How ESG education can unlock the potential in supply chains 

Pressure is mounting on companies to ramp up their sustainability efforts — and the supply chain is a hotspot for environmental and social impact.

Developing procurement and supply chain management professionals’ skills and capabilities in environmental, social, and governance (ESG) is a surefire way to enhance business productivity and improve sustainability.

According to a report by McKinsey & Company, as much as 90% of greenhouse gas emissions and other environmental impacts are the result of consumer companies’ supply chains. As such, the supply chain has significant potential for achieving major advancements in sustainability performance.

With effective ESG education, procurement and supply chain professionals can identify and measure the most pressing sustainability issues for their company, and improve resilience by mitigating disruption, legal, and other risks in procurement practices.

A recent survey by Avetta found that a “lack of in-house understanding of the importance of ESG issues within the supply chain” was the greatest challenge to incorporating ESG practices into the supply chain, followed by a “lack of suppliers understanding of ESG issues.” For optimal business outcomes, developing sustainability capabilities is critical for supply chain professionals at all levels.

But it’s not just sustainability that stands to benefit from introducing ESG education into the supply chain.

According to the International Labour Organization, 16 million people are exploited in corporate supply chains. Corruption, counterfeiting, and other governance issues also detract from supply chain ethics and cause harm. Combined with the pressing need for a sustainability push, the case for an ESG overhaul of value chains is undeniable.

As well as the ethical issues at play, applying ESG education can unlock financial and reputational gains for a company. Once proficient, ESG leaders can pass along their knowledge to suppliers to help them improve, in turn, upon their own practices. This reduces the emissions of a company's wider value chain and improves its social impact.

Existing and upcoming regulatory requirements provide additional impetus for senior business leaders to quickly rethink their approach to value chain management.

The European Union’s Non-Financial Reporting Directive already requires mandatory sustainability reporting for large companies, and the European Commission — the executive arm of the bloc — is expected to release additional sustainable corporate governance legislation shortly.

The United States Securities and Exchange Commission (SEC) is not far behind. It is expected to follow suit this year with its own climate risk disclosure requirements.

These rules add a new layer to value chain risk and compliance, requiring companies to integrate sustainability into their supply chain strategy and operations practices. ESG education will be key to ensuring regulatory requirements are met.

There are countless possibilities for applying ESG education to procurement and supply chain management. Here are just a few examples of how ESG knowledge can improve business performance.

Environmental: Optimize resource utilization

The ESG mindset helps leadership to think about the supply chain in a new way. Instead of a linear process with waste and negative externalities, viewing the value chain as an interactive ecosystem can help companies reuse instead of lose materials and resources.

Take water, for example. It is a key resource in food and beverage, manufacturing, textile, and other industries. ESG-educated professionals are more equipped to develop metrics to capture key data points surrounding water use, wastage, and pollution. They can use this knowledge to identify key stages in the product lifecycle where water use can be reduced, water can be recycled, or water quality can be improved.

These changes can add up to big savings for companies, while benefiting the health of the community and conserving a valuable resource to boot.

Social: Improve working conditions and brand reputation

Monitoring the social conditions of workers throughout the supply chain is a complex but necessary task. Companies are increasingly coming under fire for the presence of forced labor in their supply chains, even for second and third-tier suppliers. Because of this, expertise in human rights compliance is a must for holistic supply chain management.

Supply chain professionals with knowledge about social issues in the supply chain can develop better protocols for monitoring and auditing suppliers to create more effective remediation plans. These practices are critical to maintaining brand reputation, reducing legal risks, and improving working conditions across the board.

Governance: Prevent counterfeiting

Counterfeit items also present significant legal and reputational risks. Businesses can find themselves the victim of counterfeiting when another company falsely sells products to them or under their brand name.

Procurement teams must be educated on counterfeiting — both how to spot it and how to handle it — to mitigate these risks.

Capable, ESG-educated professionals understand the correlation between corruption, counterfeiting, and other governance issues. They can best identify high-risk products and help develop policies to identify and manage counterfeiting situations related to sourcing and the supply chain.

ESG-oriented supply chain management entails establishing a chain of custody that documents a product’s movement throughout the value chain, ensuring the authenticity of products at every stage. It also requries collaboration with suppliers; educating suppliers on this and other governance issues also reduces the risk of counterfeiting occurring.

The value of ESG education cannot be understated. Professionals with these tools and skills will outperform their peers and capture greater value in the supply chain. ESG-educated leaders are what businesses and the world need to lead in the transition to a sustainable society.