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ESG and your supply chain: a 5-point plan

Andrew Henderson
Andrew Henderson
Director of the Due Diligence Proposition, Refinitiv

Environmental, social and governance (ESG) considerations remain top of the agenda for corporates across the globe, but what practical steps can business leaders follow in order to convert their ambitions into concrete initiatives? 

  1. Incorporating ESG elements into your business’s compliance programme needs to involve a range of stakeholders in your supply chain and distribution network.
  2. An ESG compliance programme is beneficial to your business and the environment, and can be implemented in five practical steps.
  3. A well-designed ESG programme can create a direct link to the investor community.

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The clear opportunity for corporate leaders to mitigate the environmental impact of humans on the natural environment continues to drive increasing numbers of CEOs to sign up to the ‘E’ of ESG policies.

While the task of ensuring that an organisation meets its regulatory and legal obligations is generally seen as the role of the compliance function, this broader remit of incorporating ESG elements into the compliance programme needs to involve a wider range of stakeholders.

It is estimated that over 80 percent of a business’s emissions are found in its supply chain. Consequently, any programme that aims to support emissions or sustainability obligations must concentrate first and foremost on its wider network, and must involve stakeholders within procurement and supply chain management.

The ESG regulatory landscape is complex

Quick explainer: broad-based ESG issues 

  • ‘Environmental’ considers how a business performs as a steward of our natural environment, looking at, inter alia, waste and pollution, resource depletion, deforestation, sustainability and climate change concerns. 
  • ‘Social’ looks at how a business treats people, handles health and safety, upholds human rights, tackles child labour and slavery, and more. 
  • ‘Governance’ considers how a company manages and runs itself.

In addition to involving the right stakeholders, it is important to remember that the regulatory landscape relating to ESG matters is complex.

Some regulations require diligence and statutory reporting, whilst others (such as the new German supply chain laws) impose significant fines of up to 2 percent of global turnover and bans from public contracts.

Reasons for implementing ESG programmes may include legislation, positive business reasons or a desire to appeal to investors

Against this backdrop, integrating ESG into your entire supply chain offers a host of benefits, but how can this best be achieved?

Watch: Creating a 360-degree view of third-party risk

A five-point action plan

Some practical steps to follow include:

1. Set clear objectives

A range of objectives can drive the decision to build an ESG compliance programme.

Firstly, and most importantly, it can help to alleviate the impact of humans on the natural environment, but other reasons for implementing ESG programmes may include legislation, positive business reasons or – more recently – a desire to appeal to investors.

It is important to set clear objectives.

2. Understand the drivers

Investors are leading the charge to ESG compliance through a desire to support businesses with a long-term sustainable future. In so doing, they are driving significant increases in investment funds with ESG mandates.

Substantial pools of funds are consequently becoming inaccessible to companies without a strong ESG message.

This has led to a significant change in how stakeholders view ESG programmes, and business functions like procurement and supply chain management are steadily moving away from being entirely focused on supply quality and cost.

These groups are now seen by executives and finance leaders as a crucial link to the future funding of any business.

3. Select your framework

Compliance frameworks range from the generic (such as ISO19600 or ISAE 3000) – which can be modified to cover almost any topic – to the bespoke.

More specific frameworks can be applied to each ESG-related topic (such as the Green House Gas Protocol Corporate Accounting and Reporting Standard). These are more tailored to a particular obligation but may require more application work internally.

4. Remember your reporting

Any programme must be able to report in a format that is commonly understood by the investor community. This requires consideration of general descriptions of what your business is, possibly using the EU taxonomy for sustainable activities or more detailed tools like the FTSE Russell Green Revenues Classification System (GRCS).

Additionally, for specific topics such as carbon reporting, there are generally several options to choose from.

5. Prioritise and communicate

Given time and budget constraints, it is crucial that you prioritise your obligations.

Once you have a clear set of priorities, draft and communicate policies that set out your intentions, including detailing the resources that will be committed to achieving each objective.

ESG initiatives help our planet – and a well-designed ESG due diligence programme can create a direct link to the investor community

Reaping the benefits

The successful integration of ESG considerations into the supply chain offers a host of benefits, ranging from innovation, producing better products and lower costs, to the competitive advantages afforded by demonstrating sustainability and meeting the expectations of a more aware and discerning customer base.

Firms may also benefit from better staff retention if their businesses can show that they share the ethical beliefs of their workers.

More than this, ESG initiatives help our planet – and well-designed ESG programmes can create a direct link to the investor community, with clear benefits for the future of any business.