Procurement sits at the forefront of an organization’s social and sustainability efforts. This is because organizations are now judged not only on their internal practices, but also on their ability to enforce ESG standards throughout their extended supply chains.
As pressure from these challenges increases, supplier collaboration emerges as a critical lever for achieving various ESG objectives.
Reducing Carbon Emissions in The Supply Chain
According to research by PwC, between 65% and 95% of most companies’ carbon impact falls within its supply chain, under Scope 3 of the Greenhouse Gas (GHG) Protocol. Notably, PwC also found that up to 80% of these Scope 3 emissions stem from just 20% of purchases, underscoring the need for targeted action. These figures underscore the critical role that supplier collaboration plays in achieving environmental goals. While reducing these emissions might seem daunting, the task becomes more manageable when broken down into specific, actionable steps, supported by strong supplier relationships and supplier collaboration.
Gain full transparency into carbon footprints. Measuring supplier-specific Scope 3 emissions is vital, albeit challenging. While spend-based averages offer a rough estimate, supplier-specific data provides the precision needed for effective emission reduction strategies. Collaborate with and prioritize suppliers with the highest carbon reduction potential. Increasingly, suppliers will be more able and willing to participate in joint reduction projects if it means more contract opportunities.
Embed sustainability into supplier onboarding. Aligning with internationally recognized standards, such as the Science Based Targets initiative (SBTi), helps ensure your procurement teams only engage with suppliers committed to sustainability. Continuous monitoring and engagement with suppliers are necessary in order to foster collaboration in emission-reduction efforts. By prioritizing sustainable suppliers, companies can achieve emission reductions of 10% to 30%, according to PwC.
Proactively manage risk. Real-time visibility across the entire supply chain, enabled by advanced procurement technologies, allows companies to anticipate and mitigate risks that could hinder their emissions targets. Integrating third-party monitoring data and compliance checks into internal systems and procurement processes ensure compliance with environmental regulations, minimizing potential penalties.
Drive efficiency. Cost management and decarbonization efforts are becoming aligned as decarbonization is increasingly incentivized. The European Union’s Carbon Border Adjustment Mechanism (CBAM), for example, illustrates how regulatory frameworks are driving decarbonization by rewarding companies that reduce supply chain emissions. Efficient procurement processes are essential for balancing cost efficiency, value creation, and sustainability objectives. Leveraging automated systems and data-driven insights can help organizations stay agile, enabling efficient, sustainable decision-making that delivers both environmental and economic value.
Ensuring Ethical Practices and Diversity in the Supply Chain
Demands by stakeholders are growing for organizations to enforce ethical practices throughout their supply chains. There’s a greater expectation that companies address issues such as forced or child labor and ensure inclusive business operations and supplier diversity. There are several steps procurement can take to foster social responsibility throughout their supply chains.
Drive supplier transparency. Modern technology can be leveraged to provide transparency into social risks that lurk within the supply chain, and help procurement teams identify and address unethical practices. The passing of legislation such as the German Supply Chain Due Diligence Act underscores the urgency of this task. Beyond compliance requirements, fostering social responsibility is important for business performance. Consumers increasingly prefer to buy from companies that demonstrate a commitment to ethical practices.
Enhance supplier diversity. In many countries, ensuring diversity in the supply chain is not just a social responsibility — it’s a legal requirement. Technology can help companies identify and engage with diverse suppliers that also meet key business criteria, thereby fostering inclusion and broadening the supply base.
Upholding Ethical Standards and Managing Risks
Governance risks include corruption, bribery, data breaches and anti-competitive practices. Effective governance in the supply chain is crucial for maintaining ethical business operations and protecting the organization from legal and reputational harm. Key steps include:
Rigorously screen suppliers. Ensure compliance with ethical standards by screening suppliers against sanctions lists and politically exposed persons (PEP) lists. This is especially important in sectors dealing with primary materials like oil, gas, and rare metals, where governance risks are particularly high. Additionally, robust data-protection measures are essential to prevent breaches that could expose sensitive supplier information.
Consistently collaborate with suppliers. Clearly communicate ESG expectations with your suppliers, and include these expectations in contracts from the start of the relationship. Offer continuous feedback, performance monitoring and ESG training. Build a collaborative relationship where you identify and resolve issues together. Offer rewards to suppliers who excel in meeting ESG goals. This approach fosters a culture of continuous improvement.
Building a Sustainable Future Together
As businesses face mounting pressure from governments, consumers, and stakeholders to address ESG issues, procurement professionals must rise to the challenge by leveraging supplier collaboration to ensure compliance and best practices in the extended supply chain. By fostering strong, transparent relationships with suppliers and embedding ESG considerations into every aspect of procurement processes, companies can make significant strides toward reducing their carbon footprint, ensuring ethical practices, and upholding governance standards.
Ultimately, the success of these efforts hinges on a shared commitment to sustainability, where suppliers and procurement teams work together to build a more responsible and resilient supply chain.
Georg Roesch is VP of Direct Procurement Strategy at JAGGAER.