By Rafiq Merchant
With new reporting frameworks and increasing government regulations, investor pressure, and consumer expectations, the odds are stacked against any organization that does not embed environmental, social, and governance (ESG) into its corporate strategy. It’s no longer about whether your organization has ESG goals. Today the question is, how much progress have you made in implementing your ESG strategy?
Many business leaders fear that the goals of driving ESG, containing costs, and improving supply-chain resilience cannot coexist. That’s a misconception. The answer to striking a balance lies within the ESG goals themselves, and your procurement and supply-chain teams can lead your organization’s effort to reach those goals.
How ESG Impacts Costs and Revenue
ESG = Cost Avoidance
New and tightening regulations across the U.S. and EU require enterprises to meet their ESG targets and to measure and report them. Without ESG metrics and visibility into your organization’s supply chain, the risks of legal costs, fines, penalties, and reputational damage run high.
The U.S. Uyghur Forced Labor Prevention Act (UFLPA), passed in 2022, bans any goods or merchandise produced, mined, or manufactured in China’s Xinjiang Uyghur Autonomous Region on the presumption that their manufacture involved forced labor. The burden of proof lies with the importer to provide documentation of fair labor practices throughout their value chain. The price of violation is steep: it can lead to the immediate seizure of imported goods, causing significant supply-chain disruptions as well as civil and even criminal penalties.
Similarly, legislation such as the EU’s Corporate Sustainability Reporting Directive and Germany’s Supply Chain Due Diligence Act requires sustainability reporting and human rights and environmental due diligence within large companies’ supply chains. Noncompliance attracts financial penalties and can cause serious reputational damage.
Enterprises must keep a close eye on regulations—those in effect as well as any impending ones—and have mechanisms to measure and report compliance.
ESG = Cost Reduction
Many sustainability initiatives can reduce costs even as they drive ESG goals.
In much of the world, power generation from renewable sources of energy has reached or surpassed price parity with fossil fuel-based energy. The share of renewables in the global power generation mix could rise from 29% in 2022 to 35% in 2025, according to the International Energy Agency’s Electricity Market Report 2023.
Some countries are encouraging the transition to clean energy through tax exemptions and benefits. The 2022 U.S. Inflation Reduction Act (IRA) has committed $400 billion in investment and subsidies to cut greenhouse gas emissions and offers an investment tax credit of up to 70% on green energy projects. The European Commission has proposed tax breaks and looser state aid rules to boost renewable investment by the private sector.
Adopting renewable energy does not necessarily require huge capital investments. Organizations can start small, directing procurement teams to explore options such as renewable energy credits (REC) and virtual power purchase agreements (VPPA) that can help reduce emissions. In making changes, procurement teams must have energy-reporting tools to monitor consumption and quantify cost savings.
ESG = Lower Cost of Capital and Increased Revenue
Consumers and investors are increasingly directing their capital to organizations with a strong ESG policy, a track record of sustainability, and an ongoing commitment to improve environmental and social outcomes where they operate. This trend presents an opportunity for organizations to use their ESG ambition to increase top-line revenue, access cheaper capital, and recruit top talent: more and more job seekers say they want to work with organizations that share their environmental and social values.
For many investors, ESG is one of the criteria for investment decisions: 85% of investors considered ESG in their investments in 2020, according to Gartner. Because investors want to see how a company handles social and environmental risks, it’s critical for organizations to track, measure, and communicate their ESG activities and performance widely and transparently.
ESG’s Impact on Resilience
ESG and supply-chain resilience intersect at several points, including risk management. Identifying, analyzing, and addressing risk are key to building resilience, and ESG is a great tool to reduce exposure.
Meeting ESG goals requires organizations to be transparent, eco-conscious, and ethical. Organizations need to track and measure ESG for compliance, which requires visibility into supplier operations to help evaluate risks within supply chains.
Having a robust supplier risk-assessment platform and supplier relationship-management framework will go a long way in helping organizations build resilience and succeed in their ESG efforts.
Driving Goals with ESG Visibility and Tracking
To achieve the intertwining goals of ESG, resilience, and cost management, organizations should embed their ESG strategy within their supply chains. It’s not enough to simply define an ESG strategy. Acting to set metrics and key performance indicators, implementing technology that helps measure and report ESG metrics across the value chain, and collaborating closely with suppliers will help companies achieve positive outcomes for both their business and society.
Find out how GEP can help your enterprise drive sustainability across the supply chain.
Rafiq Merchant is a senior director of consulting at GEP and leads the company’s global ESG and sustainability practice.