In the global supply chain, suppliers have – not without reason – often been labelled as the weakest link in a company’s Environmental, Social and Governance (ESG) chain. With heightened scrutiny of supply chains and the demand for transparency, suppliers are taking more centre stage in responsible procurement discussions.
ESG reporting is not for much longer a ‘nice to have’. Most JSE-listed firms today undergo some form of ESG rating, a factor that reveals the maturity of their sustainability journey and the reliability of their reporting.
Environmentally, there is a common trend requiring business to account for emissions which are largely in their scope 3, including the emissions of their suppliers. As the focus falls on the provenance of the products and services businesses purchase, the question arises as to how such firms with substantial supply chains will respond to the increasing investor and consumer pressure to demonstrate that they are taking steps to address the ESG challenges and opportunities within their supply chains.
International investors are flexing their muscles, for instance with the formation of net-zero groupings. The Net-Zero Banking Alliance, for one, is a group of banks representing 40% of global banking assets worldwide. It has committed to aligning its lending and investment portfolios with net-zero emissions by 2050, with some having set intermediate targets for 2030. Another, the Net-Zero Insurance Alliance, is a group of insurers representing 14% of world premium volume, which has committed to transitioning their underwriting portfolios to net-zero greenhouse gas (GHG) emissions by 2050.
The Principles for Responsible Investing body, with 4 000 signatories across 60 countries managing USD 120 trillion in assets, has committed to incorporating ESG factors in their investment decisions and active ownership.
Stakeholders of all descriptions want to see evidence that their money is being used ethically and in compliance with regulations. In response, large firms have begun looking much closer at their supply chains and implementing and monitoring sustainability standards and requirements at the level of their suppliers. This can include a wide range of issues: setting targets for reducing GHG emissions, water usage and waste, as well as ensuring their workers are treated fairly.
However, while firms can ensure that their own workers are well treated, or that their own premises use renewable energy, it’s rather more difficult for them to have a handle on third-party suppliers. They need to appoint only trustworthy, reliable, sustainable businesses and organisations in their supply chains.
Supply chains typically are on an 80/20 split – 20% provide 80% of a company’s spend. Often these suppliers may already be mature, listed companies themselves with coherent ESG strategies. The conversation, therefore, revolves around the remaining 20% which may be SMEs or larger unlisted companies below the ESG radar. Mazars’ experience in consulting to JSE-listed firms is that many have difficulty in commencing these conversations with the 20%. Consequently, the starting point must be to refine their procurement policies so as to present a realistic meeting point with smaller businesses.
Furthermore, many such companies fail to see this as the opportunity which it is. It’s a human rights issue, a health and safety issue, an issue of encouraging each supplier to establish the level of consciousness required for its own decarbonisation journey.
In an enterprise’s CO2 footprint, it has immediate control over certain internal elements such as its air-conditioning, its fleet and business travel. It also has marginal control over its electricity consumption. Thereafter, it becomes difficult because supplier’s CO2 emissions are the biggest unknown. There is little in-depth data available or interventions in place – in fact usually, the conversation hasn’t even started. In a typical illustration from a case study Mazars recently performed, 94% of one company’s CO2 came from this latter category in the supply chain of which 71% was derived from purchases primarily of raw materials.
This case study demonstrates how, while a corporate may have a credible ESG strategy, it really is not shifting the dial in any significant manner nor will sustainably meet its CO2 reduction target without addressing its supply chain. This points to the fact that the conversation so far is generally at a highly superficial level. If African business is sincere about preparing itself for global competitiveness, this is where it will fall short. This is of particular urgency to businesses offering goods and services into jurisdictions with maturing ESG legislation, such as the EU, where stringent regulation may compromise their sales channels where there is non-compliance.
However, monitoring one’s supply chain ESG compliance is possible. This is derived from the level of interconnectedness of the main pillars of the circular economy. Innovation and digitally driven solutions can automate supply chain ESG management. Artificial intelligence is widely seen as being essential to manage supply chain corporate sustainability and ESG.
Agile working, intelligent workflows, and efficient and accurately tracked information gathering by automation can deal with current constraints. In this light, the future will not only be green but digitally green.
In the not-too-distant future, ESG-conscious consumers can look forward to being able to track the provenance of just about anything they buy with the quick scan of a bar code. African firms will need to be ready. The question to ask of any link in the supply chain is: has that business’ social licence to operate been legitimised?
Bongiwe Mbunge, partner for sustainability services at Mazars in South Africa.
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