Rather than being a nice-to-have PR tactic, an enterprise-wide environmental, social, and governance (ESG) strategy that stretches across the supply chain is a key element in preserving growth for businesses, according to the first part of a three-report series from the University of Tennessee, Knoxville’s Global Supply Chain Institute (GSCI).
The report series, which was sponsored by supply chain and operations consultancy Maine Pointe, examines the “what and why” (article one), “how” (article two), and "return on investment" (article three) of ESG initiatives.
The first article, released today, notes that ESG is such a critical issue because of changing expectations of investors and consumers. Approximately 86% of global consumers expect CEOs to lead on societal issues, while 58% of employees consider a company’s ESG commitments when choosing a workplace.
“ESG improvement is becoming an imperative, not just as a function of acknowledging important social justice or climate change issues, but also as a critical function that positively impacts the company’s growth, bottom line, and ability to attract and retain top talent,” said Simon Knowles, chief marketing officer at Maine Pointe.
Companies that neglect ESG in their supply chains – including emissions, diversity, working condition, reporting and disclosure, and cybersecurity – can face immediate financial consequences in addition to future risks. For example, in July of 2020 Boohoo lost over $1.5 billion in market value over two days following revelations of poor working conditions at one of its garment manufacturers in the UK. Investors and customers recoiled at reports of factory workers being paid less than £3.50 per hour and not being provided proper Covid-19 PPE.
It turns out the company Boohoo contracted with had not operated the factory for years, and a different firm assumed the original supplier’s name, took over the factory, and continued to supply Boohoo. Investors and customers didn’t afford the fashion company a pass – highlighting the importance of supply chain visibility, and that stakeholders view far-flung suppliers as non-distinct from corporate headquarters.
Supply chains are central to ESG strategy, with the transportation sector generating 29% of greenhouse gas emissions in the US and 14% worldwide. Supply chains also entail an enormous social responsibility, employing 450 million people – with many located in developing countries where working conditions and human rights issues are more prevalent issues than in the developed world.
Though supply chain professionals feel this responsibility, few feel equipped to take actionable steps. A 2021 survey of logistics firms found that 83% included ESG in their supply chain strategy, but only 43% had executive sponsorship and only 30% had structured ESG goals and plans.
Executive sponsorship is critical, according to the GSCI report, because companies need to integrate ESG as a proactive business strategy rather than as a reactive, sideline business element. ESG is an investment that allows companies to set themselves up for long-term growth and get ahead of issues before they kneecap their companies.
“Today a coherent ESG strategy, with support from top management and clear goals and metrics, has become an imperative to a company’s short, medium, and long-term success,” said Alan Amling, distinguished fellow, Global Supply Chain Institute.
On a wider societal level, emissions reductions and climate change management are a central element in maintaining economic stability and growth. Further increasing wildfires, floods, rising sea levels, rising temperatures in already hot climate regions, and related civil unrest and mass migration are not good for business on a global level. On a narrower scale, diversity initiatives can open up new market channels, according to the report.
Proactive ESG strategy would also help companies get ahead of regulatory compliance. For example, a projected $100 per ton of CO2 tax would force Exxon to pay $11 billion annually on emissions. As such, rival oil firm Chevron is plowing $10 billion through 2028 into a transition from fossil fuels to technologies like biofuels and hydrogen.
“If companies don’t spend some time and resources to prepare for these potential actions in advance, they will spend multiples more cleaning up the mess,” the report notes.
In terms of the supply chain, companies have broad opportunities to improve ESG performance in the areas of supplier diversity, carbon impact reduction, alternative fuel vehicles, and sustainable packaging. Large companies – with expansive resources and economies of scale – are making progress across multiple areas. Intel has increased its spend with diverse suppliers from $299 million in 2015 to $1.2 billion in 2020; Amazon has contracted Rivian to produce 100,000 electric delivery vans by 2030, with 10,000 delivered by 2022; and Mondelez has committed to making all its packaging recyclable by 2025.
Companies should take several key steps to launch an effective sustainability program, according to GSCI. First, they should measure and assess where they stand in each component of ESG and determine the measures most appropriate for their company (e.g. UN Sustainable Development Goals). Then, they should map out their most important stakeholders and target the priorities with the most significant impact on their business and how it affects the world.
Companies should also set clear ESG goals and measurements, including interim goals and reporting. For example, as part of Intel’s initiative to double diverse supplier spend by 2030, the firm’s interim goals include $250 million with US Black-owned suppliers by 2023 and $400 million with women-owned suppliers by 2025.