For many years, calls have been getting louder for business leaders to pay more attention to their organization's environmental, societal, and governance (ESG) strategy. This pressure is now intensifying from all directions, from customers to employees, investors to governments. If companies don’t move faster, they won’t be able to deliver on their ESG commitments, and risk losing market share, investors, and talent. With so much at stake, we believe that the procurement function will be key to enabling and accelerating ESG initiatives.
Capitalizing on the skills and experience of the procurement teams will be key to advancing sustainability far and fast enough in the future. To make a meaningful transition towards sustainability, it’s important to focus efforts and metrics not only at the company level but also grasp the full scope of supply chains. While organizations themselves may be diligent in minimizing their ESG footprint, when taking suppliers into consideration, this could be between two and eleven times larger than that of their internal operation.
The Impact Of Procurement On ESG
Source: Oliver Wyman analysis
Having procurement champion supplier diversity, for instance, can make a significant difference to communities but can also have an upside for company revenue, as customers are increasingly keen to purchase products or services from brands they perceive to be committed to diversity and inclusion. Sourcing from diverse suppliers also creates jobs in much-needed areas, which is another driver of social change.
Put simply, only procurement has the capabilities to ensure that their organization not only performs well but is more socially and environmentally responsible. This is because procurement alone has the most comprehensive overview of corporate ecosystems, including internal structures, suppliers, assets, and customers. With this comes the ability to shape the vision and create value by selecting and supporting partnerships, structures, and relationships that best support their ESG agenda.
ESG is arguably the most important factor in organizations’ resilience and long-term value, so the need to act is sharply increasing. But there is a lot of work to be done to convert awareness and concern into clear science-based targets, robust strategies, and effective actions.
If organizations are serious about addressing the gulf between intention and execution of their ESG policies, Chief Procurement Officers (CPOs) must assume leadership for ESG at the executive table. This will help senior leaders to prioritize the most important sustainability issues, minimize risks, and engage stakeholders across the business. By shaping, communicating, and executing the ESG agenda, procurement will be in a unique position to cement sustainability as an instrumental pillar in the organization’s strategy.
In a recent study we conducted of CPOs of the top 300 companies across the United States, Europe, and Asia Pacific, more than half of companies acknowledged that they had not yet reached a supplier engagement level of 60 percent, meaning half their spend in direct procurement categories is not tracked from an ESG perspective. This figure is even worse for indirect categories (such as services), where the ratio decreases to 40 percent. This highlights the urgent need for organizations to take a more proactive and methodical approach to understand the ESG activities of their suppliers.
To address this, our twelve-point sustainable procurement playbook outlines how organizations can create and implement an ESG-strategy that works for shareholders, suppliers, employees, customers, and for broader society:
The Sustainable Procurement Playbook
Source: Oliver Wyman analysis *TCO - Total Cost of Ownership; EP&L - Environmental Profit and Loss
Business sustainability is a daunting topic but will influence some of the most important decisions organizations will take in this era. Approaching ESG in the right way gives leaders an opportunity to reframe the future, one where growth and resilience defines our post-pandemic world.