Index 2021: Mandatory EU Due Diligence a Challenge For Supply Chain Sustainability

October 6, 2021 Sean Donnelly

Business leaders are increasingly aware of the performance benefits to be derived from adopting sustainable practices. However, the data uncovered in the latest Business Sustainability Risk & Performance Index makes clear that it’s not enough for business leaders to focus on the sustainability of internal operations. Adverse social and environmental impacts are embedded overwhelmingly in the upstream value chain and, as the European Union (EU) prepares to implement mandatory due diligence regulations, business leaders must act to integrate sustainability into the procurement function at every tier of the supply chain.

The EcoVadis Index examines the sustainability ratings of companies that have been assessed by EcoVadis. This comprises an overall, total score, as well as ratings derived from research organized across four themes: 1) Environment, 2) Labor and Human Rights 3) Ethics; and 4) Sustainable Procurement. You can read more about the EcoVadis ratings methodology and how scoring works in our comprehensive guide

Europe: A Global Leader in Sustainability 

At an average, overall score of 52.1 in 2020, companies based in Europe improved their sustainability performance by over a point on their 2019 total (51.0) and maintained a lead in excess of 5 score points over the next-best performing region, North America (46.5). This result correlates with findings published in other leading sustainability rankings, which have found that Europe is home to almost half of the world’s most sustainable publicly-listed companies with a revenue in excess of $1 billion. 

Nevertheless, it is essential that European business leaders do not grow complacent. For when one digs into the data underpinning overall average scoring, particularly that collated under the Sustainable Procurement theme, it is clear that significant sustainability risks continue to lurk in the supply chains of many European businesses. 

Overall sustainability performance among EU Member States

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The Importance of the Supply Chain in Sustainability Management

The most challenging of the four performance themes assessed under the EcoVadis ratings methodology, Sustainable Procurement is fundamental to scaling sustainable impact, building organizational resilience and effectively mitigating risk. 

While many companies work effectively with direct suppliers to integrate sustainability considerations into the procurement function in the upper tiers of the value chain, the key to scaling the impact of a sustainable procurement program is to provide supports and incentives sufficient to cascade such measures beyond Tier 1 suppliers in order to ensure that social and environmental due diligence practices are implemented in procurement processes throughout the entirety of the upstream value chain. For no matter how many tiers separate an end product or service from an upstream supplier found to contribute to adverse social or environmental impacts, research demonstrates that the purchasing company is invariably exposed to considerable legal and reputational risk.

This is particularly the case for companies based in Europe as more and more national legislatures, as well as the EU, take steps to enhance ESG reporting requirements and mandate supply chain due diligence. The German Supply Chain Due Diligence Law, adopted in June 2021, for instance, mandates that all companies subject to its provisions undertake due diligence across all tiers of the supply chain. Similarly, proposed EU mandatory human rights due diligence legislation states explicitly that “companies’ due diligence not only covers first-tier contract partners, but that obligations extend to a company’s potential influence over additional tiers of the supply chain (‘n-tier’ suppliers).”

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Sustainable Procurement a Major Challenge as EU Regulation Tightens 

In light of this evolving regulatory landscape, it is concerning that global average scoring in Sustainable Procurement declined for a fifth consecutive year in 2020 to 37.6. While European businesses remain the global leader in Sustainable Procurement performance (42.0), and have maintained a consistent level of performance under the theme over the past five years, the data reveals a high-degree of variation in scoring across the continent and most businesses are unprepared to meet upcoming regulatory requirements at a national and EU-level.

Indeed, over 65% of companies rated by EcoVadis in 2020 have no sustainable procurement policies in place whatsoever, and it is striking that, on average, both European and EU businesses fall short of the 45 point threshold required to achieve a “Good” EcoVadis performance assessment under the Sustainable Procurement theme. They are, consequently, considered “medium-risk” in terms of supply chain management. 

Sustainable Procurement performance held steady, and in some cases improved, among companies based in the EU’s four largest economies (Germany, France, Italy and Spain), while those located in the bloc’s most northerly Member States – namely; Sweden, Finland and Denmark – maintained their remarkably strong and consistent level of scoring under the theme.  Striking, too, in the context of the ongoing regulatory and political fallout arising from Brexit, is the fact that UK companies’ Sustainable Procurement scoring has declined in each of the last three years, contrasting starkly with the relative stability of the EU’s performance as a whole. 

Nevertheless, Sustainable Procurement continues to fall behind all other sustainability themes in Europe, as it does across regions. Indeed, even in the context of the EU, there can be observed significant discrepancies in Sustainable Procurement performance between Member States. This is particularly the case among companies located in some more southerly economies, such as Portugal, Cyprus and Malta, all of which averaged below 40.0 in 2020. 

Similarly, there is a significant improvement potential for many central and eastern European states who acceded to the EU in 2004 and after. While companies located in Poland, for instance, achieved a modest improvement in Sustainable Procurement performance last year, they remain some way off matching the Union’s more northerly leaders in the theme. Much the same could be observed of businesses located in neighbouring states such as Hungary, the Czech Republic and Slovakia.

The data is clear, therefore, that some European states will face a greater challenge than others in adjusting to a more stringent regulatory landscape going forward, and it is essential that companies begin readying their management systems early to meet new legislative requirements. 

Sustainable Procurement performance across regions and industries

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Time to Invest in Supply Chain Reporting and Supplier Collaboration

In assessing how companies can grow sustainability performance, it is difficult to overstate the importance of the procurement function. As recent McKinsey research demonstrates, 80-90% of the average company’s greenhouse gas emissions are “Scope 3”: indirect emissions that occur across the company’s value chain, such as embedded emissions in purchased goods and services, employee travel and commuting, and the use and end-of-life treatment of sold products. And of these emissions, two-thirds can usually be traced to Tier-n suppliers in the upstream value chain.

As regulators at both a national and EU-level increasing legislate to compel European businesses to account for and address adverse social and environmental impacts in their supply chains, it is essential that leaders begin investing the time and resources required to cultivate requisite evaluation and reporting capacity. In practice, this means identifying choke points and mapping risk exposure ahead of time, and working closely with suppliers to formalize processes for identifying procedural violations and remedying adverse impacts.

For more information on global trends in Sustainable Procurement scoring, check out the Deep Dive section of the 2021 Sustainability Risk and Performance Index.

 

 

About the Author

Sean Donnelly

Sean Donnelly joined EcoVadis in 2021. He holds a PhD in Modern European History from Teesside University and has worked previously in research and communications capacities at the European Commission and in the Irish Civil Service.

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