Procurement as the Epicenter of ESG and Climate Program Transformation

Organizations are faced with mounting pressures to establish resiliency and reliability within their supply chains, especially in light of factors such as climate change, geopolitical risks, and diversity, inclusion, and belonging, which all contribute to the ever-changing regulatory environment. In this article, we delve into how embedding sustainable procurement within your organization can not only support the achievement of a resilient and reliable supply chain, but also help mitigate risks associated with these complexities. Knowing who is in your supply chain, even just a level or two below, is becoming increasingly vital in today’s interconnected world. 

Sustainable Procurement 

What is sustainable procurement? According to the UN’s Development Program, Sustainable Procurement¹ means making sure that the products and services that an organization buys are as sustainable as possible, with the lowest environmental impact, and most positive social results. Becoming an increasingly sustainable procurement organization involves making a focused transition toward beneficial environmental and social impacts within the supply chain, while exceeding stakeholder expectations and delivering triple bottom line (people, planet, and profit) results, or total value, to the organization. Sustainable procurement can be adopted by organizations of all shapes and sizes, irrespective of industry.

What Drives the Transition to Sustainable Procurement?

Governments, shareholders, and consumers are key drivers pushing for environmental, social, and governance (ESG) and climate transformation in today’s competitive marketplace. Regulations mandating climate transparency are rapidly increasing globally. Action has been brisk this year, with the implementation of the Corporate Sustainability Reporting Directive and regulations on deforestation-free products in Europe, the recent adoption of the US Securities and Exchange Commission’s climate-related rule, China’s stock exchanges proposing sweeping mandatory environmental disclosure rules for large listed companies, and Australia releasing an exposure draft of Treasury Laws Amendment Bill 2024: Climate-related financial disclosure. Each regulation, in one form or another, will introduce supply chain requirements, which will require companies to refocus their procurement efforts around sustainability. Those that build a holistic sustainable procurement program—one with effective supply chain due diligence, procurement practices, and reporting—will be best placed to meet compliance requirements and drive value creation. 

Benefits of Transitioning to Sustainable Procurement?

As market competition intensifies, sustainable procurement enables organizations to emerge as leaders in environmental and social initiatives, while simultaneously improving their bottom line and attractiveness to customers and investors. The transformation to sustainable procurement not only enhances internal efficiencies but also fosters talent acquisition, crucial for navigating today’s market dynamics, geopolitical challenges, extreme weather impacts, and other uncertainties. Understanding the depth of your supply chain, including suppliers and their practices, can enhance the overall sustainability efforts and can minimize risks associated with non-compliance or unethical practices within the supply network. The figure below details a selection of these benefits.

Procurement Team’s Role in Sustainable Procurement

An emerging perspective emphasizes the procurement team’s role in delivering holistic value to the organization. While cost reduction and financial bottom lines have traditionally dominated discussions of business value, the procurement team possesses the unique ability to influence a broader and more holistic interpretation of value. By leveraging their expertise in supplier risk management, procurement teams can spearhead efforts to enhance supply chain resiliency and sustainability. Knowing the various layers of suppliers and subcontractors within the supply chain enables procurement teams to assess risks more efficiently and implement appropriate mitigation strategies. 

Components of Sustainable Procurement and Procurement Team’s Actions

The section below highlights each component of the above model and provides examples of how procurement professionals can leverage core competencies to lead a sustainable procurement transformation within the organization. 

1. Market Awareness. Procurement professionals should maintain a solid understanding of the shifts in the marketplace, particularly in the rapidly evolving ESG and climate space. Integrating market analysis early on can ensure alignment with customer needs and regulatory requirements, including those related to supply chain transparency and sustainability reporting. 
2. Organizational Governance. Establishing organizational purchasing policies that include ESG requirements, identifying best practices for contract negotiation, and aligning procurement goals with sustainability targets are critical for success. Understanding the depth of the supply chains help ensures that these policies are enforced consistently throughout the entire network of suppliers. 
3. Supplier Diversity and Risk Management. Developing robust solicitation processes, implementing supply chain risk management programs, and diversifying the supplier portfolio are essential to mitigate various risks within the supply chain. Knowing who operates at different levels of the supply chain aids in identifying potential risks and vulnerabilities, allowing for targeted risk management strategies. 
4. Sustainable Innovation. Collaborating with suppliers to stimulate innovation and develop sustainable solutions is critical for long-term supply chain resilience. Understanding the composition of the supply chain facilitates effective communication and collaboration with suppliers to drive innovation and sustainability initiatives throughout the entire network. 

Conclusion

Procurement teams play a pivotal role in driving sustainable procurement initiatives across supply chains. By focusing on a holistic interpretation of business value and leveraging their core competencies, organizations can successfully transition to sustainable procurement practices. To kick-start sustainable procurement efforts, organizations are advised to evaluate their sustainability position, establish a sustainability strategy, prioritize initiatives, enhance awareness through training programs, and incorporate sustainability requirements into supplier contracts. This comprehensive approach, coupled with a deep understanding of the supply chain composition, lays the foundation for integrating sustainability into daily business practices, which can lead to long-term success in an increasingly complex interconnected global marketplace.