suppliers
which adds ever more complex but important ESG obligations and
increasing liabilities.
Risk and Compliance
The acceleration of governmental action and intervention is set to
continue through 2021 in the run up to the UN Client Change
Conference (COP26) in November. A signpost of things to come can be
seen in the recent proposed German supply chain legislation which
combines the need for an organisation to demonstrate compliance
with stringent requirements and enforced with a tough penalty
regime up to 2% of global revenue. Given the current global
political climate it is highly likely that other countries will
want to match the German lead in this space and implement similar
ESG focused regulatory frameworks.
Meeting Targets
In recent years there has been a rush by organisations to establish
and publish ambitious targets including spend with diverse
suppliers, carbon footprint reduction and how they are helping
local and small organisations to thrive. To help drive delivery of
targets and objectives, there has been the rapid expansion of
ESG/Sustainability teams within companies, working alongside all
aspects of the business including procurement. Historically, it has
been challenging for companies to understand how to message
accurately and demonstrate not just compliance but also intent and
impact to investors and regulators. With a plethora of quasi
reporting standards, the challenge is often multiplied. This is
coupled with the need to demonstrate that ESG targets have been
met. This has become an issue that now challenges the boards and
the non-Executive directors that provide input and guidance; they
need to ensure the data provided can be audited and evidenced as a
result of real concern amongst governments and regulatory agencies
around Green Washing, intentional or otherwise. This is also more
material for public companies as ESG (non-financial) factors become
embedded in financial markets and such information becomes more
price sensitive in both directions.
So what is the fix?
For as long as there has been a focus on ESG, there have been
attempts to solve for these problems from certifications to data
and technology solutions. It is only now with the advent of
powerful data gathering, analytics, industry utilities and audit
capacities that there is a real chance of answering the questions
required and helping to avoid the significant liabilities, both
reputational & economic in world where information is a form of
energy.
It is essential to apply a comprehensive approach to identify,
assess, and continuously monitor your supply chain. There is an
increased need for Supply Chain leaders to embed ESG as part of
supplier risk management and vendor risk assessment processes.
Looking at ESG data alongside cybersecurity, data privacy, and
compliance requirements is essential for the success of modern
Third Party Risk Management programs. It is also important at a
time of vendor onboarding and periodic assessment to take action to
work with your suppliers in remediating ESG deficiencies just like
remediating a cybersecurity risk. This being combined with an
ongoing, long term program that continuously monitors the process
and notifies the correct individuals if there is a drop in ESG
posture or a negative news alert against any of your suppliers.
You can find out about the full Supply Chain Solutions
here.
The power of IHS Markit, as a combination of an industry leading
Third Party Risk Management solution (KY3P) and our ESG data
management system [Repository] bringing the combined power of
strategic & process insight, platform, data, and services
together.
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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