The global supply chain has been unstable due to several territorial and universal factors. Healthcare risks threatened it in 2020, and wars affect it today. This situation calls for a strategic attitude concerning supply chain and business development. This post will illustrate the role of ESG principles in supply chain sustainability.
What are ESG Principles?
ESG principles utilize sustainability compliance metrics to modify an organization’s policies and activities based on environmental, social, and governance requirements. These principles are also at the core of ESG services that help responsible investors and businesses estimate risks, plan compliance initiatives, and track performance.
For example, deforestation adversely impacts trees, animals, soil fertility, atmospheric oxygen circulation, and monsoon. Therefore, an ESG principle will demand corporations explore methods to reduce deforestation occurring due to their industrial projects.
Why Do Businesses Need ESG Principles in Supply Chain Sustainability?
Affordable resources and inexpensive laborers made specific countries attractive to brands. These companies had no or incomplete data on how their suppliers had managed workers. Besides, several suppliers engaged in irresponsible waste disposal and child labor while neglecting workplace safety standards.
By the time managers, leaders, and investors realized what was happening, their brand reputation had declined, and consumers were angry. Today, all businesses assess suppliers and partner companies based on sustainable finance disclosure regulation (SFDR) or global reporting initiative (GRI) standards. So, most ESG principles and reporting technologies integrate these frameworks.
Without these methods, corporations and investors expose themselves to risks and controversies driven by supply chain components. ESG principles are necessary to overcome these threats and ensure seamless business development. Moreover, related tools like SFDR data solutions help track your carbon emissions, build inclusive workplaces, and increase governance standards.
The Three Pillars of ESG Principles for Supply Chain Sustainability
Sustainability is often about thoughtfully preserving and consuming Earth’s resources. Therefore, supply chain managers must evaluate how their material extraction, processing, and delivery practices affect natural systems like water resources, air, soil, lifeforms, and forests.
The environmental principles in ESG allow leaders to implement policies aimed at decreasing their organizations’ adverse impacts. All recognized frameworks, like SFDR, GRI, or the Task Force on Climate-related Financial Disclosures (TCFD), have provisions for gauging environmental risks. Consider the following ESG principles when inspecting your supply chain.
- Energy transition discourages the use of non-renewable petroleum fuels. Instead, embracing solar, wind, and geothermal energy is preferred.
- Plastic reduction implies companies must decrease the non-biodegradable synthetic materials from coatings, packaging, and products.
- E-waste regulation recommends refurbishing used electronic devices containing arsenic and other heavy metals.
Contractors and materials vendors will employ people to fulfill distinct duties. These stakeholders might only work for your enterprise indirectly. However, they are integral to the supply chain’s stability and efficiency. Also, they have the right to work in a safe environment and get compensation proportional to their contribution to the project.
ESG principles for the social pillar prioritize workers’ well-being. Alongside the fair wage policies, a reputable company must enforce anti-harassment protocols. Reasonable insurance coverage and retirement planning assistance are also crucial to the social ratings.
If a firm fails to comply with the social requirements, it will likely witness high employee attrition, office toxicity, and low productivity. As a result, it will lose investors because its ability to deliver the promised returns will decrease. Likewise, customers will start using products offered by competing companies that follow SFDR, GRI, or TCFD guidelines for supply chain sustainability.
Corruption and misuse of a company’s resources endanger the leadership’s authenticity. Sooner or later, employees and customers will grow wary of inefficiencies due to a lack of corporate governance that fails to curb corruption and malicious practices.
The third reporting section in an ESG inspection studies a company’s integrity across accounting, recruitment, documentation, and investor communication. Corporate governance is based on a self-regulation policy where public and private sector companies must abide by local and global laws.
Its scope can extend beyond financial transparency amid the rising threats of ransomware, corporate espionage, fake news, and data theft. Today, cybersecurity is as integral to governance as precise tax calculation. It also encompasses consumers’ right to privacy.
How to Use ESG Principles for Supply Chain Sustainability
- Identify the potential risks of supply chain components using ESG metrics and appropriate frameworks.
- Estimate the financial materiality of non-compliance and resources required to increase performance.
- Devise and revise strategies to mitigate ever-changing ESG risks for supply chain resilience.
- Re-assess your organization’s ESG ratings after each business model change, merger, or project commencement.
- Track how ESG metrics fluctuate throughout the project lifecycle, i.e., from material sourcing to outcome delivery and maintenance.
- Refer to industry benchmarks and conduct peer analysis to understand where your rivals surpass you in ESG-SFDR compliance.
- Educate stakeholders, especially supply partners, on the significance of sustainability accounting and risk management.
- Invest in green technology and launch meaningful corporate social responsibility (CSR) initiatives, giving tangible results.
- Gather feedback from investors, employees, suppliers, customers, and authorities to find improvement opportunities.
- Invite domain experts to suggest enhancements to current workflows from a sustainable development perspective.
ESG Technologies for Supply Chain Management and Sustainability Audits
1| Carbon Emissions Monitoring
An unpredictable rise or decline in regional temperature is a symptom of a more intricate climate crisis. After all, industrial activities release carbon compounds into the atmosphere and exacerbate ecological anomalies. Therefore, carbon accounting is essential across all the supply chain processes.
2| EU Taxonomy Assessment
The European Union mandates taxonomy disclosures, directing companies to embrace the “do no significant harm” (DNSH) principles. Furthermore, the EU requires brands to comply with minimum social safeguards. Companies must ensure they satisfy these criteria.
3| Controversy Analytics
Supply chain controversies can permanently alienate customers, increase employee resignations, and damage a brand’s attractiveness to ethical investors. However, controversy analysts will leverage extensive data collection, social listening, news tracking, and brand monitoring. They will use these capabilities to warn leaders of controversial risks.
4| Greenwashing Inspection
If suppliers make unsubstantiated green claims, you must end your relationship with them and seek resources from more responsible vendors. Otherwise, greenwashing risks will hurt investor relations and make customers feel betrayed.
Since many brands might unknowingly employ greenwashing, an unethical marketing tactic, there is value in conducting precautionary marketing content analysis. The thumb rule is never making a green claim you cannot prove with real-world evidence (RWE).
5| ESG Ratings Databases and Publications
A database that rates multiple companies using a proprietary statistical model facilitates data-driven financial decisions. It helps managers and investors distinguish sustainable brands from problematic ones. Meanwhile, an ESG publication offers thought leadership and a logical explanation for specific ESG metrics. It often includes critical insights into an industry’s financial and sustainability disclosure reporting standards.
Rising mean sea water levels and melting glaciers want humans to think twice before consuming Earth’s resources for “needs and wants.” Sustainable development goals (SDGs), which the UN’s member countries plan to accomplish, offer an opportunity to reduce our impact on this planet’s biosphere.
However, you cannot identify and fix the business risks if you do not measure your compliance performance. ESG principles based on SDGs, SFDR, GRI, and TCFD empower you to quantify your environmental, social, and governance metrics. You can utilize them to increase supply chain resilience, protect labor rights, and embrace comprehensive accounting standards.
Supply chain sustainability relies on ESG principles and technologies. Besides, governments and regulatory bodies overseeing the financial markets have worked on legal directives to support their SDGs commitments. So, you will have a competitive advantage if you adopt an appropriate sustainability framework for the supply chain earlier than your competitors.