Driving ESG Principles Through Your Supply Chain
By: Deep Parekh
Tags: Sustainability, Society, Supply Chain, Environment, Esg

Driving ESG Principles Through Your Supply Chain

First, lets see some facts to establish the scope of what we are talking about:

Environment

According to a recent MSCI study and white paper, about 95% of the environmental footprint of companies is driven by the supply chain (retail, telecommunications, automotive, personal and household goods, and media).

Source: MSCI study (2019) to attribute environmental impact to supply chains.

Social

The United States Department of Labor Statistics demonstrates that 37% of the population (44 million people) are engaged in supply chain jobs. Meanwhile, the International Labor Organization (ILO) states that 25% of the global population is engaged in a ‘Global Supply Chain’ job. Specifically, a Harvard Business Review article pointed out that there is a growing trend in supply chain traded services (e.g. procurement, freight forwarding, third party logistics, and contract manufacturing) and a downward trend in traditional manufacturing in the US context. Everyone involved, from the fairtrade farmer through to the third party stock-replenishment employee at the warehouse is part of this workforce. Their families and their welfare are part of this equation.

Source: Delgado M. & Mills K.. (2018) “The Supply Chain Economy and the Future of Good Jobs in America”, Harvard Business Review.

Governance

There are two ways to look at governance — positive and negative:

Negative: The Financial Times recently wrote that some EUR 500 billion in market capitalization was wiped off US enterprises’ value because of “ESG related controversies;” many of these were around transparency and disclosure, but as many were around management reviewing the right metrics and creating sufficient contingency planning around these metrics;

Positive: Unilever’s claim is that through sustainability and governance, their purpose-led brands outperformed other brands by 50% growth in sales. People want brands with purpose and companies that are well-governed, transparent, and align with their own values and beliefs.

Supply Chain at the Heart of ESG

Source: ESG8 (2020) | Supply Chain design is at the heart of an enterprise’s ESG Mandate

The supply chain configuration drives ESG outcomes across the enterprise and across the world. Since the supply chain function has implications across all the ESG factors in some depth, it is only natural that it should be the epicenter of the pursuit to be more environmentally astute, socially beneficial, and governed with transparency and risk-management remits.

The importance of ESG as a core attribute of supply chain design and configuration cannot be ignored. Ignoring ESG drivers significantly sub-optimizes the supply chain and undervalues the business purpose of an enterprise. Companies that don’t drive their ESG mandates through their supply chain are doing nothing more than ‘green-washing’ for sporadic and superficial gains.

ESG Mandates a Transformational Shift for the Supply Chain

We have seen the different ages of regulation, deregulation, globalization, digitalization drive transformational shifts through the supply chain and the enterprise as a whole. ESG is the next transformation.

Source: ESG8 (2020) | A fundamental shift in our foundation of our operating model

For the supply chain, the traditional philosophy is to take in all the demand inputs (typically projected sales, innovation launches, seasonality, promotion or events), supply inputs (typically materials supply, production capacity and capability, and distribution capacity), customer expectations (typically service levels and lead times), financial constraints and targets (typically budgets, cost parameters, trade working capital constraints, cash flow) and develop a feasible plan that tries to optimize between all these inputs.

Notice something? Yes, there is no explicit factor for sustainability — neither environmental, societal, nor corporate governance.

Perhaps a few levels below the deck, the production function looks at the overall ‘Safety, Health, Environment, and Quality’ or ‘SHEQ’ factors for regulatory purposes, but the focus on these is to stay within the regulation and nothing more.

The fundamental shift for the supply chain function would be not just to take into account all of these aforementioned factors, but in fact to put ESG factors at the base of all the decision-making activities, and build the entire plan on top of these factors. Think about it, how would the supply network change if the company selected ONLY suppliers that produced sustainable materials using renewable resources? The cost profile would change as well, as would working capital, if the supplier network is far away from the production facility. Similarly, using a different set of distributors that promote ethical standards and pay their employees a ‘living wage’ (vs. ‘minimum wage’), the distribution may cost more but meet the service level requirements. Further, customers might be more open or even preferential to these methods and practices as it also supports their sustainability agenda.

One of the companies that is already practicing this is Unilever. In a recent interview that we conducted with the Senior Vice President of Supply Chain for Refreshments for the Americas, we discussed the Ice Cream business:

“We are starting to buy more expensive chocolate because it is sustainably sourced. We are not launching certain types of ice cream with fruits because we are unable to buy from suppliers that are sustainable.”

Supply Chain Must Lead the Way in Sustainability

This is the fundamental transformation that needs to occur in the supply chain is the inclusion of ESG factors as an active part of decision-making, and not just an output factor that they think they need to manage around. This will be difficult at first, but the information required to make such decisions is already widely available within the confines of the enterprise, and other players like ESG8 are emerging with the right analytical techniques, design approaches, and qualitative standards for such businesses.