The extreme weather conditions in the UK this summer have focused minds on the need to reduce carbon emissions to tackle climate change. It’s also increased the imperative for companies to address Environmental, Social and Governance (ESG) issues.
Sustainable and ethical procurement remains a priority for Maintenance, Repair and Operations (MRO) professionals, according to the 2022 Indirect Procurement Report, produced jointly by RS and the Chartered Institute of Procurement and Supply (CIPS).
ESG is a key business challenge for more than half of those surveyed for the report (52%), just one percentage point behind reduced operational budgets, which was the top concern.
And 38% agreed that delivering on their organisation’s ESG goals was important, while 57% were confident of being able to execute on those plans.
Martin Wakelin, UK Head of Indirect Procurement at dairy producer Müller, suggests that ESG’s slightly lower rating as a business pressure is a good thing. “It may reflect the fact that it’s becoming embedded as a business-as-usual factor,” he said.
The 2022 RS/CIPS Indirect Procurement report provides plenty of evidence to support Wakelin’s view. Waste recycling, reducing energy use and using renewable energy have all become mainstream activities for the majority of UK organisations, the report shows.
“By 2025, at least 70% of our spend will be with suppliers and vendors who are actively managing, reporting and reducing carbon emissions,” said one MRO professional who responded to the survey.
Another put it like this: “Our focus is on preventing or limiting harmful pollutants within and around the place of work, lowering greenhouse gas emissions, encouraging diversity and only dealing with ethical supply chain partners. Finally, we embrace corporate transparency.”
“You need to work with suppliers who can demonstrate that they are putting their ESG commitments into action every day.” Emma Botfield, Managing Director for the UK & Ireland, RS
Emma Botfield, Managing Director for the UK & Ireland at RS, believes maintaining an ethical supply chain means ensuring that suppliers share your ethical standards. “You need to work with suppliers who can demonstrate that they are putting their ESG commitments into action every day,” she says.
Why is ESG important?
Sustainability is the cornerstone of ESG criteria, which in turn are founded on the United Nations’ 17 Sustainable Development Goals (UNSDGs) that aim to make the world more equal, cleaner and safer by 2030.
“Improving supply chain sustainability is not … purely about tapping into an opportunity for business growth. It is also the right thing to do,” says Kevin Parke, Senior Director of Procurement, RS Group.
“We’re talking about a planet that has a problem and all businesses need to take action to decarbonise, reduce risks and invest in opportunities that support the transition to a low-carbon economy.”
Procurement departments need to be vigilant to ensure suppliers abide by their ESG standards. For example, if a supplier is found to be supplying materials made with forced labour, the buying organisation will not only be in breach of their own ethical procurement policy, but may also suffer considerable reputational and commercial damage.
But it’s not just customers who are likely to turn away; investors may refuse funding. A survey by PwC found that 49% of investors would be willing to divest their holdings in companies not taking enough action on ESG, while 59% said they would vote against executive pay resolutions at annual meetings in this situation.
The PwC survey also found that 79% of investors said the way a company manages ESG risks and opportunities was an important factor in their investment decision making.
“It’s increasingly true that companies must demonstrate their commitment to their ESG values and really live by them.” Bernhard Raschke, Chief Transformation Officer, RS Group
“It’s increasingly true that companies must demonstrate their commitment to their ESG values and really live by them,” says Bernhard Raschke, Chief Transformation Officer at RS Group. ESG ratings are particularly important for institutional investors, he adds.
Sustainability for resilience
In addition to morals and money, Raschke says ESG is also about building resilience.
“Where resilience drives more localised buying, that improves your carbon footprint, but it becomes tougher where companies charge a premium for being sustainable,” he adds.
“You have to make a commercial decision and put a value on sustainability against something you can measure, which is your purchase price. And I think a lot of companies still struggle with that.
“If in doubt, they’ll be looking for short-term savings. So it’s important to put a value on sustainability so that the procurement team doesn’t get penalised for not achieving savings targets.”
ESG at the operational core
Helen Alder, Head of Knowledge & Learning Development at CIPS, agrees. She says ESG and resilience go hand in hand. But she says many organisations aren’t going far enough.
“What comes out of the survey is that companies are still being quite tactical about sustainability, focusing on things like waste recycling or buying renewable energy,” she says. “What’s missing is thinking about the transformational aspect of it.”.
She says that to be truly sustainable, procurement teams need to think outside the box: “They need to be asking ‘what could we do that would completely transform our business into something so much more sustainable?’”
Alder thinks there is another reason why sustainability has slipped from the top of the agenda. “If people are looking at just trying to keep their supply chains going, then it doesn’t surprise me that it’s dropped off the top, because I just think it’s so hard at the minute.
“A lot of firms are on the edge financially, so they’re in survival mode. And maybe investing in long-term strategies at the moment isn’t where they need to be. They’re just literally trying to survive, especially smaller businesses.”
Creating an effective strategy
Nevertheless, ethical procurement doesn’t have to be more expensive. “If you draft your specification to ensure it is more ethically balanced, people tend to assume that’s going to cost more,” says Kate Davies, Global Head of Indirect Procurement at RS Group.
“I don’t agree with that. ESG enforces more innovation from a procurement professional’s perspective because we need to look at the other levers. And it’s not always the case that it will cost more, because it may reduce waste, it may manage demand in a different way which means that we don’t actually need to buy as much.”
So, how can you create an effective ESG procurement plan?
Kevin Parke from RS Group says it is important to learn from other organisations. “There’s lots of advice out there. Talk to your suppliers, understand what they’re doing,” he says.
ESG needs to be integrated into employees’ objectives and work plans and must be supported from the top of the organisation. If you’re unsure where to start, Parke says apply the 80:20 rule and ask, which actions will have the biggest ESG impact?
And he has this final message: “Remember it will become easier to improve ESG, and more specifically sustainability, in your supply chain as more businesses adopt the same agenda and make the same demands.”