There is increasing pressure from investors, consumers and government legislation for organizations to transform their procurement practices based on ESG requirements. Aside from emissions reduction, these mandates often include waste management, ethical sourcing of materials and labor, and an overarching evaluation of environmental and social impacts across the value chain. Here is a great article from GEP. How Procurement Can Drive ESG Goals for the Enterprise | GEP
Depending on the supplier and situation, there are various strategies that can help them achieve ESG outcomes. For example, for a supplier with whom there is already a strong relationship, procurement can collaborate with them to review performance compared to benchmarks, provide them with improvement areas, set priorities and collaborate with them to advance their sustainability practices.
Additionally, procurement can incentivize suppliers by:
- Motivating suppliers through consistent supplier engagement and being transparent about the weight sustainability carries in procurement decisions
- Including KPIs and/or a bonus-malus structure in the contract; for example, by tying fees/penalties around supplier score improvement goals or decarbonization clauses
- Rewarding progress financially through exclusivity, improved payment terms and co-branding
- Some suppliers may require more support to improve their ESG performance. In these cases, procurement can employ several strategies, such as
- Investing in workshops and training on supply chain decarbonization, ethical labor practices or other ESG areas
- Providing free audits and guidance from experts, which could apply to areas such as energy, carbon, waste and human rights
- Instituting policies that encourage transparency and accountability across all suppliers and incentivize collaboration and communication on ESG outcomes
- Setting up long-term relationships with suppliers so they can overcome expenditure barriers that impede progress on ESG goals