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Supply Chain Sustainability & ESG Impact

By Ekta Mody - November 02, 2020

3-2-1 Approach to Creating Sustainable Value in Supply Chains

  • Businesses today are focused on creating Supply Chain Sustainability value in their processes
  • What is Supply Chain Sustainability & why it is the need of the times for businesses today
  • We use a 3-2-1 approach for businesses to create and benefit in value from Sustainability initiatives- 3-fold theme, 2-point impact assessment and 1 key Answer

One of the most significant shifts we have seen over the last decade, is the rising importance of sustainability for businesses—particularly around environmental, social, and governance (ESG) initiatives. Increasing awareness of the catastrophic effects of climate change and the destruction/depletion of natural resources as well as a growing concern for human rights violations, inhumane working conditions, corruption etc. are driving companies to incorporate sustainability into their values, processes and their mission statements.

Over the last few years, there has been a revived corporate emphasis on sustainability—especially as the global investment community’s interest in environmental, social, and governance factors (ESG) has spiked.

While some believe that this progress may have slowed due to the recent COVID-19 pandemic, ultimately the momentum cannot be stopped, and that ESG will set the direction for much business investment in the coming decade, reshaping our world for the better. Even amid the COVID-19 pandemic businesses are rapidly realigning their strategies to focus on key emerging trends related to digital transformation; supply chain; environmental, social and governance (ESG) programmes; and new work realities

With ESG into focus, societal impact is high on the agenda. In the context of the pandemic, businesses have recognised the importance of accelerated transition to digital business models. They believe that digital technologies are imperative to maintain customer trust and keep remote work forces connected. Consequently, they are prioritising investments in new technologies to pave the way for a more sustainable and resilient future

To begin with, businesses are making changes to improve sustainability performance starting in their supply chain processes. The reason for that is that supply chain offers a clear and actionable roadmap for creating a networked impact and driving real improvements. For example, many companies are working to create “sustainable procurement” programs, where their corporate social responsibility principles are integrated into their procurement processes and decisions, thereby building a “sustainable supply chain solution” in their growth story.

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What is Sustainable Supply Chain

Sustainable Supply Chain is the adoption and integration of Corporate Social Responsibility (CSR) principles into the procurement processes and decisions, while also ensuring they meet the company’s and its stakeholders objectives.

The process integrates requirements, specifications and criteria that are compatible with the protection of the environment and the society. It is not only about not using child labor or illegal chemicals that can damage the environment and peoples’ health.

Commitment in sustainable procurement ensures values, which are core to the business and they are integrated through a company’s supply chain into the life cycle of the company’s products and services.

Theme of Supply Chain Sustainability

Driven by Purpose - Sustainability commitments are forming the core part of most of businesses globally. 72% of the global corporates highlight in their annual and sustainability reports, their priorities, and aspirations on the ESG initiatives. The value of sustainability isn’t just the ask of the stakeholders, it is now the demand of customers, employees and society as a whole. Adoption of environment friendly, good social and economic practices goes far beyond in creation of a better world.

Realignment of Strategies- While keeping ESG programmes as the key, there is a dramatic shift in how businesses assess their potential risks. With the pandemic hitting the growth story, while ensuring short-term survival of their companies, there is immense amount of focus on the impact to realign strategies for long-term growth.

Accelerated Digital Transformation- Digitisation is the need of the hour today and will be the driving force of change in the coming decade. Companies have invested heavily in technology during the lockdown period and they are betting on major dimensions of digital transformation to make their companies more operationally resilient, agile and customer focused, at the same time having ESG as their core value.

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Impact Assessment

Risk Reduction - Brand and value creation has a proportional impact of the risk factors associated. Bad supplier practices (e.g., child labour, local pollution) and the economic cost of sustainable procurement disruptions (e.g., non-compliance with environmental regulations), has a direct financial impact on the brand value, thus increasing risk factors. Therefore, ESG practices are integrated as a key element in processes, thereby mitigating the risks associated.

Cost Reduction & Revenue Growth - While adopting the ESG programmes, coupled with digitisation, there is seen a reduction in total cost of ownership linked to reduced energy costs, reduced over-specification, reduced consumption and reduced social and environmental compliance costs. This in turn creates a positive impact on the top-line, with additional revenue generated through innovation of eco-friendly products/services, price premiums or income from recycling programmes.

Key Answer

A recent study found that companies with mature sustainable procurement programs report more benefits across the board,

A study by the World Economic Forum and Accenture found that sustainable supply chain practices actually reduce supply chain costs by 9% to 16%, revenue is increased by 5-20% , brand value increases by 15-30% and labor standards rise and GHG emissions fall by 13-22% ( Weforum survey). This fact is crucial because cost reduction is more important than ever as we battle global shutdowns and shortages. The value of sustainability goes well beyond creating a better world.

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Adoption and transformation of processes in the supply chain brings about the roadmap for the change that businesses are aiming to achieve. Encouraging suppliers also to adopt the ESG practices brings about the significant impact on the entire value chain. Investors believe ESG integrated portfolios are likely to perform as well or better than non-ESG integrated portfolios, and hence are placing their bets higher on businesses that are totally integrated with ESG practices. From Climatic change, to waste reduction, anti-corruption, human practices & to shareholder rights, these have become the parameters that companies are being evaluated upon. Therefore, this is further encouraging companies to actively work toward sustainability, making this the decade where transformative progress will be made.

Crossflow helps to integrate with ESG strategies and practices

Digitisation and supply chain transformation will drive the company’s objective to develop healthy ESG practices and having a supply chain working capital solution would swiftly enable businesses to drive this change.

Crossflow’s platform encourages businesses to boost up this initiative, by offering early payments to suppliers who are on-boarded on the programme. The early payments are offered with discount charges applied to the suppliers’ invoices.

However, for suppliers who are ESG compliant or who are willing to bring this change in their model, there are significant reductions in these charges, thereby encouraging them to adopt the change.

This reflects the fact that the financial institutions who provide funding through the Crossflow service are equally focussed on the companies who are adopting the ESG practices and integrating the same in their entire value chain, thereby offering more competitive supply chain solution.

 


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Ekta Mody is Head of Consulting at Crossflow. She has extensive experience in the field of Corporate Treasury and Risk Management within large global corporates. With a forte in cross-border fund raising & structured lending, Ekta is proficient at identifying risks and implementing solutions related to funding programmes. She brings her experience to Crossflow as a key leader in the global Corporate Engagement team.

 
 
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