By Alan Amling, PhD
This article is part 1 of a 3-part series explaining the what, why and how of Environmental, Social and Governance (ESG), its best practices and the ROI of integrating ESG priorities into supply chain management.
The Call to Action
Environmental, social, and governance initiatives have moved from a “nice-to-have” public relations tactic to an enterprise-wide strategic imperative that deeply involves supply chain management. It’s no longer enough to optimize procurement, operations, and logistics networks to create a competitive advantage. From the board and CEO down, leaders must manage the environmental and social impacts of their end-to-end supply chain or face stark financial consequences, as U.K. online fashion retailer Boohoo found this out the hard way.
From the board and CEO down, leaders must manage the environmental and social impacts of their end-to-end supply chains or face stark financial consequences.
ESG Financial Consequences Case Study
In July of 2020, Boohoo lost over $1.5 billion in market value over two days after revelations of poor working conditions at one of their garment manufacturers came to light. Investors and customers balked at reports that factory workers in Leicester, England, were being paid less than £3.50 per hour and not provided proper Covid-19 PPE. Boohoo told reporters that it discovered its declared supplier was no longer a garment manufacturer, and it was not sure who was supplying all its garments. The manufacturer Boohoo originally contracted with had not operated the factory for two years. Another company took over the factory, assumed the original supplier’s name, and continued to supply garments to Boohoo. Consumers and investors did not give Boohoo a pass. Losing visibility in its end-to-end supply chain cost the company nearly a third of its value. The lesson is clear: To consumers and investors alike, contractors, sub-contractors, and any other participants in a retailer’s extended supply chain are as much the retailer’s responsibility as if the action came directly from the corporate office.
What is ESG?
ESG is the environmental, social, and governance standards by which investors judge a firm’s social and environmental conscientiousness. ESG is often incorporated into a business’s risk mitigation, compliance, and investment strategies and includes a wide array of measurements and best practices. ESG is the term most often used by investors, but public-facing documents usually refer to these practices as sustainability. There is a slight difference between the two. Sustainability language usually emerges from a business’s marketing arm, and many enterprises will have a sustainability report directed towards a consumer audience rather than investors. The central idea behind both however is that organizations should be concerned with long-term sustainability—of their business, the people in their sphere of influence, and the planet. Public concern about corporate trustworthiness and environmental impact has been escalating for decades, but accounting for it has become a strategic imperative for organizations in the last five years.
Broad Opportunities to Improve ESG Performance
- Energy Efficiency
- GHG (Greenhouse Gas) Emissions
- Circular Economy
- Water Management
- Diversity and Inclusion
- Working Conditions
- Employee Relations
- Community Relations
- Human Rights
- Risk Management
- Executive Compensation
- Reporting and Disclosure
- Board Structure
Why is ESG so Important Now?
Many companies have acknowledged climate change, resource conservation, and social justice as important issues for years, but companies limited their involvement in them to philanthropy—or at best a PR campaign—not integrating ESG concerns as part of their core business.
Today, ESG is a critical issue, impacting a company’s growth, bottom line, and ability to attract and retain talent.
- 86% of global consumers expect CEOs to lead on societal issues.
- 58% of employees consider a company’s social and environmental commitments when deciding where to work.
- 64% of millennials won’t take a job from a company that doesn’t have strong sustainability practices.
- Employees are 3 times more likely to stay and 1.4 times more engaged at what they consider to be purpose-driven organizations.
The deluge of statistics that confirm sustainability’s importance, coupled with a confluence of recent events, has driven ESG over the tipping point. Taken singly, each of these events was a storm; together, they are a tsunami.
- Paris Agreement to contain global warming to less than 2 degrees above preindustrial levels
- Over 200 companies pledging net-zero by 2040
- Deadly floods in Europe in July and U.S. in September
- Racial tensions spurred by the police killings of George Floyd and Breonna Taylor
- 181 large U.S. corporations signed Business Roundtable statement renouncing embrace of shareholder wealth maximization to one that delivers value to all stakeholders
- 1,097 organizations hit by ransomware attacks in the first half of 2021 (Cognyte CTI Research Group, August 8, 2021)
- Consumer and investor demands for greater ESG disclosures
- In 2020 letter to shareholders, Blackrock ($8.7T assets under management) CEO Larry Fink said the “tectonic shift” toward sustainability-focused companies is accelerating in the wake of the coronavirus pandemic
ESG is an Investment, Not a Cost
Investment, as the outlay of money for income or profit, is really just sacrificing some of today’s bounty in the hope of a better tomorrow. ESG fits this definition well, and it helps if leaders conceptualize it like R&D or employee training. Sustainability isn’t just a public demand for more responsible management, but an investment unique to each company, depending on its core values and business model. For example:
- Chevron is investing $10 billion through 2028 to begin pivoting from a core strength in fossil fuel to a future where technologies such as biofuels and hydrogen rule the day.
- Patagonia’s trade in program, commitment to fair Fair Trade Certified™ manufacturing, and donations to preserve and restore the natural environment bring their culture to life.
- UPS’s ORION route planning software has saved 200 million miles and 10 million gallons of fuel annually – which saves UPS transport time and money and reduces carbon dioxide emissions by 100,000 metric tons.
Environmental, social, and governance issues touch nearly every operation in an organization, so it helps to consider sustainability practices as investments in three business priorities:
- Investment in Company Values: When it comes to GHG emissions, energy, waste, and water use, more sustainable operations can have an immediate benefit to the bottom line. However, the most impactful sustainability practices seek to correct where your business model might have a far-reaching downstream or upstream effect that undermines your established company standards or creates instability in your supply chain. Investors reward ESG investments when they demonstrate internal control and long-term planning. Consumers reward sustainability investments that demonstrate a company aligns with their own personal values.
- Investment in Economic Stability & Market Growth: The impact of global warming has proven a dire cost to economies across the globe. In mid-July, the deadly floods in Europe cost insurance companies an estimated $12 billion. Damage from wildfires in the Western U.S. cost an estimated $70-90 billion. Over the last 50 years, weather-related disasters have increased by a factor of five, demonstrating that these economic costs and resource disruptions are only likely to become more prevalent. On the social front, the World Bank estimated the global loss in human capital wealth due to gender inequality is over $160 trillion. Investing in more environmentally friendly operations is a minimum step for organizations hoping to thwart global warming’s impact on society as well as their business, and prioritizing diversity can help open new market channels.
- Investment in Future Compliance: ESG regulation is currently a wild card, but one many experts believe will almost certainly be drawn in the near future. How would your company be impacted if a price was put on carbon? E.U. Emissions Trading System models suggest the price could be between $50-100 per ton of CO2 to start. To contextualize that price, at $100/ton, Exxon would owe about $11B annually on their own emissions. This summer, the British government said it would pursue a new law forcing big companies to clean up their supply chains by fining them if they used products grown on illegally deforested land. If delivery is part of your business, consider that 15 major cities worldwide are starting to ban cars. If companies don’t spend some time and resources to prepare for these potential actions in advance, they will spend multiples more cleaning up the mess.
Supply Chains are the Front Lines of ESG, Like it or Not
The supply chain’s outsized environmental impact shouldn’t be surprising. The transportation sector generates 29% of greenhouse gas emissions in the U.S. and 14% worldwide. Supply chains likewise have an enormous social responsibility, employing an estimated 450 million people across every corner of our planet.
The environmental and social challenges of our time will not get solved unless executives and supply chain leaders meet the challenge head on. Though supply chain management professionals are aware of their responsibility, few feel equipped and supported to take actionable steps. A 2021 survey of third-part logistics providers showed that 83% included ESG in their supply chain and growth strategies. However, the same study revealed only 43% had executive sponsorship, and only 30% had structured ESG goals and plans.
To borrow a phrase from Smokey and the Bandit, “We’ve got a long way to go and a short time to get there.”
To be sure, supply chain organizations are making real progress to improve visibility and traceability and increase supplier audits to avoid their own “Boohoo moment.” Instituting supplier diversity and carbon offset programs, increasing commitments to all-electric delivery fleets, and making packaging environmentally friendly are top actions being taken by companies.
Broad Opportunities to Improve ESG Performance
- Spending on diverse suppliers rose an average of 54% between 2017 and 2020 (Coupa, 2021)
- Intel has increased it’s spend with diverse suppliers from $299M in 2015 to $1.2 in 2020 (intel.com)
Carbon Impact Reduction
- UPS has offered a Carbon-Neutral shipping option since 2010
- FedEx donated $100m to fund a new center at Yale University focused on developing natural solutions for reducing atmospheric carbon
Alternative Fuel Vehicles
- FedEx will replace 100% of it’s parcel fleet with electric vehicles by 2040
- Amazon has contracted Rivian to produce 100,000 electric delivery vans by 2030 with 10,000 delivered by 2022
- Colgate-Palmolive developed an industry-first recyclable toothpaste tube and shared the technology with their competition
- Mondelez is making all their packaging recyclable by 2025
There is No ‘One-Size Fits All’ Program
Just like there is no single supply chain strategy that is correct for all companies, there is no single right ESG strategy for every company. Every company will prioritize different ESG elements and have different sustainability challenges. Modern sustainability programs do have one common element, however.
Companies need to move from a reactive approach—only considering ESG issues as a side-line business element—to integrating ESG as a proactive business strategy.
Also, because ESG action must be taken before outcomes are proven, senior leadership commitment is essential. Much like a volcano that smolders for years before blowing, slow-moving threats like rising sea levels or social unrest may not significantly impact your organization today. However, left unchecked their devastation will reach your bottom line and beyond: rising sea levels will swallow communities, unrest will turn into revolution, markets, supply lines and even whole ways of life might disappear overnight like they did with Covid-19. Only senior leaders are in a position to make the necessary tradeoffs between short-term demands and long-term prosperity. Senior leadership must focus beyond the next quarterly report, and you can help convince them by showing them that many investors are already doing so.
Where to Begin with a Sustainability Program
ESG should be considered part of all business decision-making in order to stay on top of the longer-term changes necessary to be successful. Consider these five steps:
- Measure & Assess. Determine where you are in each component of ESG. Review different ESG reporting frameworks such as The Global Reporting Initiative (GRI) and United Nations Sustainable Development Goals (SDGs) to determine measures most appropriate for your company. Alternatively, hire a firm to conduct an independent assessment and help develop an implementation plan tailored to your needs.
- Map Out Stakeholders. Identifying your most important stakeholders and engage them early in the process will help you narrow the universe of sustainability initiatives to priorities that will have the most significant impact on your business and how you affect the world.
- Prioritize Company Values. Focus on areas that complement your corporate strategy and drive the most significant impact. For example, low-cost leaders may want to highlight waste reduction, and customer experience champions could focus on employee relations to ensure stellar customer service.
- Set ESG Goals & Measurements. A typical path is to PLEDGE – PLAN – PROCEED – PUBLISH. Interim goals and reporting are essential to the credibility of your commitment. For example, on the way to Intel’s pledge to double diverse supplier spend by 2030, they set three interim goals: $250M with U.S. Black-owned suppliers and $800M with minority-owned suppliers globally by the end of 2023, and $500M with women-owned suppliers by the end of 2025.
- Build Momentum. By demonstrating the win-win of ESG to stakeholders, you will garner financial support and resources to propel future initiatives. Waste reduction and route optimization are two examples of win-win for the environment and your bottom line.
Best Practices and ROI
Our next article will address the ‘how’ of sustainability, highlighting best practices in ESG to uncover the strategies, structures, and tools achieving actual results today. Our last article will focus on the ROI of ESG, underscoring how being a good corporate citizen and driving bottom-line results are not mutually exclusive.
About Maine Pointe
Maine Pointe, a member of the SGS Group, is a global supply chain and operations consulting firm trusted by many chief executives and private equity firms to drive compelling economic returns for their companies. This is achieved by delivering accelerated, sustainable improvements in resilience, EBITDA, cash, and growth across their procurement, operations, logistics, and data analytics. SGS-Maine Pointe’s hands-on implementation experts work with executives and their teams to rapidly break through functional silos and transform the plan-buy-make-move-fulfill digital supply chain to deliver the greatest ethical value to customers and stakeholders at the lowest cost and risk to business. We call this Total Value Optimization (TVO)™. www.mainepointe.com
SGS is the world’s leading testing, inspection and certification company. SGS is recognized as the global benchmark for quality and integrity. With more than 93,000 employees, SGS operates a network of 2,600 offices and laboratories, working together to enable a better, safer and more interconnected world. www.sgs.com
SGS has been delivering ESG and sustainability solutions and services to clients for the past 25 years and has been a carbon-neutral company for the past 7 years.