Sustainability Leaders research indicates that 59% of companies’ sustainability impact across five areas – the environment, human rights, labour relations, fair business practice and product compliance – stems from their supply chains.
Many businesses are grappling with the challenge of quantifying this footprint. Those that have such figures, meanwhile, are discovering first-hand that audits alone will not enable them to reduce the footprint of operations that are outside of their control.
To deliver change, organisations typically issue corrective action plans to those suppliers that are not complying with their ESG standards. The development of such plans generally follows a process of engagement, measurement, and performance improvement (see Figure 1, below).
However, during Sustainability Leaders’ working group on corrective action – which comprised procurement and sustainability executives from 13 companies, who took joined three sessions in June and July 2022 – discussions between members highlighted three areas in which many companies are encountering difficulties:
Martin Chilcott, chair and CEO of Manufacture 2030 – a platform and service provider that helps companies reduce upstream scope 3 emissions – told working group members that corrective action planning should deliver value for buying organisations and their suppliers.
To deliver on their ambitions, he said, organisations must change mindsets within the procurement organisation to help ensure buyers understand and appreciate the importance of improving sustainability performance; and change the dynamic between the procurement organisation and its suppliers to one of joint endeavour.
The first step for sustainability teams is to ensure the organisation’s aims, sustainability goals and procurement targets are aligned.
Chilcott explained how this looks in practical terms, stating the organisation must be able to express the cost of hitting or missing its carbon targets and use those calculations when negotiating with suppliers. Including carbon alongside traditional considerations for buyers – such as price, volume, quality and availability – helps ensure the procurement team pays due attention to sustainability and makes it easier for suppliers to take action.
To help it communicate with suppliers using one voice, the sustainability team at one biomedical sciences company is working with business partners to have high-quality conversations with suppliers and include sustainability performance in regular business reviews.
During a presentation to the working group, Clariant demonstrated how it has integrated sustainability into its processes to ensure it is a day-to-day consideration for staff. The speciality chemicals company explained how it has aligned its different business units and set shared targets to gain more transparency. In addition, the organisation promotes ethical and responsible sourcing and provides education and training to buyers so they understand the importance the organisation attaches to sustainability.
Mutual understanding is crucial to ensuring organisations and their suppliers are moving in the same direction. Chilcott told working group members that businesses must understand the challenges suppliers face to resolve them in the right way.
He advised that companies approach suppliers by recognising that delivering substantial improvements to sustainability performance will require a fundamental shift in the supply chain if the parties are going to be competitive in the future.
Key to this, Chilcott explained, is sharing the organisation’s sustainability journey with suppliers to help build closer relationships and empower them to be a part of that sustainable future.
Although gathering data from suppliers is an important focus for many organisations, working group participants identified several barriers to collecting that information – many of which relate to supplier resistance.
Obstacles identified included:
Manufacture 2030’s Chilcott gave several practical tips to organisations that have encountered objections from suppliers. First, he advised, ensure that the person making the request frames it correctly. This entails explaining to the supplier the strategic importance of improving sustainability performance – to both parties – as well as how the organisation will use the data and how the supplier will benefit from disclosing this information. Strong internal alignment on the importance of sustainability to the organisation and sharing the organisation’s ESG journey with the supplier will also help in this endeavour.
Second, he recommended that organisations design questionnaires to be as short as possible to help maximise response rates and ease the reporting burden on suppliers, which are likely to receive requests from numerous suppliers on their ESG performance.
A procurement professional at one company said their organisation’s data-collection efforts had been inhibited by a low response rate from suppliers – which some vendors attributed to the cost of conducting a sustainability assessment using the Ecovadis tool.
In response to this objection, a number of companies are exploring the option of reserving Ecovadis assessments for strategic or partner suppliers while considering alternative data-collection tools – such as Integrity Next and Ecodesk – for other vendors and service providers.
Solutions that working group members have either used or considered include:
In addition to using Ecovadis to ease the reporting burden on suppliers and share data easily, a number of working group participants highlighted the important opportunities that industry bodies offer to help organisations gather and share ESG data at scale.
During her presentation to the group, Jacklin Wienczierz, head of supplier sustainability and climate initiatives at Clariant, discussed the value of joining Together for Sustainability (TFS) – an initiative in the chemicals industries that aims to standardise ESG principles across the sector. Its 37 members, with a combined spend of $300bn, use the same supplier assessments and audits with their suppliers to ensure consistency. Read the case study, Clariant’s approach to supplier assessments and corrective action planning, to discover more.
Clariant is by no means the only company to have benefited from such a scheme. Working group members also highlighted the benefits other industry organisations provide, including the Pharmaceutical Supply Chain Initiative, which has developed a supplier audit collaboration programme to improve supply chain visibility in the industry and ease the reporting burden on suppliers. In addition, it has a supplier capability-building programme to help educate suppliers and enable them to identify and resolve potential ESG issues.
Another company in the group, which said it had benefited from taking part in the Responsible Business Alliance, noted the challenges that differences in maturity by industry presented to buying organisations. While companies in the chemicals and pharmaceuticals sector were said to have more advanced capabilities, it noted that many smaller suppliers – particularly in the electronics and mechanical engineering sectors – had said it was the only customer requesting ESG performance data.
Manufacture 2030’s Chilcott demonstrated the value of third-party providers in helping companies to collect and share ESG data quickly, citing the example of data disclosure between UK supermarkets in helping a number of companies to achieve engagement rates of more than 80%.
Furthermore, Chilcott said, such collaborations help companies and their suppliers to improve their ESG performance rapidly. He noted an initiative involving two UK supermarkets had resulted in a 59% reduction in waste to landfill, usage of renewable energy doubling over three years and a 17% improvement in supplier Scope 1 and 2 emissions per tonne of output.
A pulse survey during one of the working group sessions revealed that as of June 2022, just half of members had issued a corrective action plan to any of their suppliers this year, further indicating that gathering and synthesising supplier data remains the greatest challenge for many organisations.
Within the working group, members had differing expectations of suppliers and requested remedial action in a variety of ways. The key thread running throughout the discussions, however, was the importance of excellent relationship management.
The head of procurement sustainability at a working group participant said their organisation primarily uses Ecovadis scores to generate corrective action plans for suppliers. These results form the basis of conversations with vendors, with the organisation outlining its expectations around minimum criteria. It then reassesses supplier performance the following year by comparing year-on-year performance against the Ecovadis survey.
At Clariant, the category manager responsible for the supplier works with the sustainability team to determine further measures. These may include, as a final course of action, reducing expenditure with that vendor to push that company to fix any ESG issues.
By contrast, one working group participant said it puts any supplier found in major breach of any environmental regulation on a corrective action plan and requires the vendor to resolve any issues quickly. However, due to the limited number of suppliers of certain components and global pressures, it cannot easily eliminate suppliers in certain categories. As such, the company’s approach largely focuses on relationship management and understanding the supplier’s plans to move past the issue.
Looking further into the future, Manufacture 2030’s Chilcott challenged working group members to think beyond “correction”, which can often have negative connotations. Instead, he reframed the issue of improving sustainability performance as a joint initiative, between customers and suppliers, in creating a future-fit supply chain.
Tackling this challenge requires ambition and creative thinking to deliver transformative innovation; it may also mean that, as customers, organisations need to provide support in the form of capital, expertise or buying power that will enable suppliers to accomplish more than they could on their own.
By way of example, Chilcott shared the story of a supermarket chain that wanted to decarbonise its eggs. After conducting a life cycle assessment, the supermarket learned that the carbon – at an industrial scale – was generated from the soya beans it used as chicken feed.
When it proved impossible to feed chickens low-carbon soya at the required scale, the supermarket switched the focus of its supply chain. It now redirects food waste from its processes to industrial insect farms, with the insects harvested and distributed to farmers to serve as chicken feed. By thinking out of the box to reengineer the value chain and support its suppliers, the supermarket was able to leverage its scale to deliver a carbon-positive egg supply chain.
Such initiatives highlight how companies in other industries could embrace similar methods and reengineer their supply chains to accelerate their decarbonisation efforts.
The findings of this working group were informed by three working group sessions that took place between June and July 2022, with the following companies participating: Becton Dickinson, Boehringer Ingelheim, Clariant, Ferring, General Mills, Gilead, Mol Group, Perfetti von Melle, Polaris, Posti Group, RWE, Telus and Thermo Fisher Scientific.