“What we are seeing is companies have made the decision that they believe being more sustainable is good business. Therefore, that is the number one priority.” – Daniel Dorr, VP of Marketing at Supplier.io
ESG is an increasingly important part of managing global supply chains, but many organizations overlook the inherent risk that is oftentimes hiding in plain sight.
In this podcast episode based on an AOP Live session, Kelly Barner and I speak with Daniel Dorr and Laura Noonan from Supplier.io and Alexandra Di Fabrizio from Impak Analytics about their findings from over 200 in-depth ESG risk assessments. They share the highest risk areas associated with ESG, mitigation best practices for procurement teams, and opportunities to strengthen procurement’s role in the business by lowering ESG risk in the supply chain.
Our conversation spanned a wide range of topics within risk mitigation and ESG. Here are a few of the highlights from that conversation, in their own words:
Supply Chain Emissions Impact
“About 80 percent of a company’s emissions – overall greenhouse gas emissions – can be found in the supply chain. The ability to be able to reduce those emissions – whether you are working on reaching a science-based target commitment that your company has, or trying to lower overall emissions – the only way to do that for most companies is to be working very closely with their supply chain and to be figuring out ways in which to reduce those emissions.” – Laura Noonan
Risky Supplier Practices
“The first thing that comes to mind is climate risks. […] With more and more investors pushing for full disclosure of climatic impacts – like I said, the importance in measuring Scope 3 emissions is really rising – Scope 3 emissions are often misreported due to the complicated nature of collecting all 15 categories.” – Alexandra Di Fabrizio
Procurement’s Evolving Role
“We have been on this journey for the last few years as procurement professionals, getting our seat at the table, and now more and more being involved with the CEO and board-level discussions. While the data is the kind of data that the bankers and the CFO care about, as procurement professionals, we need that level of rigor to be able to go in and have exactly that conversation.” – Daniel Dorr
How to Talk to Suppliers About Risk
“I always say that the thing that I think can really be helpful and can really arm you is going in and having a conversation with a supplier to manage that performance with data in hand. You have already done an analysis. You know where the risk is.” – Laura Noonan
Industries with Stricter ESG Regulations
“Industries facing stricter ESG regulations are typically those with a significant impact on the environment, public health, safety, or social welfare. We are really looking at the energy industry, chemical and pharmaceutical companies, automotive, transport, and there is also a geographical element that affects the level of regulation as well.” – Alexandra Di Fabrizio
How Adversarial Supplier Relationships Increase Risk
“If you are relatively new to this process and you are in an adversarial relationship with your suppliers, for example, you may get a low price, but you may be introducing a lot more risk which means getting the data and the information is a real problem.” – Daniel Dorr
Industries with High Risk Tolerance
“If you are in a manufacturing environment, oil and gas, areas where you have high environmental output, you are going to have a higher tolerance for that risk, and you are going to understand that, based on the actual sector that you are in, there are different criteria or ways to look at risk and what is material based on that industry.” – Laura Noonan
Importance of Governance in ESG
“We think of S, but there is also a G here. G is really big because we include the term ‘supply chain management’ under governance risks, but it is really supply chain management of ESG under the G. It is a bit confusing, but it did emerge as a significant concern with 45 percent of companies facing material exposure to supply chain management risks.” – Alexandra Di Fabrizio
Social Risk is High Priority for Procurement
“Modern slavery – we call it more of an umbrella term of poor labor and working conditions – affects around 45 percent of companies in our assessment. This is not just forced labor but also migrant workers, especially when you are talking about the oil and gas industry or certain geographical areas.
Poor working conditions can lead to labor unrest, strikes, boycotts, and that is where we really see the production delays and the shortages. That is more of our financial risk side of things. The more impact risk side of things will also include reputational damage. Obviously, reports of forced labor or child labor or other human rights abuses in the supply chain can severely tarnish a company’s brand image. We have seen that over the past 20 years in news media.” – Alexandra Di Fabrizio
ESG Journey Progression
“With immature reporting companies or companies that are just starting off on their ESG journey, you will mostly see these governance risks being addressed and mitigated, then we might have really poor mitigation on E and S, but at least we know they are moving somewhere.” – Alexandra Di Fabrizio
Find Your ESG Champion
“On the flip side, if you are looking to engage your stakeholders, do not only look for a few wins. Do not just highlight the supplier that brought you that win. Highlight the business leader that is driving change at the company and make him or her a hero.” – Daniel Dorr
Recognizing the presence of risk in your organization and supply chain is just the first step in minimizing threats to the business. It’s what you do next that really counts. Having a strong mitigation strategy that includes ESG is the key to identifying and then minimizing looming threats.
Subscribe to Art of Procurement
Apple | Stitcher | iHeart Radio | Email
