Guest Perspective: Let’s Get Real with ESG and Procurement in the Lead

Everyone wants to talk about Environmental, Social, and Governance (ESG), but no one has the details.

I don’t write this to disparage anyone—quite the opposite. I truly believe most business leaders, from small companies to giant global corporations, are sincere in their efforts to address sustainability. However, we haven’t done enough research within individual lines of business–procurement, human resources, etc. to translate high-level ESG goals into specific metrics that can help organizations attain their goals.

With its unique view of organizational spending, the procurement function is positioned to help drive ESG initiatives for most businesses. But like everyone else, they need metrics to guide them. For example, if an organization decides to assign procurement the task of helping “reduce carbon emissions,” what metrics define success? Should procurement base spend decisions on Scope 3 emissions metrics? If so, which ones?

Inaction on ESG Is No Longer an Option

In a wide-ranging study sponsored by SAP, Economist Impact looked at the challenges facing procurement today. The study, "Shifting gears: procurement refocuses on risk and sustainability," concluded that “procurement teams cannot afford to remain complacent about integrating more sustainability into their practice, especially as new climate regulations come into play.”

This is important to consider because the sustainability initiatives of today may foreshadow the regulations of the future. For example, it’s very likely that 10 years from now, the world will have regulations around carbon emission standards. So, it makes good business sense to prepare your business, not just to impact the environment and society positively but also to ensure you are ready to comply with coming regulations.

Technology Is Giving Us a Head Start

To create an impact, ESG measures must be constant, repetitive, and embedded in our business processes. Technology can help with this. I want to share some examples of how you can use it to collect data and drive behaviors that support climate action, the circular economy, and social responsibility.

Climate Action. Supply chains often account for more than 90% of a company’s environmental footprint. With its deep visibility into data across the value chain and the business, procurement can create metrics and policies that reduce emissions in line with corporate goals.

For example, companies can leverage business networks to discover and prioritize suppliers who align with their ESG goals. They can also set parameters around purchasing products that contribute to Scope 3 emissions and use procurement technology to automatically guide procurement teams to products with low carbon footprint impact.

• Track carbon footprint data in your buying processes. Leverage available product footprint data in the purchase requisitioning to analyze the environmental impact of that purchase.
• Choose suppliers aligned with your climate goals. Collect supplier information via prequalification questions, product questionnaires within the sourcing event, and weighted scoring of sustainability-related sourcing event questions.
• Avoid carbon-intensive rush transportation. Track and trace shipments across the supply chain to manage supply chain risks proactively and avoid carbon-intensive activities, such as rush shipments.

Circular Economy. It’s estimated that less than 5% of the plastic used in manufacturing is recycled each year. That’s a lot of waste. Procurement can help reduce waste by incorporating circularity into the supply chain.

• Source climate-friendly materials. Use business networks to look beyond your usual supplier base, with an eye toward suppliers offering recycled or recyclable materials.
• Improve circularity and reduce cost by buying less. The most sustainable thing you can buy is what you already have. Reduce waste and cost by extending technology refresh policies, offering repair services, and prioritizing existing inventory over new items in purchasing catalogs.
• Use contracts to ensure supplier alignment. Author and manage contract clauses that ensure suppliers are working toward your circular economy goals.

Social Responsibility. Millions of people are living in modern slavery, and a significant number of them are being exploited in the private sector. Procurement has visibility into the supply chain and tools to help drive responsible business practices and ensure compliance with human rights legislation.

• Improve pay equity. Gain visibility into market rates by position and location to ensure you and your trading partners pay fair wages to external workers.
• Ensure human rights due diligence (HRDD). Implement an ongoing risk management process to ensure compliance with current and future human rights regulations. This includes supplier self-assessments and findings collaboration.
• Procure from diverse suppliers. In your catalog and non-catalog purchasing processes, label suppliers that fit diversity categories, such as minority-owned businesses.

Case Studies: How Procurement Teams Are Leading the Way

Although ESG initiatives remain in their infancy, businesses are finding ways to work toward their goals. Here are a few examples.

• Grupo Nutresa: Capitalizing on digital procurement for sustainability advantages. For Grupo Nutresa, sustainability is an important part of its corporate credentials. Its long-term goals and programs make its food manufacturing operations consistent with the United Nations’ Sustainable Development Goals. The SAP Ariba Supplier Lifecycle and Performance solutions help Nutresa streamline supplier management and measure the performance of suppliers of indirect materials in terms of quality and sustainability. Read the case study.
• DSM: Aligning spending with sustainability and supplier diversity goals. The Dutch chemical company Royal DSM (DSM) is a global, purpose-led leader in health and nutrition, applying bioscience to improve the health of people, animals, and the planet. It has digitalized its source-to-pay process for indirect procurement using SAP Ariba solutions tightly integrated with SAP Business Network. DSM’s transformation focuses on ensuring that spending on indirect goods and services aligns with procurement policies for sustainability and supplier diversity. SAP Ariba solutions with EcoVadis enable DSM to qualify suppliers based on specific sustainability criteria. Read the case study.
• Norwegian Air Shuttle: Controlling sustainability by controlling the value chain. Norwegian Air Shuttle needed to move away from manual, decentralized procurement processes to gain better control. SAP Ariba solutions provide a 360-degree view of contracts, sourcing, and suppliers, supporting the airline’s journey to sustainability leadership. With measures such as data-driven fuel management, in-flight waste management, and sustainable fuel offtake agreements, Norwegian Air aims to reduce CO₂ emissions by 45% by 2030. It considers SAP Ariba solutions fundamental to its sustainability goals. Read the case study.

Focus on the Details: Identifying ESG Metrics

I started this article by saying we don’t have the details we need to measure progress in ESG initiatives. Specifically, we need data to quantify where we are now and metrics to serve as a yardstick to show where we want to be.

SAP wants to continue to be part of the solution. Right now, my team is sponsoring research to identify metrics you can use to inform your ESG initiatives and to help guide our product development. We’ll share this information in the coming months.

Baber Farooq is SVP, Marketing Strategy, Procurement Solutions, SAP.