What is ESG Criteria in Procurement?
Planet Earth being destroyed from unsustainable oil extraction.
What ESG means for Business and Procurement Teams
What ESG Stands For
Ethical, Social, and Governance are what ESG stands for. In today’s world, corporate social responsibility (CSR) is a significant factor in supply chain management for some businesses. ESG is an expansion of CSR in many cases.
Ethical, Social, and Governance [ESG] Criteria
ESG criteria have become an essential part of many procurement strategies. This article provides a detailed overview of ESG criteria and how they can be used to your advantage as a buyer. We will also discuss what ESG means and the benefits of using them and give tips on incorporating them into your strategy.
CEOs now see ESG as a driver for financial performance within their business. As this flows through the C-Suite, you can bet that your CFO (Chief Finance Officer) or Chief Procurement Officer (CPO) will be tasked with finding ways to unlock the supply chain and draw out suppliers with good ESG records.
Take a read of this article, and get more clear on what ESG Criteria are in Procurement. It’s good to get ready to start talking to your suppliers about this over the next 12 months more than you ever have done. Because 47% of CEOs are considering how they diversify their supply chain to manage the geopolitical challenges we’re facing, the impacts of wars, sanctions and repetitional challenges are ever-present.
Why should Procurement care about ESG?
ESG is a way of measuring the environmental impact of a company. It helps you decide if you want to buy from a company because it enables you to understand how they impact the world around them.
With the interest of CEOs, Shareholders, and Customers of both products and services caring more than ever about investing or buying from sustainable companies, Procurement needs to respond.
The supply chain will be the epicentre for ESG. Suppose your suppliers have poor ESG ratings based on ESG criteria and independent checks you carry out against them. In that case, you shouldn’t be using them. This means your approach to sourcing will need to change if you aren’t detailing what you need from your Suppliers when it comes to ESG.
Furthermore, Scope 3 emissions will become a problem everyone looks to solve whether you only buy software or have a heavy logistics and goods supply chain. Every supplier that you look to onboard will need to be viewed through the lens of ESG if they are going to become one of your chosen or approved suppliers.
ESG Criteria for Procurement
ESG criteria help evaluate your suppliers’ environmental, social and governance impact. You may have a standard set of criteria that you can use for all of your suppliers, but it’s unlikely.
A standard ESG criterion for procurement teams to follow is yet to be formed. Instead, Procurement takes corporate ESG strategic objectives and converts them into strategic procurement objectives. From here, Procurement will work with the supply chain, rework category and broader procurement strategies, and look to work with suppliers and partners who can deliver on ESG. This might require existing relationships to flex to accommodate ESG or new suppliers where existing suppliers fail to deliver on ESG requirements.
Procurement must embed ESG criteria within their procurement processes and ensure that they monitor results. This work is mainly worthless without monitoring the results within their supply chain in the post-signature phase. Data is the objective here to ensure that the supply chain performs under the ESG commitments in the contract.
Procurement ESG Criteria List
Environmental ESG Criteria
The ESG Criteria can be used to assess suppliers’ environmental impact.
For example:
How much waste does the supplier generate?
Are they recycling that waste?
Does their supply chain have any impacts on local communities or people?
How is the business approaching Scope 3 emissions?
Social ESG Criteria
The ESG Criteria can also be used to assess suppliers’ Sustainable impact.
For example:
Do they pay their workers fairly?
Do they treat them well?
Does the supply chain cause any negative impacts on local communities or people?
Governance ESG Criteria
The ESG Criteria can also be used to assess suppliers’ governance.
For example:
Are they financially stable?
Does the supplier have good internal controls?
Does the supplier have a ISO14001 accreditation?
Does the supplier have an ISO26000 accreditation?
Planet Earth suffocating and destroying itself from global emissions
How to Achieve your ESG Criteria with your suppliers
Look at the supplier’s environmental impact. You want to ensure that your suppliers aren’t polluting the environment and harming wildlife or otherwise causing unnecessary harm to our planet. Suppose you’re using natural resources for your products. In that case, you are responsible for not using them too quickly, significantly if their extraction could harm surrounding communities or ecosystems.
Look at the supplier’s sustainability impact. Social refers to how well a company treats its employees, partners, and customers (not just with positive public relations). You want proof that your suppliers treat everyone fairly and with respect. Look out for any bad press or lawsuits against them that might indicate they’re somehow mistreating someone.
Look at governance impact. This can include anything from good corporate governance practices like setting aside money for environmental protection efforts or paying workers a living wage, or how the CEO spends their money. For example, would you want to work with a supplier whose CEO is directly lobbying or supporting the lobbying of poor ESG standards at a legislative level?
Closing thoughts on Procurement’s ESG challenge
ESG could be a game changer for businesses. There’s an opportunity to significantly improve how we connect with our suppliers and work with them.
There’s also room for fraud, ESG washing, and poor practices.
Let’s not be part of that.
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