Sourcing and Procurement

Procurement Risk Preparedness: The Growing focus on ESG metrics

Have you ever wondered if top companies are really setting the goal of adhering to ESG standards and values, including ESG responsible procurement, for themselves; or is it just a game aimed at customer retention?

The question did not occur to me until recently when during one of my travels I took part in a street poll. The survey consisted of standard questions like do I like the city? Is the standard of the hotel sufficient? How do I assess the city transportation services, etc? And then, out of the blue, a sustainability question was asked - How much more would you be ready to pay if all these services were delivered more sustainably?

I replied being comfortable with around 20% premium payment, which should give me that nice, warm feeling “of doing good,” as well as contribute towards saving our planet and social inclusion. This gave me food for thought and I wondered if companies are optimally using the charged premium to deliver on their ESG commitments.

Status of ESG rules in companies

In the light of recent natural disasters and the COVID outburst, consumer awareness regarding ESG standards has only been growing. More weightage is set on how these factors are (and will continue to) influence the adherence to ESG rules by companies’ supply chains and production lines, so much so, that it has become a sine qua non-requirement for the entire business.

Practising sustainability has now become critical to a company’s reputation and denying conformity or responding to the required ESG call can pose a great risk of losing customers. And losing customers is ‘the’ end of the pain-chain, preceded by lost or difficult access to resources, higher waste-disposal or packaging costs, fines and penalties paid for non-adherence to legal regulations, difficulty to attract talent while the companies may be seen as not purposeful enough, etc. Resultantly, we are already witnessing a major change in corporate behaviour with hundreds of companies being forced to publicly reassess their relationships with their customers, employees, suppliers, and the wider community.

In fact, this phenomenon has been well captured by Larry Fink from BlackRock in his annual letter to CEOs where he bluntly states: “We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients. That requires understanding how companies are adjusting their businesses to the massive changes the economy is undergoing. (…)  Stakeholder capitalism is all about delivering long-term, durable returns for shareholders. And transparency around your company’s planning for a net-zero world is an important element of that. But it’s just one of many disclosures we, and other investors, ask companies to make. As stewards of our client’s capital, we ask businesses to demonstrate how they’re going to deliver on their responsibility to shareholders, including through sound environmental, social, and governance practices and policies.”

According to a McKinsey study accentuating the environmental, social, and governance concerns does not lead to a slog on value creation. Instead, emphasis on ESG correlates with higher equity returns. Seconding the fact, financial services group BNP Paribas suggests that sustainability equity indices have outperformed standard non-sustainable benchmark stock indices in the past five years.

While there are promises and commitments made by the world’s largest companies to reduce carbon emissions or become carbon neutral, recycle 100% of plastic used, plant trees for bottles of water sold, help local suppliers and likewise, the questions arising are how will these commitments be measured? Will the companies only measure themselves or will they include all supply chain parties? How can we compare the companies? In fact, this is the “evergreen” problem of independent, standardized, and easy to understand and compare reporting.

The course of ESG metrics in the upcoming future

As ESG’s importance grows, especially in the light of the COVID pandemic, the World Economic Forum has prepared a comprehensive set of core and expanded ESG metrics and disclosures in collaboration with several companies called the Stakeholder Capitalism Metrics. Mentioned metrics and disclosures span across four so-called pillars: Principles of Governance, Planet, People, and Prosperity.

The effort to review, rework and reframe all existing, scattered frameworks and metrics, and more importantly to align on its usage at the global scale, was welcomed. Consequently, since January 2021, more than 50 companies originating from different industries have not only supported the idea but also included Stakeholder Capitalism ESG metrics in their annual and sustainability reports so far. A company even put their reputation at stake by issuing so-called “green bonds” to finance its endeavour to cut carbon emissions.

I must admit that it is an interesting concept! However, some companies may be misleading or even deceiving their customers and investors through a range of “greenwashing” practices from making promises which cannot be checked if kept, the vagueness of promises or slogans, hidden trade-offs, irrelevance, or worshipping false labels up to fibbing with emission-cheating engines and software as an example.

Therefore, getting back to the original question of whether a premium charged by the companies in the name of sustainability is too high and, even more importantly, whether it is being utilized to deliver on their ESG commitments. I have realized that as a customer, the sustainability factor does influence my choices and that I have the biggest power to hold corporations accountable for their commitments. And probably, if asked to pay more for “doing good things for the planet and people” I would not mind. But I would need an assurance that my money, and more importantly, that the ideals I hold are not wasted. It seems that the world is having the same thoughts, and the global community of economic leaders has started to equip itself and us with unified and easy-to-understand metrics to monitor and assess the ESG commitments of companies. It is a promising start, but let’s all be prepared for a long journey.