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ESG in Supply Chain

By June 19, 2024Uncategorized

Acronyms abound when it comes to supply chain. AT Logistics Viewpoints, we cover a wide range of these acronyms, including AS/RS, DOM, GTC, SCP, TMS, and WMS to name a few. Over the last few years, another acronym has been showing up on the radar: ESG. ESG stands for environmental, social, and governance, and is a framework that evaluates a company’s performance and ethical behavior. It’s a set of practices that organizations use to limit negative impacts or increase positive impacts on the environment, society, and governance bodies. ESG reports can help investors make informed business decisions by identifying companies with less financial risk and avoiding those that may be impacted by stricter ESG metrics.

Today’s article is the fourth part in a series featuring surveys from APQC on supply chain topics including environmental sustainability,  last mile, and digital transformation. APQC conducts research on supply chain and logistics to help organizations assess the performance of their own processes and functions compared to their peers. Most recently, from December 2023 to January 2024, the Digital Supply Chain Institute (DSCI) and APQC jointly conducted a survey to gather insights from supply chain leaders on the role of Environmental, Social, and Governance (ESG) factors in managing their supply chains and relationships with suppliers.

The purpose of this research is to understand the current state of ESG in supply chain management (SCM) and identify the emerging trends that will shape the future of the industry. This report provides an overall snapshot of the current state of ESG in supply chains, such as its use and prioritization, integration into corporate strategy, stakeholder influence, assessment of ESG goals, as well as challenges and opportunities.

Importance of ESG in Supply Chain

Survey respondents were asked “How important is ESG in the measurement of your organization’s supply chain management practices?” A significant majority, 62 percent, of respondents consider ESG factors to be extremely or very important in their organization’s supply chain management practices. A mere 1 percent of respondents indicated that ESG is not important at all. However, even with respondents indicating that ESG is very important to their supply chain management practices, there is still a gap when it comes to supplier selection.

Although 62 percent of respondents acknowledge the importance of ESG in supply chain management, only 43 percent actually apply ESG performance as a criterion for selecting suppliers. A full 20 percent of respondents never, or rarely, use ESG performance as criteria for selecting suppliers. This gap indicates an opportunity for businesses to align their practices with their stated values.

Considering that ESG covers environmental, social, and governance, companies will generally need to prioritize their focus. Interestingly, 60 percent of organizations lack a clear prioritization within ESG in their supply chain management practices. For those that do prioritize, 19 percent indicated governance is their top priority, 15 percent rank environmental as their top priority, and 6 percent rank social as the top priority. This suggests a need for a more defined ESG strategy and framework within the industry to guide effective integration and action.

ESG Strategy in Supply Chain

When it comes to an ESG strategy, there are a number of stakeholders that hold influence over the strategy. APQC asked respondents “how much influence do the following stakeholders have on your ESG strategy? (Ranked Among Top 3).” Customer demands (69 percent) and regulatory mandates (58 percent) are the primary influencers of ESG strategies, underscoring the critical link between market demands, risk management, and compliance. Interestingly, suppliers / partners (32 percent) and employees (31 percent) ranked toward the bottom of the list.

There are a myriad of factors to consider when selecting impactful and achievable ESG goals. Internally, strategic alignment with operations (74 percent), and externally, compliance with regulatory mandates (68 percent), are the two most impactful factors in selecting ESG goals. Along with these factors, companies must determine how to establish ESG goals for specific topics. Social- and Governance-focused goals—specifically ethical business practices and social inclusion and diversity—are established in more organizations compared to Environmental goals. The following are the most established topics where companies have ESG goals in place: ethical business practices (75 percent), social inclusion and diversity (70 percent), waste reduction and recycling (68 percent), and sustainable supply chain practices (66 percent).

ESG Challenges and Opportunities

With any goals, there are challenges and opportunities that a company must assess. Survey respondents were asked to identify the top three challenges they face in implementing ESG into their supply chain. Not surprisingly, the top challenge is cost (48 percent). Beyond cost as a barrier, the leading challenge for 46 percent of respondents underscores a critical bottleneck in ESG implementation: the lack of reliable data from suppliers and other supply chain partners.

As mentioned above, there a large number of stakeholders that have an influence on ESG strategy, including customers, regulators, investors, consumers, suppliers, partners, employees, and NGOs. Not surprisingly, relevant stakeholders do not always see eye to eye when it comes to developing a strategy or set of goals. Conflicting stakeholders demands and priorities (33 percent) is the third top challenge that companies face.

In the face of these challenges come opportunities. Respondents were asked to identify the opportunities in implementing and integrating ESG performance criteria into their supply chain management. The top three opportunities identified by respondents are enhanced brand reputation (69 percent), competitive advantage (65 percent), and meeting regulatory requirements (65 percent).

While the cost of ESG implementation is a noted challenge for 48 percent of organizations, only 25 percent recognize its revenue-generating potential. This suggests a narrative shift is needed, framing ESG not as a financial burden but as an untapped source of value creation and market differentiation.

Final Thought

While ESG continues to be front and center for companies, there is still a significant gap between acknowledging its value and the actual integration of ESG principles into the core strategy and operations of businesses. Companies must refine their management focus on the ESG agenda by clearly defining the prioritization between environmental, social, and governance factors within their operational policies. Today’s ESG landscape is shaped by regulatory compliance and customer expectations, which act as primary driving forces.

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