The Importance of ESG in Your Supply Chain

No matter the name or acronym the initiatives take, companies across the world are investing in being better global citizens. You don’t have to look too far down the organizational charts of large corporations to see titles relating to environmental and social governance (ESG).

ESG-oriented investing has experienced a meteoric rise. Global sustainable investment now tops $30 trillion—up 68 percent since 2014 and tenfold since 2004.

And for good reason.

Customers, investors, and government regulators expect companies to understand and manage the impacts their operations have on the environment and society as a whole. Beyond that, there is an expectation that companies create greater value to the benefit of the collective. That is, they put more back into society than they take out. 

Within this umbrella of ESG, is the concept of supply chain sustainability.

Increasingly, enterprises are including the companies with whom they do business in their ESG initiatives. Beyond mitigating social and environmental risks within the supply chain, there are copious rewards offered by enabling responsible supply chain partners: sustainable supply chains can be a strong driver of financial value for the business.

Why is ESG Important in the Supply Chain

However, as suppliers are beyond a company’s direct span of control, supply chains can open up the business to risks like environmental damage, human rights violations, and scandals. These are issues that can damage financial viability, reputation, and operation of a business.

Being a responsible corporate citizen with a model ESG program is a great aspiration for companies globally, but achieving that goal is hard. It’s even more difficult in the supply chain. When studying suppliers of three multinational companies in 2020, The Harvard Business Review found that, “many were violating the standards that the corporations expected them to adhere to. The hoped-for cascade effect was seldom occurring. They cited the backlash Apple, Dell, and HP faced “for sourcing electronics from overseas companies that required employees to work in hazardous conditions, and the fallout that Nike and Adidas suffered for using suppliers that were dumping toxins into rivers in China.”

According to the organization Principles for Responsible Investment, the direct impacts on businesses from ESG failures in the supply chain include: 

• interruption of flow of materials, including raw materials or components;
• impact on delivery times with knock-on effects to customer satisfaction; 
• poor financial management of the supplier leading to inability to supply goods on time; 
• loss of social license to operate resulting from major reputational concerns linked to pollution, human rights abuses, corruption, etc.; 
• increase in cost of materials as companies are forced to change their suppliers last minute.

With those consequences (and others) looming, it is easily understandable why companies are making every effort to increase ESG initiatives into their supply chains.

The Benefits of ESG in Supply Chains

“We live in an increasingly resource-aware and resource-constrained world,” said Kris Gopalakrishnan, CEO and Co-Founder of Infosys. “We need to live within our means and not borrow from the future. To build a sustainable tomorrow, we need to make our supply chain sustainable today. In fact, I firmly believe that increased sustainability in the supply chain reduces risks and increases profits for all organizations and stakeholders”

Again, according to Principles for Responsible Investment, managing ESG factors in supply chains brings both short-term and long-term financial benefits, including:

• Quicker response to emerging regulation or legal obligations which incur supply chain responsibility;
• Protecting licenses to operate and avoiding loss of governmental contracts; 
• Increased stakeholder confidence;
• Significant opportunity for companies to develop long-term, trusting partnerships with direct suppliers; 
• A reduction in costs through better financial risk management;
• Enhancing business continuity;
• Higher company revenue from increased labor and process productivity;
• Improved environmental performance;
• Formal supply chain management procedures can make companies more attractive to investors and customers.

Focusing on environmental and social governance in your supply chain – and business practices as a whole – is important to drive productivity and save your business money. Companies are already experiencing the financial consequences of failing to act on sustainability and the financial and banking sectors have integrated ESG rules into their funding criteria. Customers demand a higher level of consciousness from the companies they do business with. ESG is no longer a nice-to-have for companies, but an imperative that can dictate success or failure.

To learn more about about how LSQ can help your business meet its ESG goals, visit lsq.com/platform/accounts-payable/supply-chain-finance/.