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Beware the ESG heat dome

Waves of legislation are putting pressure on the management

2023 is on track to be the hottest year on record. Around there are reports of record-breaking temperatures and catastrophic fires.

One weather phenomenon that is increasing in frequency and duration is the occurrence of heat domes. They occur when hot ocean air is trapped over an area. High atmospheric pressure above the area pushes air down and, as it compresses, it gets even hotter.

The pressure building from new and coming legislation is, without doubt, heating the surface we work on. Much of it is being generated by policy developments that fall into the environmental, social and governance (ESG) basket.

If you’re an executive or manager in a large company, you’ll probably know what a heat dome feels like.

If you’re a procurement or supply chain expert, you are probably thinking about buying a fire-resistant suit, because, while ESG policies influence the entire organisation, a great deal of ESG policy relates to formal interactions with other organisations, especially our buying decisions and the credentials of the suppliers we work with.

The new and proposed ESG legislation is extensive

If you work in a company operating in the UK with a turnover greater than £36 million, you will be aware of the need to prepare and register a Modern Slavery Statement every year. This came from the Modern Slavery Act of 2015.

You might also be operating in the USA. In which case you probably need to be aware of the Uyghur Forced Labor Prevention Act, introduced in December 2021, with an effective date of 1 June 2022.

Both pieces of legislation are directly concerned with supply chains. Both work as metonyms for the development of ESG-style legislation occurring around the world.

Many jurisdictions have, or are set to introduce, transparency legislation, where again supply chains are in the crosshairs. And it is not just at the level of nation-states. Some regulations cover whole regions, such as EMEA and LATAM and then some occur at a state level.

California has a solid track record of developing policy, especially environmental policy, that applies higher or stricter standards than the rest of the world. As the most populous state in the US and the world’s fifth largest economy – just behind Germany and ahead of India – California can flex its muscles knowing that businesses wanting to operate in the USA will comply.

At the other end of the spectrum, you could be forgiven for not being aware of the Supply Chain (Modern Slavery) Act being proposed by the government of Tasmania, the small island state of Australia with just half a million people sitting below the mainland and above the Antarctic. 

In recent research and analysis for a global client, we developed an assessment matrix that covers more than 80 important pieces of ESG-related legislation around the world that are either in force or are being proposed. This corpus covers human capital, natural resources, climate change, safety, social licence, governance and good old commerce. It is easy to see why it feels like a heat dome.

The heat dome does not need to be permanent

So where is the relief? Is there an SPF 50+ for organisations? Not quite. But there is a cool change on the way.

The wonks talk about next-generation procurement or NextGen. And yes, it is digital, but there is more to it than that.

NextGen also means that established practices like supply chain mapping become even more important and so organisations will need to develop the capabilities to undertake this work more effectively and efficiently.

Likewise, the diagnostic tools we use will need to be better informed and oriented by the strategic goals of the organisation. Building on that, we argue that proactively dealing with the emerging ESG environment requires the procurement function to be a permanent part of the strategy-setting team.

A NextGen procurement team also has a different mindset. Not only is it well-informed by strategy, but it is also dedicated to adding value to the organisation. So, its people are easy to deal with. They are problem solvers, not the police. And they are truly multi-disciplined, with the ability to effectively deploy technology and garner genuine insight from procurement data – insights that will not only identify ESG risks but also unlock growth opportunities and create competitive advantages.

Technology will help us a great deal in managing a far more complex environment but, ultimately, to handle the heat we all need to understand how a heat dome is formed in the first place, and what sort of conditions cause it to dissipate. That requires weather system intelligence and practical know-how, and that is what NextGen teams have.

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