For businesses across the globe, the integration of sustainable practices into corporate strategy is now increasingly necessary to meet stakeholders’ expectations and regulatory requirements. As it turns out, it's not easy being green without looking beyond company boundaries – a sustainable approach to buyer-supplier relationships is the only viable choice for any company's long-term success.
Companies worldwide are running a busy sustainability agenda, outpacing the competition in setting ambitious goals. Working toward progress, they tend to realize that a significant portion of the impact they’re trying to achieve sits outside the company walls, in their supply chains.
Take the example of reducing greenhouse gas footprint: transition towards net zero requires addressing Scope 3 emissions. In total, working on reducing direct emissions by transitioning to low-carbon operations (Scope 1) and changing the purchased electricity mix to renewables (Scope 2) make for a small impact. For a company, the bulk (up to 90%) of its carbon footprint is indirect emissions within its supply chain operations.
Scope 3 emissions represent up to 90% of a company’s carbon footprint.
Yet only 4% of the companies screen their Scope 3 emissions.
From Carbon Maturity Report 2022: The State of Climate Action in Global Supply Chains.
We Need a New Approach to Move Forward
The main obstacle to achieving net zero (and other environmental, societal and governance goals) is that implementation lies outside a company’s sphere of influence. Well, not entirely – applying pressure or incentives in some cases can encourage suppliers to promote a company’s sustainability goals. The dilemma is to figure out how to motivate suppliers that seem to require that extra push, while not straitjacketing them with arbitrary targets.
Companies must be more discerning about the targets they set for their partners and how they monitor progress. When they attempt to measure the performance of their suppliers, they are likely to run into challenges. For one, establishing whether corresponding data is available may be a significant obstacle. Two, not all suppliers will have the capacity to report on their performance due to a lack of in-house resources or know-how. Also, they might be over-stretched thanks to hundreds, if not thousands, individual and recurring requests to disclose sustainability data.
Buyer companies are adopting various methods for changing their suppliers’ sustainability practices – cascading codes of conduct, fielding audits and questionnaires – to help suppliers establish a sustainability strategy that supports buyers’ goals. But they can’t begin working with their supply base to advance those goals until they measure supplier sustainability performance first – they need a baseline for action.
Practices to Improve Outcomes
Toyota has been a prominent example of how supplier-performance metrics can drive product delivery, cost and quality improvements. The company has been including targets in supplier contracts and holding steering committees for involved parties to ensure successful efforts toward targets. Buyers should be willing to assist their suppliers when possible, helping them with best practices in advancing sustainability. Take this as an example: Unilever provides tools and resources to suppliers with significant climate impact to help them measure and reduce emissions.
What about suppliers who fall short of expectations? Is it about the survival of the fittest? It’s more about adaptability. The business environment is fast embracing “flexibility as a currency,” looking to identify the most adaptable partners and feature adaptability in sourcing requirements. Bluntly put, buyers can set performance standards for their suppliers and hold them accountable if they fail to meet targets.
Can we do this? Now, we have the analytical tools we need. A sustainability scorecard, for example, allows buyers and suppliers to effectively manage and communicate a company’s performance in a clear and actionable way. This entails that all suppliers along the supply chain are closely involved, and they understand their strategic importance to their customers.
A Win-Win Situation
What does using a sustainability scorecard mean for suppliers? It means random acts of transparency are over – they need to report on their environmental behaviors, social practices and human rights due diligence, and to do so in an aggregated manner. It also means that they are ranked based on their performance. That inevitably creates pressure on the suppliers to have benchmarkable scores.
The good news is you can make a business case in favor of those with strong sustainability performance, with opportunities extending beyond the obvious benefits of being a more sustainable company. For one, buyers may incentivize suppliers with favorable performance results by rewarding them with more business. Two, other stakeholders – like financial institutions, investors, or regulators – are increasingly looking at sustainability scores as a means to quantify risk or business potential. Sustainability generates values on multiple levels.
A Question Remains How Suppliers Can Influence Their Performance
The backward-looking approach to measuring sustainability performance would be if companies are awarded results without means to improve. This misses the opportunity to engage and support suppliers with lower scores to influence their sustainability outcomes. Suppliers need more formal, data-driven mechanisms to review progress with partners and agree on corrective action plans.
This is not to say suppliers depend on consumer companies to drive their sustainability agenda. Rather, there are two sides to the equation. Making supply chains more sustainable requires intensive involvement from both supply and demand sides.
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