ESG (Environmental, Social and Governance), are increasingly growing factors of importance for companies to measure within their supply and value chains.
A strong ESG framework now reflects greatly on an organisation’s brand – and how it is viewed by investors and broader stakeholder groups such as customers, suppliers and the community. With the way the current world is changing, due to climate change, COVID and social awareness, monitoring of and progress in ESG is more essential than ever.
However, implementing an ESG program is not always a walk in the park. Organisations adopting and measuring ESG, within their supply and value chains, may face emerging areas of challenge. Here we’ll address six key ESG challenges:
1. ESG Governance Issues
For Karin Reiter, Global Head ESG and Sustainability at Adecco Group, governance is the foundation of ESG: “It is the ‘G’ in ESG that really underpins the ability of a company to achieve its environmental and social goals. The ‘G’ enables us to thrive from an ‘E’ and ’S’ perspective.”
Governance is therefore critical to get right and has been the cause of some of the biggest corporate media scandals when neglected. With the changing world, the law and media are more so than ever putting ESG and the importance of human rights across the value chain into the limelight. This now raises the stakes further for companies to effectively monitor ESG factors.
If not, reputational damage, compliance costs, the potential loss of business, plus the lack of a company’s ability to attract top talent may come into play. If a company does not comply with ESG policies, legislation and regulations correctly, it could lack secure funding and the ability to attract potential investors.
2. Scope 3 Emissions
There are many challenges to consider when implementing ESG within a supply chain, but Scope 3 emissions may just take the crown as the most complex to manage.
Greenhouse gas (GHG) emissions are broken down into three categories or ‘scopes.’ Scope 1 refers to direct emissions. Scope 2 refers to indirect emissions from the likes of purchased energy generation. Scope 3 covers all other indirect emissions from the company value chain.
Why is it so tough to manage? Well, for Emir Sassi, Global Head of Procurement Sustainability, at Novartis, “The size of scope three as part of our total GHG emissions is more than 90%.” It is a huge area for many companies to manage and many of the factors that affect the percentage are non-direct. Employee vehicle travel, factory and office emissions are often easier to track being at less than 10% of the GHG total. The rest is generated from within the supply chain.
3. ‘Walking The Talk’
“Sustainability is a hot topic – great in theory, but hard in practice,” says Richard Howells, vice-president, solution management for digital supply chain, at SAP. Organisations often talk about monitoring ESG factors but fail to follow through with the process. Issuing marketing and PR statements about achieving goals and net-zero targeting is simply not enough.
In order to successfully monitor ESG, companies need to have a strong employee culture, clear policies and software systems already in place. Systems must fully integrate with each other, or better yet, be situated on one software management platform. This is to gain a clear overall picture of the company value chains and entire organisation. Only then can a company base any future decisions around sustainability.
4. Culture Change
When it comes to implementing ESG factors into an organisation and value chain, it is not just about the tools used to measure effectiveness – employee mentality and values matter too. Patrick Fetzer, president and CEO, Castolin Eutectic argues, “Employees make decisions every day. You can put a lot of policies in place, but you cannot make each of these decisions yourself, and you cannot check them all the time. This is where culture comes in.”
Senior members at the top must lead by example, maintaining a high-value company culture through being transparent about the company’s goals, needs, policies and ESG mission. Employees, customers and stakeholders need to understand what the company stands for and why sustainability plays a vital role within company efforts. The more employees understand about ESG benefits and importance, the more they can help to drive the companies’ sustainability mission and goals.
5. Forming Partnerships
ESG is a huge area to monitor, especially for larger organisations, and many companies cannot manage or measure it by themselves. “Where we are with ESG, whether you are looking at the E’, the ’S’, or the ‘G’, the whole point of it is that you can’t fix it all by yourself.” states Nancy Hobhouse, Head of ESG at Hermes. This is where partnerships become key. Unless companies are in continuous contact with both suppliers and clients within their supply and value chain, companies are never going to know their exact measurements or hit ESG targets.
In order to gain better visibility and understanding of ESG factors, companies, agencies, employees, stakeholders and investors need to collaborate, have increased communication and open, honest conversations with others about climate and ESG factors. By joining forces, more can be achieved and longer-term sustainability goals within organisations can be realised.
6. Ethics: Compliance Regulations
Supply chains are not lifeless and sometimes, it can be easy to forget there are real people working within them. State legislations are greatly needed areas of protection for those out-of-sight employees in order to eradicate any forms of social inequality or dangerous workplace practices.
The UK Modern Slavery Act and the California Transparency in Supply Chain Act, for example, have been in place for over five years. Germany has already passed into law its Supply Chain Due Diligence Act, and only last month the EU adopted a proposal for a Directive on corporate sustainability due diligence.
With compliance on the rise, advances in technology will be needed in order to track, measure and maintain the ethically rising standards within compliance laws. “The human element is a critical component, but also I am a technologist. Technology has a big play in this; bringing together ESG solutions that can help enable companies and their suppliers to meet some of these ethical challenges across the supply chain.” says Karen Alonardo, Vice-President of ESG Solutions, at Navex Global.
With modern technology, issues such as child labour, conflict minerals and human rights standards can be more easily monitored than ever before.
Overall, from broad areas like company culture to specific issues like Scope 3 Emissions, there are many challenges needing to be tackled when companies implement ESG goals, strategies and controls into their supply and value chains. By creating and maintaining a strong company culture – through ensuring ESG goals are transparent, keeping up to date with legal regulations, building strong relationships with other organisations and implementing modern monitoring technology – the above issues are a lot easier to overcome.
At NAVEX, we provide technology solutions that will help you conquer these points of challenge and achieve your company ESG targets. To learn more about managing your businesses ESG goals on one platform, discover how NAVEX ESG can help.
For more information on how to get started with ESG, download the ESG Definitive Guide.