Environmental, social, and governance (ESG) performance has become increasingly important for companies. In this era, consumers and investors are depositing more emphasis on sustainability and responsible business practices. However, companies often overlook the ESG performance of their suppliers, which can have a significant impact on their overall sustainability goals and reputation. This blog post primarily focuses on the benefits of measuring suppliers’ ESG performance, including improved risk management, enhanced reputation, alignment with global sustainable development goals (SDGs), and increased innovation and efficiency. Many companies rely on a network of suppliers to provide the goods and services that they need to operate. Nevertheless, these suppliers can also represent a significant source of risk in terms of environmental and social impact, also regulatory compliance. This is where measuring suppliers’ ESG performance comes into play. Here are some reasons why Companies ought to start measuring their suppliers’ ESG (Environmental, Social, and Governance) performance.
Mitigating risk:
One of the most important reasons for companies to begin measuring their suppliers’ ESG performance is risk management. By quantifying the environmental and social impact of their suppliers’ operations, companies can figure out potential risks and take steps to alleviate them. For Instance, a company that relies on suppliers who engage in unethical labor practices or have a high carbon footprint may be at risk of negative media attention or legal action. By investigating suppliers’ ESG performance, companies can identify potential risks and work with suppliers to address them. This can aid reduce the risk of negative impacts on the company’s reputation and bottom line.
Align with global sustainability goals:
Quantifying suppliers’ ESG performance can help out companies to align with global sustainability goals, such as the United Nations’ Sustainable Development Goals (SDGs). By working with suppliers to identify ESG issues, companies may present to more sustainable future and help to make a positive impact on society and the environment. Take for example, a company that works with its suppliers to lessen its carbon footprint can contribute to SDG 13 (Climate Action). Similarly, a company that works with its suppliers to ensure that they cohere to human rights and labor standards can contribute.
Enhancing brand reputation:
A company’s reputation and brand can be impacted by the actions of its suppliers, especially in areas such as labor practices, human rights, and environmental impact. Consumers and investors are increasingly demanding transparency and sustainability from companies. And a company’s reputation can be remarkably impacted by the ESG performance of its suppliers. By measuring their suppliers’ ESG performance and ensuring that they meet certain sustainability standards, companies can strengthen their reputation and brand value.
For example, a company that sources its raw materials from suppliers with good labor practices and a low carbon footprint can illustrate its commitment to sustainability and attract customers and investors who value these principles. In contrast, a company that sources its raw materials from suppliers with poor labor practices and a high carbon footprint may face reputational damage and lose customers and investors who prioritize sustainability.
Driving innovation:
Measuring suppliers’ ESG performance can help drive innovation, as companies seek out suppliers who are flourishing new and sustainable products and services. For example, a company that evaluates its suppliers’ carbon footprint can be able to identify opportunities to work with suppliers who are thriving with low-carbon alternatives.
Let’s talk about Walmart, a leading global retailer, has set aspiring sustainability goals, including sourcing 100% of its energy from renewable sources and achieving zero waste. To acquire these goals, the company works closely with its suppliers to implement sustainable practices and technologies, such as energy-efficient lighting and packaging innovations.
Meeting regulatory requirements:
Companies can be subject to legal and regulatory requirements related to ESG issues, such as conflict minerals, labor practices, and environmental regulations. Measuring suppliers’ ESG performance can help ensure that suppliers are meeting these requirements. This may help mitigate the risk of legal action or regulatory fines, and demonstrate a commitment to ethical business practices.
For instance, Unilever has flourished a system for measuring and reporting on supplier ESG performance and works with suppliers to implement changes that lead to better ESG performance. By doing so, Unilever can ensure that it meets the requirements of the UK Modern Slavery Act and other regulations, and avoids any penalties or fines for non-compliance.
Improve Supply chain efficiency:
Measuring suppliers’ ESG performance can also help to refine supply chain efficiency. By recognizing areas where suppliers can improve their ESG performance, companies can work with suppliers to implement changes that can lead to cost savings and functional efficiencies. For example, enhancing energy efficiency or minimize waste can lead to cost savings and improve overall supply chain efficiency.
Conclusion
Overall, measuring suppliers’ ESG performance can have significant benefits for companies and their stakeholders. By taking a more holistic approach to ESG performance and including suppliers in their sustainability efforts, companies can mitigate risks, enhance their reputation, drive innovation and efficiency, meet stakeholder expectations, and contribute to global sustainability goals. As such, companies should start measuring their suppliers’ ESG performance and work together towards a more sustainable and responsible future.
Not sure where to start? Tools like Susternal make it very easy to track your suppliers’ ESG practices and performance.
