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How to Mitigate ESG Risk Using Sustainable Procurement

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Because supply chain emissions often dominate corporate carbon footprints, procurement is central to delivering on a company’s environmental, social and governance (ESG) agenda and ultimately on corporate net-zero pledges on emissions. Yet still too many companies fall short of being able to use procurement as a primary lever to reduce their own greenhouse gas emissions.

That’s because only a tiny minority — 2% to 3% — rely on ESG quantitative data as predominant factors in decisions on the selection of suppliers and sourcing, according to a 2022 Oliver Wyman survey of 300 chief procurement officers. Instead, most still depend heavily on historical metrics, such as cost, quality, and service level. As a result, many companies are missing out on an important opportunity to make their operations more sustainable and reduce their ESG risks.

But the news is not all bad. A majority of companies told Oliver Wyman that they now routinely include ESG quantitative criteria in decisions on suppliers and sourcing. Only around one-fifth said they don’t consider ESG at all. That’s significant progress over where things stood a few short years ago.

We expect even more attention to be paid to procurement and supply chains in the coming months. Chief procurement officers continue to address the plethora of disruptions from natural disasters, geopolitical conflicts, inflation, labor shortages and the COVID-19 pandemic that have kept them up at night for the past two years. 

With things in flux anyway, this is a perfect time for CPOs to overhaul procurement processes to make them and corporate operations more sustainable. 

Using the ESG Lever

That said, it’s no easy task. Even though procurement is the primary way companies can reduce their Scope 3 supply chain emissions, senior leaders often need to be shown the real cost of failing to embed ESG into business as usual. For sustainability to become a driving force in companies, sustainable procurement must be a substantial part of the business model. 

What needs to change? Essentially, the problem stems from the failure to make quantitative ESG criteria a day-to-day predominant factor in supplier selections and sourcing decisions. This prevents procurement from realizing its full potential as a strategic tool. 

In the small minority of companies where ESG-driven procurement is business as usual, procurement teams are able to translate ESG ambition into robust management objectives, key performance indicators (KPIs), and even new operational approaches to the core business. 

For sustainability to become a driving force in companies, sustainable procurement must be a substantial part of the business model.

These leaders do not wait for legislation to tell them how to address sustainability. They listen to what their customers and investors are looking for in terms of emissions reductions and climate risk management. They respond instead to the marketplace zeitgeist, which is after all, also driving legislation. 

But to do this successfully, companies must give sustainable performance metrics proper priority and have in place the right managers with sufficient understanding of ESG principles and climate challenges as well as the training to implement and adapt policies. Almost always this requires significantly expanding the skillsets of both managers and buyers.     

Reinventing Performance Monitoring 

How performance is monitored is also key to whether ESG will become embedded in procurement. ESG needs to drive purchasing, but if the metrics for sustainability are of secondary importance in decision-making, then the outcomes will likely not reflect the company’s net-zero or sustainability goals.

Various methodologies can be used to reinvent the monitoring of procurement performance. Looking at the environmental pillar of ESG, this might include adopting a narrowly targeted metric, such as carbon pricing. The metric calculates the carbon impact of every purchasing alternative. 

More broadly, an ESG-adjusted total cost of ownership model can present a powerful and comprehensive approach that can be incorporated directly into an environmental profit and loss (EP&L) account and reported on the company balance sheet. A worldwide luxury goods company that adopted this approach to monitor its ESG performance has received accolades from financial rating organizations for the clarity this produces. Additional credibility comes from ensuring the independent monitoring of outcomes in a third-party assessment or independent audit. 

Training Procurement Teams

ESG is such a complex topic, with regulation constantly evolving. It places extraordinary demands on category managers and buyers involved in the procurement process that go well beyond their usual remit. 

For these decision-makers to understand ESG fundamentals and stay well-informed on evolving best practices, companies must make it an urgent priority to expand their skill sets and reprioritize decision-making processes to emphasize ESG criteria. This upskilling will require much more than a few random training sessions and may require them to be more involved in strategy-setting efforts. 

But it is not only category managers and buyers who need to understand how the new ESG KPIs apply in procurement. ESG needs to be understood companywide. This is an area where the procurement teams can take a lead in training internal stakeholders across the company.

Tracking Outcomes Using Digital Solutions

One final piece of the jigsaw needs to be in place to ensure the company can embed its ESG metrics: the right technology. This is easier to do than ever before because of the evolution of software and networks. 

Four out of 10 companies report that they leverage the latest available procurement tools to collect, digest and report ESG data. The next step is to ensure these enhance the efficiency of procurement. Chief procurement officers are looking to their teams to employ digital solutions that enable them to focus on value-adding activities and eliminate those that are more transactional in nature. 

Overall, in terms of the data itself, it is important to favor data quality over data quantity. This will help avoid creating massive data reserves that end up producing meaningless averages with data points of low credibility. 

The urgency of this task has been underlined by COP27. The pressures driving ESG are growing all the time and are shining a spotlight on corporate procurement. For chief procurement officers, doing nothing to make procurement more ESG-aligned is becoming a very risky game.

Xavier Nouguès

Partner, Global Head of Value Sourcing at Oliver Wyman

Xavier Nouguès is an Oliver Wyman partner, based in Paris, who serves as the global head of Value Sourcing. Xavier advices on operational excellence and specializes in large corporate transformations. He works across a broad range of industries, including retail and consumer goods, transportation and services, automotive, utilities, and financial services.

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