What is ESG? How can it elevate Supply Chain Management?

Supply Chain Management, as a domain, includes activities deeply entrenched in strategy, regulations and standards. Without these standards — and proper strategies for implementing them into daily supply chain activities — supply chain risks would materialize a lot more often than they do.

The ESG (Environmental, Social and Governance) criteria is no exception to this rule.

Conceptually, the ESG criteria serve as a guideline for environmentally friendly, socially acceptable, and ethically righteous supply chain activities; especially in the procurement, sourcing and supplier relationship management-related actions.

These criteria (Environmental, Social, and Governance) apply as much internally, as they do externally. Meaning, if ESG standards serve as a parameter during an organization’s monthly internal-performance review, the same standards should be applied during a random supplier factory-audit.

As a result of globalization and the outsourcing of labor, within globally functioning supply chains, traceability and transparency into supplier’s activity has become necessary to manage ESG related risks. This is why ESG must be a main focus when developing a procurement or sourcing strategy.

“The procurement function often has a handle on what takes place among Tier 1 suppliers (possibly also Tier 2). But for a globalized supplier base, with numerous subcontractors and sub-tier sourcing relationships, supply chains can often be very obscure” (Corporate Citizenship 2013).

Obscurity of supply chain networks has made the management of ESG related risks, the application of preventative guidelines/actions, and the response to manifested supplier-related risks a very complicated process.

Typical supply chain management strategies include supplier-compliance actions, and review of compliance performance. This information is the building block for purchasing entities to ensure that suppliers are performing in line with ESG expectations.

“Such supplier monitoring is a transactional governance mechanism designed to provide buyer-firms with information that can help them manage supply chain risk and make strategic outsourcing decisions. However, it is not clear that buyer-firms are getting complete and accurate information from their supply chain monitors (e.g., Esbenshade, 2004; Heras-Saizarbitoria and Boiral, 2013; O’Rourke, 2002)” (harvard.edu 2015).

Participation from the supplier-body is crucial in collecting reliable and quality data sets. Without quality supplier-related data, purchasing entities have a tough time working with the right suppliers. Subsequently, collaboration with the wrong suppliers could lead to unethical supplier actions, such as feeding back faulty data sets to the purchasing entity.

A real catch 22 of supply chain management, sustainability and transparency.

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