ESG Ignite Report 3: Supply chain ESG - The sustainability connection

ESGIgnite:Unlocking nvironmental,socialand governancepotential

Part 3: Supply chain ESG: the sustainability connection

ESGIgnite

ESG Ignite is a series of reports aimed at helping organisations to take a proactive and positive approach to environmental, social and governance issues. Rather than a regulatory burden, ESG is treated as being fundamental to building strong, future-proof foundations.

The series includes thematic insights highlighted during in-depth, face-to-face interviews with 60+ senior leaders across a diverse range of sectors. The aim was to gather insights and opinions about how they are responding to ESG challenges and opportunities.

To stay up to date on the latest ESG developments affecting clients across Mills & Reeve’s sectors, sign up to our blog, listen to our podcast or visit our dedicated ESG page.

Contents

Introduction: a long road ahead | Page 1

Insights: trigger, trickle down, technology | Page 2

Practical steps: using ESG principles to drive supply chain resilience | Page 7

Get in touch | Page 10

Introduction:alongroadahead

In my experience, responses to environmental, social and governance obligations in the supply chain vary wildly. Some organisations adopt, shall we say, a laid-back approach. Others, especially these with greater resources, embrace increased regulation and expectations as an opportunity for improvement and to deliver positive messaging to their customer base.

However, when you scratch the surface, even within apparently sophisticated organisations, internal challenges often impede the extraction of meaningful information on activities and behaviours. More needs to be done, and diluting positive activities blaming the enduring cost of living crisis is not an option for three fundamental reasons. Firstly, moral and ethical issues arising from human rights abuses and modern slavery attract significant adverse publicity. Next, investors, employees and consumers are steadily demanding greater accountability and action from businesses. Finally, technological advancements providing data on product origins and labour practices highlight improvements and demonstrate what is possible. In this context, the pressure to establish - and validatea sustainable, ethically sound supply chain is only intensifying.

To help organisations navigate these challenges, we interviewed senior leaders in large and mid-sized organisations to discover their greatest supply chain concerns. This report reveals the results and concludes by providing five key pieces of practical advice.

What is clear is that organisations need to come together to collaborate to find solutions to ensure that the supply chains upon which we all depend are sustainable and responsible. I hope you find this report useful in considering your organisation s environmental impact, social awareness and governance throughout your supply chain.

Insights:trigger, trickledown, technology

We have anonymised the quotes throughout this report to encourage open and honest feedback whilst protecting the commercial strategies which underpin the complex supply chains our clients are a part of.

Trigger

Increasing legislative requirements means large organisations must have a thorough understanding of their complete value chain. With the advent of new reporting regulations like the Corporate Sustainability Reporting Directive in Europe and the UK Sustainability Disclosure Standards, large companies must engage with their value chain if they want greater transparency and more detailed information from their suppliers.

“80% of emissions come from your supply chain. The big boys who are selling the stuff at the end of the queue simply have to go to their supply chain and say, ‘Do it or else’. That is really where the pressure is going to come from.”

International food business

“75% of our carbon footprint is from our supply chain and so, if we cannot prove what they are doing, we cannot calculate our own supply chain.”

Professional body

“[The supply chain] is where some of the biggest risks are. It is almost certainly where some of our biggest impacts are.”

Veterinary group

“Many suppliers do not understand their supply chains as well as they think they do, and we need to change that. We want to set a good example, as a good employer and for our customer base.”

Public sector supply chain management company

Trickledown

Smaller organisations not directly caught by the legislation will be indirectly impacted where they are part of the value chain of a large company.

To remain competitive, small businesses need to exhibit their compliance with their customer's 'Supplier Code of Conduct' and demonstrate social value in the realm of public procurement. Failure to do so could result in missed opportunities.

"We will look at what our suppliers do and how they deliver that, and how they treat their staff. We...make sure that their ethos and mindset is in tune with ours."

“We are a supplier, so a driver for us is the pressure they [larger organisations] put on us and we then place pressure on our suppliers.”

Railway digital infrastructure business

“From the third-party perspective, the pressure is on to ensure we are meeting stringent ESG credentials. That is one of the drivers for us to adapt.”

Property management business

"We have a supplier impact questionnaire and a responsible supplier programme. We organise an annual supplier day where we present our sustainability strategy to engage them."

Organic food delivery business

“The gear has shifted. It's not just in tenders and it's not just being evaluated: I'm seeing much more contract management now.”

International insurance business

Technology

Embracing technological innovations enhances ESG engagement in supply chains and promotes transparency, efficiency and accuracy.

Adopting new technologies such as AI can not only improve data quality, thereby minimising the risk of greenwashing claims, it can also help identify opportunities in the supply chain to reduce the company’s environmental impact, for example by streamlining transportation routes, creating new packaging and improving demand planning.

“As a supplier, the imposition of technology for ESG reporting initially seemed daunting. However, it has proven to be a game-changer. It has not only streamlined our reporting process but also provided us with valuable insights into our operations, enabling us to make more sustainable and responsible decisions.”

Food business

e and high turnover organisations, there is utational and regulatory pressure to ensure e chain is sustainable and ethical. They need tion that they deal with to prove they share the ensive approach. We call this the ‘supply chain esult is that all organisations now need to sticated purchasing, working practices and standards. Negotiating tenders and contracts ainability goals and upholding ethical ss a supply chain are becoming the norm.”

(she/her) & Reeve

Practicalsteps:using ESGprinciplestodrive supplychainresilience

Alison Ross Eckford (she/her)

Partner, Mills & Reeve

tegy

plexity requires an ESG strategy which comes consumers, investors, and shareholders. ESG m business. Each ESG strategy will differ each should set itself clear goals. The strategy essed to ensure it remains relevant and tum by delivering manageable undertake an ESG materiality assessment to Looking at national and international de structure and highlight any gaps. Against n plan with bitesize activities to build upon.

an covering basics like setting climate targets ct including living’ wage, building an inclusive lbeing on S, and robust governance and rockacy processes on G. Consider, for instance:

ou getting the information you need from your her information could they be providing? gains you can make by changing day-to-day ent practices in line with your strategy? source components more locally and if so, be implemented?

nities that you can support closer to home?

3. Treat ESG as an ongoing exercise, not a compliance issue

ESG should be embedded within your business. Contracts are powerful tools to help you achieve that. Ensure they include clear obligations on reporting obligations, sustainability, human rights and labour standards, as well as continuous improvement clauses and key performance indicators. Stay on top of data across your supply chain and use that information to verify your own reporting requirements. Help suppliers keep improving by sharing and promoting best practices on sustainability and human rights.

4. Understand everyone’s priorities and share learnings

Collaboration is key. Often issues arise where there is an inherent tension between doing the right thing and achieving a price to appeal to customers. Share best practice and use ESG as a means to do things differently, to innovate, incentivise, and explore new opportunities.

5. Consider how technology can support your supply chain

The role of technology in supporting ESG is crucial. Digital tools can forecast more accurately, minimising waste. Analytics can allow you to drive efficiencies. Blockchain is increasingly used in industries where traceability and provenance of materials is paramount. Overall, digitalising your supply chain can help improve visibility, efficiency, accountability, and bring cost-effectiveness to your entire operation. Aligning your digital strategy with your ESG strategy is key to supporting your ESG aims and unlocking potential.