ESG targets are becoming increasingly important for all businesses and Scope 3 reporting of carbon emissions is the single biggest contributing factor in determining any company’s sustainability strategy. Scope 3 emissions include all indirect business activities that create emissions, including the complex, extended, inbound supply chain, making supply chain emissions the top of everyone’s sustainability focus list.
The recent pandemic has seen a sea change in customer expectations towards sustainability. Customers want to buy from brands that they see as having similar perspectives on the environment; they want to buy and consume in a more sustainable way. However, it is not just customers that are demanding that businesses address sustainability. Investors are also insisting on more transparency on sustainability targets, and this is seen as a predictor of future business success. Research from Gartner shows that value driven consumers are demanding more sustainable products with transparent reporting of ESG agendas. It is also important that businesses are transparent on their ESG targets and reporting in order to avoid accusations of green washing, which can be more damaging to brands than having no ESG agenda at all.
The chain of custody for all data sitting behind publicly stated ESG measures is therefore critical in proving assurances of the integrity of ESG reporting. Published ESG data must be as watertight as any financial reporting. The only way to achieve this is having traceability measurements in place to understand where the products are sourced from and if the retailers’ ESG standards are upheld throughout the extended inbound supply chain. Some countries, including Germany, have started to enforce ESG compliance through publication of its Supply Chain Due Diligence Act (LkSG), and it is expected that more ESG legislation will follow in other countries, so systems to support traceability of regulatory reporting data and ESG due diligence will be key to underpinning confidence in publicly announced ESG statements.
Supplier mapping systems can help businesses to trace their end-to-end supply chain and to understand their product components to a raw material level. Looking at raw material sources can also help in managing compliance certification and in verifying the efficacy of claims regarding organic products or recycled materials globally. Tracing raw material and produce flows throughout the end-to-end supply chain and managing that insight on an ongoing, dynamic, basis will help businesses validate ESG reporting accuracy and verify ESG claims, including the ability to track carbon emissions.
Once traceability measures have been established, active risk management can be undertaken to underpin ESG requirements. Traceability systems can be used to identify questionable ESG practices along the extended supply chain, promoting timely investigation and auditing to mitigate risk exposure. It’s been estimated by Korse & Curtin that fewer than five percent of all supply chain leaders have significant visibility beyond their Tier 2 suppliers, exposing the business to potential ESG risk from Tier 3 and Tier 4 suppliers and beyond. Risk areas can include natural disasters, which could affect raw material availability, country of origin verification, organic verification, fair trade compliance and animal welfare guarantees, all of which can be validated and tracked through ESG tracking solutions. Following an initial discovery phase, typical solution implementation focusses on risk management (with a 360-degree view of all product components), logistic routes, human rights aspects, suppliers, and subcontractor compliance. It is crucial for retailers to constantly monitor all of these aspects to avoid the unknown and not expose themselves to brand damaging supplier practices, associations with unwanted political regimes or unnecessary waste, including carbon emissions.
Having a complete supplier database with multi-tier visibility, helps a brand to drive compliance throughout the extended supply chain, even where they may not have a direct contractual relationship with the supplier. This transparent knowledge exchange and information flow throughout the extended supply chain is key to reducing risk and can help establish business continuity plans to improve resilience. Global supply chain crises have become more prominent, with Covid being a recent example. Business continuity plans are critical to underpin supply chain resilience and, if executed well, can become a point of competitive advantage.
Supply chain resilience
To conclude, ESG compliance and reporting is becoming an increasingly important topic, not just for corporate annual reporting, but because it is underpinning brand credibility in the eyes of the customer. As such, it will be a key focus area when seeking to leverage a strong market position, not just because consumers are demanding it, but also because of increasing regulatory requirements.
To avoid the risk of green washing, businesses must improve their understanding and education on the ESG data sitting behind their extended supply chains, beyond Tier 1 suppliers, because the brand risk of adverse publicity, intentional or unintentional, could be catastrophic. Truly owning end-to-end supply chain data and using this to assess the risk and resilience of each node within the extended supply chain is key to achieving global compliance to mitigate these risks.
ESG targets, just like any other business KPI, need to be SMART – specific, measurable, achievable, realistic and timebound – and to deliver this in an extended, multi-tier, global supply chain requires careful planning and execution.
For a list of the sources used in this article, please contact the editor.
Stuart Higgins is Partner, and Laura Schmidt is Senior Consultant at BearingPoint. BearingPoint is an independent management and technology consultancy with European roots and a global reach. The company operates in three business units: Consulting, Products, and Capital. Consulting covers the advisory business with a clear focus on selected business areas. Products provides IP-driven digital assets and managed services for business-critical processes. Capital delivers M&A and transaction services.