Long gone are the days when companies could get away with neglect in their day-to-day activities of the environment and display a “take it or leave it” attitude towards their employees, suppliers and the communities where they operated.  

Sending thousands of plastic cups to landfill, having lights and computers on day and night, inefficient heating and air-conditioning in offices, excessive business travel and employee commutes, various forms of inequality and harassment – all that only 20 years ago was a common business reality and a norm. It may not always have been deliberate. Though it was still often unconsciously done and didn’t even make the “low priority” list for some organisations. Today it amounts to poor business ethics and has resulted in the additional ESG responsibility for  Scope 2 and 3 Emissions. 

What is ESG and How did it Evolve?  

So, what is ESG and how did it evolve? Although the roots of ESG, which is short for Environmental, Social and Governance, can be traced back to several corporate social responsibility and investment movements. They emerged in the 20th century. The ESG concept was first laid on the table globally in the 2006 United Nations’ Principles for Responsible Investment (PRI) report. It consists of the Freshfields Report (A legal framework for the integration of environmental, social and governance issues into institutional investment, October 2005) and The Who Cares Wins Conference and Report (Connecting Financial Markets to a Changing World, 2004-5). This was the start point for the drive to have ESG criteria and sustainability. More importantly, they were incorporated into the financial evaluations of companies and the widespread use of ESG started gaining momentum.  

Why ESG is Such a Hot Topic  

The pun in the heading is intentional here. Global warming is recognised by many as an existential threat to our way of life. As a result, ESG performance is now at the top of the priority agenda for most businesses and public organisations. To some extent, it has supplanted the term Corporate Social Responsibility (CSR) as a focus area for the boards of companies. There are various reasons for this. Not least because companies which have invested in ESG and made it part of their corporate business goals, tend to show long-term financially stability and are more capable of addressing risks and challenges that can have an impact on company on both internal and external levels. When ESG and sustainability becomes part of company’s investment strategy, there is typically a better alignment between investment and company’s values and growth. Alongside this, has been the linking of executive performance and associated rewards to delivery of improved ESG. 

ESG Explained  

In simple words, ESG is a set of standards measuring how a company’s business practices affect society and the environment, and how transparent and accountable the company is for that impact. The “E”, or the environmental aspect, focuses on organisation’s carbon emissions, water and energy efficiency and waste management. The “S”, or the social aspect, considers company’s interactions with its employees, suppliers, customers and communities that its operations and labour practices affect. The “G” element covers organisation’s internal governance structure. Furthermore, how its decision-making meets stakeholder needs, enforces company policies and ethics, and complies with the law and local and international regulations.

Implementation of ESG 

Implementation of ESG means improvement in a company’s environmental, governance and social practices and reporting whilst maintaining efficiency and meeting the expectations of stakeholders. The set of criteria used to evaluate company’s performance in ESG can vary. Although it generally aims at assessing company’s performance in managing its environmental and social responsibilities. On top of that, how its governance practices ensure that the long-term sustainability goals are met.       

ESG in Supply Chains 

ESG in supply chains, on top of the basic metrics to evaluate the environmental and social impact of company’s practices and the effort to ensure sustainability, also typically looks at such challenges and risks as diversity, human resources, investment strategies, ethics and conduct in societally-impacting business practices. One of the key challenges in supply chains is that manufacturers’ ESG footprints may not be so obvious to the purchasing company. As it is not always a direct outcome of their production and operations. Supply chain ESG must look at the various aspects of the suppliers’ operations beyond their immediate output. It includes how the materials are sourced, the sources of where materials originate from, their journey through the supply chain. Most importantly, what impact all of these aspects have from the environmental, social and sustainability perspective.

Scope 3 Emissions Defined 

In simple terms, Scope 3 are the emissions not produced by a company itself. They are not generated as a result of their own activity, but produced by others for whom it is indirectly responsible. The supply chain is a prime example of a Scope 3 emissions source. In the supply chains these mean a range of indirect emissions, such as greenhouse gas emissions. They have an impact on the environment and stem from activity conducted by a supplier to fulfil a task requested of it by another company. A haulier transporting goods on behalf of a manufacturer, for example, is a Scope 3 emission conducted by the manufacturer’s supply chain. Many organisations today aim at improving sustainability and reducing their carbon footprint by monitoring. They manage and make every effort overall on how to reduce Scope 3 emissions. A big part here plays better managing of supply chains and working closely with organisation’s partners, customers and suppliers alike. A strong commitment, sustainability and collaborative approach is key to addressing these issues across the supply chain.  

The Role of Supplier Relationship Management and Procurement in improving ESG and Reducing Scope 3 Emissions  

In practice, advanced and effective ESG in supply chains involves engaging with suppliers to address environmental and social issues. Mainly to systematically manage global supply chain’s carbon footprint, ensure its actions meet the set ESG standards and criteria, its Scope 3 emissions tracking, benchmark its global carbon performance, encourage product innovation to create more sustainable and energy-efficient products, overcome challenges in understanding and quantifying Scope 3 emissions, create and implement sustainable investment objectives and strong and meaningful ESG reporting and Scope 3 emissions reporting.  

Procurement and supplier relationship management plays an important role in accomplishing the above. Along with successful supply chain ESG performance metrics helping companies and their supply chains not just to make a positive environmental and social impact, but also to manage risks and overcome challenges by working collaboratively to adopt more ethical, environment-friendly and sustainable practices. 

Benefits of Improvement in ESG and Reducing Scope 3 Emissions 

Addressing and reducing Scope 3 emissions, as well as other ESG improvements in the supply chain take time and effort. However, other than achieving sustainability and contributing to the common good of the society and the environment, these efforts are also instrumental in helping modern businesses improve their financial performance. As well as growing their reputation and market share, strengthening their supply chains making them more sustainable, reliable and risk-free.

Source Materials 

We thought it would be useful to provide links to some of the key source materials on the subject.