How to Drive ESG in Your Supply Chain
The importance of environmental and social governance (ESG) for companies across the globe has never been greater. Customers, investors, and regulators expect companies to manage the impacts their operations have on the environment and society as a whole. Beyond that, there is an expectation that companies create greater value to the benefit of the collective.
That is, they put more back into society than they take out.
“The purchasing power of a corporation can become a unique driver for bringing about positive change in society, said Arnand Mahindra, Vice Chairman and Managing Director of Mahindra. “Companies must use this power to achieve a purpose and make their supply chain a vehicle for inclusive growth.”
One way for companies to make strides toward positive ESG outcomes is to promote sustainability and good corporate citizenship within their supply chain ecosystems.
As a start to creating supply-chain sustainability programs, a Harvard Business Review study found four common steps taken by companies to be successful. These businesses:
- Have established long-term sustainability goals.
- Require first-tier suppliers to set their own long-term sustainability goals.
- Include lower-tier suppliers in the overall sustainability strategy.
- Task a point person on staff with extending the firm’s sustainability program to first- and lower-tier suppliers.
Going beyond that, companies can:
- Ensure procurement personnel have adequate training to assess supplier and potential supplier performance related to ESG;
- Make ESG measures part of the supplier selection process; and
- Help suppliers (especially tier-1 sellers) implement their own sustainability initiatives.
ESG and Supply Chain Finance
At first glance, it’s hard to draw a direct line between a company’s ESG initiatives and sustainability and an early-payment program. But digging deeper, there are a number of ways a well-implemented and executed supply chain finance (SCF) program can help buyers and suppliers further their corporate responsibility initiatives.
The first way is simple: a supplier that is financially healthy is more likely to be able to take on environmental or social initiatives within their operations. With improved liquidity, there is capital to invest in things like new, more efficient equipment, more employee training programs, or diversity recruiting opportunities.
Typically, SCF programs offer the best rates to the largest suppliers and small-to-medium businesses pay more to use early payment. (This is the bucket minority-owned businesses fall into most of the time). With ESG-based programs, buyers and SCF providers have the opportunity to provide suppliers with the better rates reserved for larger sellers on their early payments. That is, if a seller meets certain ESG goals, they may qualify for a lower fee early payment. Those who don’t meet the goals, pay a higher fee.
Finding Sustainability Success
This was the tact taken by German athletic clothing and shoe manufacturer PUMA. Within the first year of starting a sustainable SCF program, it provided $100 million in lower financing costs to 15 percent of its sellers who achieved high ESG scores. For PUMA it paid high dividends as the company estimated 94 percent of its environmental impact could be found in the supply chain.
ESG is important to every company – regardless of size or industry. Customers, investors, and governments expect businesses to play their part and be good global citizens and societal partners. That means lessening their impact on the environment, supporting human rights, and providing safe environments for their employees. Those values must be demonstrated in all aspects of the business – internally and externally – including the supply chain. While there are no easy answers to ensuring your suppliers are responsible corporate partners, there are steps you can take. LSQ can help you with solutions that support your ESG initiatives across your organization and supply chain. Contact us today to learn how.
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