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ESG in Procurement and Contracts
Pradeep Kumar K |
October 19, 2023 |

 11,896 total views

ESG in Procurement and Contracts

The growing importance of Environment, Safety and Governance (ESG) in future is compelling to implement ESG in procurement practices. However, it can a bit challenging to determine when, where and how to approach while implementing the same. Let’s dive deep into its details stage by stage.

Identifying potential areas

Let us try to identify the different relevant areas where we can apply ESG. Supplier selection, contract management, risk management, logistics & transportation, waste management etc. are some of the potential related areas where we can apply ESG practices.

Identify the procurement categories

ESG can be applied to all procurement items/categories. You can classify the categories based on Kraljic Matrix. The level of ESG scrutiny and the strategies used to promote ESG practices may vary depending on the classification. For example, non-critical items with a simple supply market, the organization may focus on setting minimum ESG requirements for suppliers and verifying compliance can be made through self-assessment questionnaires. For critical items with a complex supply market), the organization may conduct more in-depth audits of suppliers’ ESG performance and work closely with suppliers to improve their ESG practices. Overall, the organization may evaluate ESG considerations across all procurement categories, and prioritize efforts based on the potential impact of ESG factors on the organization’s operations and stakeholders.

Understanding the supplier base across categories

This is in fact very important since the experience and commitment to ESG may vary supplier to supplier and the strategies cannot be universally applied across all the suppliers. Segregating and understanding the suppliers (strategic, critical, bottleneck and non-critical) to assess the level of experience, cooperation and commitment of suppliers will help us identify/differentiate the key suppliers suitable for strategic partnering of achievement of ESG goals. It may be also possible that the supplier may not be ready to share the ESG goals or KPIs that was opted by your organization.

Assess supplier ESG performance

Assess the ESG performance of suppliers and vendors by collecting relevant data, such as supplier policies, certifications, and environmental impact reports. One of the key challenges is the lack of reliable data on suppliers’ ESG performance. Suppliers may not have the necessary data or may not be transparent in disclosing their ESG practices. Integrating ESG considerations into the procurement process may limit the pool of suppliers available to the organization. Some suppliers may not meet the organization’s ESG objectives, which can make it challenging to find suitable suppliers for the contract. This could be challenging. Yet, this can help to identify suppliers that align with the organization’s ESG objectives.

Identify ESG priorities of the organization

Aligning with the strategic ESG goals of the organization at par or better than industry standards and trends will help the procurement team to meet the stakeholder expectations of ESG goals. It should help to choose the ESG goals which are most relevant to your business.

Benchmark suppler capability and stakeholder expectations

Once the supplier ESG capabilities and stakeholders’ expectations of ESG goals are benchmarked, it will help to finalize reasonable and achievable ESG goals.

Design ESG criteria

The next step is to define the ESG criteria that will be used in the procurement process. This can include factors such as carbon emissions, water usage, social and labor practices, and governance practices. For example, if the organization prioritizes environmental sustainability, the ESG criteria may include greenhouse gas emissions, energy usage, water usage, and waste management practices. If the organization prioritizes social factors, the ESG criteria may include labor practices, human rights policies, and diversity and inclusion practices.

Integrate ESG criteria into the procurement process

ESG criteria can be integrated into the procurement process by including them in requests for proposals (RFPs), supplier selection criteria, and supplier contracts. This will help to ensure that suppliers are evaluated based on their ESG performance, and that the organization is selecting suppliers that align with its sustainability goals. ESG considerations can be complex and may require specialized knowledge to evaluate. This can make it difficult for procurement teams to integrate ESG criteria into their procurement process and evaluate suppliers based on ESG performance. The organization should clearly communicate the ESG criteria to suppliers and require them to report on their ESG performance.

Collaborate with suppliers

Collaborate with suppliers to identify opportunities for joint sustainability initiatives and projects. This can help to build stronger partnerships and drive progress towards shared sustainability goals.

Develop implementation strategies

The organization should develop implementation strategies to achieve its ESG goals. This involves working with suppliers to improve their ESG performance, investing in technology and expertise to evaluate ESG criteria, and building a culture of sustainability across the organization. Implementing ESG considerations in procurement and contracts can be expensive. For example, requiring suppliers to implement sustainability measures may increase costs for the supplier, which can impact the overall cost of the contract. The impact of cost should be monitored.

Monitor supplier ESG performance

Regular audits, assessments, and performance metrics can be established as a part for process for monitoring supplier ESG performance and ensure that suppliers are meeting their contractual obligations.

ESG training

Provide training to procurement teams and suppliers on ESG principles and best practices to help them understand the importance of ESG and how to implement ESG considerations in their operations.

Align ESG goals with organizational ESG strategy

Finally, the organization should align its ESG goals with its overall ESG strategy. This involves integrating ESG considerations into the organization’s overall business strategy, setting targets for ESG performance, and tracking progress towards these targets. The organization should also communicate its ESG goals and progress to stakeholders, including investors, employees, and customers.

Managing stakeholder support

Implementing ESG in procurement and contracts may require support from various stakeholders, including suppliers, investors, and employees. If stakeholders are not aligned with the organization’s ESG goals, it may be challenging to implement ESG considerations effectively.

Author: Pradeep Kumar K

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