Social, environmental and governmental standards - in short ESG - have been around for more than a century. ESG was first created by socially conscious investors who wanted to align their investments with their ethical values.
By now we see ESG as much more than just an "investor sustainability score." ESG is related to climate change. And let this be a topic that is on the radar of regulators, the business community and the media.
The rise of sustainability can be explained partly by the pressure from the government and society towards companies to reduce their carbon footprint. As a society, we realize more than ever that companies are co-responsible for social and climate-related issues.
ESG factors: Environmental, Social and Governance
Let's go back to the basics for a moment. What does ESG stand for, anyway? ESG has everything to do with the impact of an organization's business operations on the world and society. The ESG factors consist of three components:
- Environmental, this includes environment-related topics such as CO2 emissions, recycling and water consumption;
- Social, these are the social issues such as working conditions and privacy issues;
- Governance, the governance issues in an organization, such as diversity and corruption.
As an organization, ideally you have all these things in good balance and as a result have your ESG performance in order. Now, of course, you may want to improve your ESG to be - or remain - attractive to investors. Yet there is more reason to start with a good policy today. We will tell you more about this later in this blog.
But ESG doesn't stop at your organization's actions only. When we talk about the E of Environmental, it is not limited to analyzing how the company's activities affect the environment, but also looks at your supply chain.
How to use ESG data for your Supply Chain Management
Therefore, it is important to also properly embed ESG data into your supply chain management processes. For example, the insight from ESG data can be used to better assess the stability and success of suppliers. This helps with both selecting new suppliers, as well as in reviewing the existing contracts with suppliers.
The smart insights ESG data provides for your supply chain:
- Quickly and efficiently identify companies that are lagging in specific areas, rather than conducting a survey or collecting data on your entire supply chain;
- Monitor lower-performing suppliers and follow them from month to month to see if their performance improves. If performance does not improve, you can re-engage and establish a performance plan, or even a contractual agreement, to encourage improvement;
- Replace suppliers that are too risky to do business with in the long term with other suppliers that offer the same services but have a better ESG performance;
- Include expectations about ESG performance in RFP criteria, contracting and supplier onboarding and screen for companies that can provide the right products and services while consistently being reliable and responsible.
Fully sustainable supply chains are the future
We've talked about the social importance of ESG. Yet there are more reasons to get started implementing ESG in your organization and in your supply chain management today.
For example, it has been proven that companies that have their performance in order have higher financial growth and fewer fines and penalties. Those fines and penalties are at the root of the next reason to start a good policy on sustainability. As a matter of fact, European regulations are pushing for a robust implementation of ESG factors within the financial sector. Other sectors are also being watched. This topic is being pushed by the EU because it can support the European Green Deal.
The European Green Deal: A set of adaptation proposals for the European Commission's climate, energy, transport and taxation policies for the EU. The main goal of the Green Deal is for Europe to become the world's first climate-neutral continent by 2050.
Thus, sustainability and sustainable business are becoming the new ideal.
Want to read more about managing the risks in your supply chain? Read our blog: Know Your Supplier: This is how you manage your supplier risk