Mitigating ESG Risks in Supply Chains: Why Supplier Visibility & Collaboration Hold the Key

If you are a business leader, you must be aware of your business’ environmental and social responsibilities. You may also have in place a structured ESG program with some pre-defined targets.

But can you say the same thing about your suppliers?

Do you monitor the ESG performance of your suppliers? How do you evaluate this aspect of supplier operations? Do your suppliers (and suppliers’ suppliers) share data related to emissions and other key parameters? If they do share this data, how can you determine it is accurate?

These are just a few risks associated with monitoring ESG performance in increasingly complex supply chain networks.

Another key challenge for businesses is how to take their ESG goals forward and transform them into actionable plans, says Von Ying Lee, manager of consulting at GEP in this podcast.

Having that knowledge is critical for businesses to meet the growing demands of their stakeholders, she adds.

Key Challenges and Risks of ESG Monitoring and Reporting

1. Lack of Visibility:

Businesses do not have end-to-end visibility of their supply chains. In many cases, they do not even know their suppliers’ suppliers. In such a case, it is very difficult to determine if ESG practices are being implemented at the grassroots level in the operations of lower-tier suppliers. For example, your tier 1 supplier may be adhering to ESG standards but may not have clear visibility into third-party suppliers’ operations.

2. Internal Data and Process:

Setting up internal processes to track ESG metrics and performance is another key challenge. While most businesses understand the significance of implementing an ESG strategy, they haven’t figured out a way to operationalize their ESG targets. They do not know how to translate their goals into actionable plans. Another key challenge relates to developing accurate baseline data to kickstart the program. Lack of expertise and cross-functional collaboration increases the risk of collecting inaccurate ESG data.

3. External Factors:

For comprehensive ESG tracking, enterprises need to look beyond their own business and production processes. Suppliers, especially those beyond tier 1, are often not fully aware of ESG regulations and reporting standards. Even if they are aware, they do not have a clear process or a technology framework to measure and share data related to emissions, waste and other metrics.

4. Lack of Resources and Technology:

Despite growing ESG awareness, businesses do not have sufficient resources dedicated to this aspect of their operations. In addition to a lack of resources and human expertise, many enterprises currently do not have the right technology that can automate data collection and reporting of ESG metrics. Different business units or functions may be following different methods of measuring ESG data. This hampers the collection of standardized and accurate data.

5. Multiple Regulations:

The overall regulatory framework around ESG is complex and varies across regions and industries. Businesses need to understand a wide range of ESG reporting standards and disclosures as well as any changes associated with them. In many cases, companies are required to report under several standards at the same time, which creates confusion.

For example, the rules concerning supply chain emissions, also known as scope 3, are rapidly evolving in different regions. This means that businesses need to quickly get familiar with the changes made.

Also Read: Why You Must Prioritize Supply Chain Risk Assessment in 2024

Collaboration with Suppliers is Key to Building a Successful ESG Strategy

With increasingly stringent regulations, ESG concerns have gained a lot of attention in recent times, particularly in supply chain operations where they are often overlooked.

Several studies have shown that a majority of emissions and other ESG-related risks originate in supply chains. It is therefore imperative for a business to have a mechanism in place to collect supply chain data. Among other things, this requires a business to actively engage with their suppliers.

Businesses also need to ask the right questions to effectively monitor ESG and sustainability in supplier operations.

For example, companies are increasingly asking for life cycle analysis (LCA) and cradle to cradle (C2C) certifications to check raw materials, says Jagadish Turimella, chief operating officer at GEP in an interview with SupplyChainBrain. Life cycle analysis helps determine the suitability of raw materials used in product manufacturing and design.

At the same time, businesses need to invest in technology that can automate supply chain data collection and reporting.

Technology has made it possible to convert spend and supplier invoice data into emissions data, Turimella adds.

This can help a business map its supply chain emissions and identify key focus areas that must be addressed first.

Active collaboration with suppliers, alignment with internal processes and investing in the right technology can streamline ESG monitoring in supply chains.

Learn how GEP GREEN can help your business meet ESG goals.