CSR/ESG and Sourcing – Who Cares Wins
October 25, 2022
ESG (Environmental, Social, and Corporate Governance) is a big deal in business these days but why is that? What exactly is ESG? Are you taking the right steps to benefit from it? In this blog, I will review ESG, how it interacts with CSR (Corporate Social Responsibility), and how this rapidly growing movement is changing how we manage the whole supply chain.
What is ESG?
Most of us have heard about ESG, an idea first outlined less than 20 years ago in a 2006 paper called “Who Cares Wins” presented in the United Nations.
Since then, ESG has grown for two reasons: First, good news, companies that care in today’s world apparently also tend to perform well financially. Second, the money motive: institutional and retail investors identified ESG as a marker for sustainable and profitable companies and so they found ways to measure ESG scores and invest in the companies that rated high.
In sum, the ESG system rewards those corporations that are mindful of the environment and their impact on society, and it delivers the message: “It pays to care.” Today, ESG has become a global phenomenon with more than US$30 trillion in assets under management. Companies are scrambling to improve their behavior, profile, and ranking.
The Evolution of ESG
How ESG evolved and gained momentum is a fascinating topic that should be addressed separately. For now, let us note that ESG was not an overnight sensation—it took years to become what it is today. And it is still controversial because it challenges the well-established notion that investments should be based on profits alone, not on political considerations.
ESG accounts for the fact that our world has evolved tremendously over the last 40 years. Through the internet, we are better connected and have become well-informed. ESG is a cause-and-effect manifestation of that greater awareness. The common denominator is people, whether they are investors, consumers, employees, or voters. People care about ESG issues and want their investments to reflect that.
CSR vs. ESG
Before ESG, many companies already recognized the importance of good governance and developed an internal code of behavior that large corporations labeled CSR. This code of conduct often focused on the health and safety of employees, philanthropy, and care for the immediate environment within which the company was operating. CSR progressively became an integral part of well-managed companies, a culture that contributed to their commercial success.
But while CSR is an internal process, ESG disclosures inform outside investors. It provides them with a way to understand the sustainability potential of a company and other characteristics that are not obvious in a traditional balance sheet. A good ESG score obtained through making improvements to such things as board diversity, energy efficiency, carbon footprint, pollution prevention, and worker safety is deemed to reduce a company’s long-term risks.
So, the two concepts are related in the sense that you need CSR to get a good ESG score, and you cannot get – and keep – a good ESG score if you do not have a strong CSR foundation.
Sourcing and ESG
A company that imports adds a global dimension to its ESG profile. Buyers operating in accordance with internationally recognized ESG practices are in effect saying: “If you want to sell to me, you have to behave like me.” In that sense, ESG is a cultural transfer vehicle. It forces suppliers all over the world to think and act differently about employees, health and safety, impact on society, pollution, and the global environment.
Managing sourcing with ESG in mind might seem difficult and daunting, but doing so starts with just two basic principles:
Know your product. The baseline requirement for a product (and its components) today is that it must be safe, meaning it cannot contain dangerous materials such as asbestos, lead paint, or small magnets. On top of that, other concerns have surfaced: for example, packaging should be recyclable, and the whole product should have a small carbon footprint.
Know your supplier. It is no longer enough for a supplier to merely deliver a quality product reliably and cheaply. Suppliers now also must behave properly and manage their business ethically. Buyers now must know their suppliers well and approve of them.
In practical terms, this means performing detailed factory audits to ensure supplier conformity before sourcing from them.
In conclusion, ESG scores have added a new way to determine the long-term value of corporations, one that focuses attention on the importance of good and environmentally responsible governance. This scrutiny is causing companies to up their game and is directly affecting the supply chain.
Can you benefit from implementing good ESG practices?