Amid growing consumer and investor pressure, shifts in government regulations, and new reporting frameworks, companies increasingly recognise the importance of embedding environmental, social and governance (ESG) into their supply chain and overall corporate strategy. Nowadays, the question is no longer about whether the company has an ESG strategy in place but rather how it’s tracking in terms of its ESG goals.
To evaluate progress, it’s crucial to set and monitor ESG metrics. In this article, you’ll learn the value of getting ESG right and how keeping track of ESG metrics can help minimise costs and improve supply chain resilience.
How Getting ESG Right Benefits Businesses
Getting ESG right brings numerous direct and indirect positive outcomes to businesses and stakeholders.
For consumers, ESG practices provide excellent product choices, improved customer experience and better product quality. For instance, Patagonia encouraged recycling and reducing waste by providing enhanced after-sales service options such as return or repair. Meanwhile, investors secure higher long-term returns while reducing risk by adding sustainable investments to their portfolios.
Internal stakeholders, especially those who belong to minorities, enjoy better working conditions and economic stability. One example is how American Express committed to double its annual spending with minority-owned suppliers to US$750 million by 2024. Furthermore, companies with strong ESG commitments can help governments meet their own carbon reduction and sustainability goals.
Improving Cost-Efficiency and Revenue By Tracking ESG Metrics
Amid the tightening regulations that require companies to meet their ESG targets, the need for proper tracking and reporting becomes more important than ever. Without ESG metrics and a solid strategy integrated into supply chains, there’s a higher risk of legal costs, fines and reputational damage.
The U.S. Uyghur Forced Labor Prevention Act (UFLPA) that was passed in 2021 bans goods produced and mined China’s Xinjiang Uyghur Autonomous Region, where state-sponsored forced labor is widespread. Violation comes with a great risk, as it may lead to the immediate seizure of goods, which may, in turn, result in supply chain disruptions and civil or criminal penalties. To avoid such repercussions, importers must provide proper documentation of ethical labor practices– something that is easily achievable with robust tracking and reporting measures in place.
The EU’s Corporate Sustainability Reporting Directive and Germany’s Supply Chain Due Diligence Act also require sustainability reporting, and non-compliance can lead to financial penalties and damage to reputation. These regulations further highlight the importance of setting up mechanisms to track and report compliance for cost avoidance.
Aside from helping companies avoid penalties, ESG efforts can also reduce costs. For instance, contrary to popular belief, adopting renewable energy doesn’t require massive investments, but the long-term savings can be significant. Companies can also start small and explore options such as renewable energy credits and virtual power purchase agreements.
Furthermore, renewables are becoming increasingly competitive in terms of cost, making them attractive alternatives for power generation. Renewable energy generation has reached or even surpassed price parity with fossil fuel-based power generation in many parts of the world. According to the International Energy Agency’s Electricity Market Report 2023, the share of renewables in the global power generation market could increase from 29% in 2022 to 35% in 2025.
Green subsidy schemes are also being implemented to promote the switch to clean energy options. For instance, through the Inflation Reduction Act (IRA) of 2022, the U.S. government has committed to direct US$400 billion in investments to reduce greenhouse gas emissions and offers tax breaks on clean energy projects.
To track consumption and quantify cost savings after making the transition, organisations must utilise energy reporting tools. Using the data and insights generated by these tools can help optimise strategies for improved cost-efficiency.
Beyond cost savings, companies with robust ESG policies and a track record of successful sustainability initiatives also witness increased revenue and access to cheaper capital, as consumers and investors are increasingly directing their capital towards them. With 85% of investors considering ESG in their investment decisions, it’s crucial for companies to track, measure and report their ESG efforts and performance transparently.
Building Supply Chain Resilience
ESG and supply chain resilience are interconnected, particularly in risk management. Identifying, analysing and managing risk are key to building supply chain resilience.
Meanwhile, in order to achieve ESG goals, companies must maintain transparency, environmental consciousness and socially responsible practices. They must monitor and measure ESG for compliance, which requires visibility into supplier operations to assess risks within supply chains effectively.
Hence, by having a reliable supplier risk assessment system and a supplier relationship management framework, businesses can build supply chain resilience and succeed in their ESG initiatives at the same time.
Achieving Business Goals Through Effective ESG Tracking
One of the most common misconceptions about the integration of ESG in corporate strategy is that it can’t coexist with cost-efficiency and revenue improvement initiatives.
However, to achieve ESG goals while building supply chain resilience, managing costs and increasing revenue, companies must not only put an ESG strategy in place but also set metrics and key performance indicators that will be tracked to monitor progress. By using tools that will measure and report ESG performance across the value chain, organisations can optimise ESG strategies and achieve better outcomes not only for the business but also for society as a whole.
Posted 31 Jul 2024
