Here are some practical ESG basics to get you on the right track.
Global complexity is accelerating — supply chains have become more interconnected, economies are evolving, weather patterns are changing, and technology has gotten more sophisticated. As business decision makers struggle to capture this complexity, assess third-party risk, and meet requirements for more sustainable outcomes, ESG data has become more relevant and sought after.
In recent years, the availability of more and better data, coinciding with better understanding of modern environmental and social pressures, has taken ESG mainstream as a means for organizations to measure impacts and manage risks in their value chains. Today, ESG is arising as a global harmonized approach for companies to calculate and report their nonfinancial risk.
International markets have generally accepted a definition of ESG that encompasses three main components:
Environmental (E): Environmental factors involve an organization's overall impact on the environment and the potential risks and opportunities it faces because of environmental issues, such as climate change and natural resource management. Examples include energy consumption, waste management, and carbon footprint, including greenhouse gas (GHG) emissions.
Social (S): Social factors address how a company engages with different stakeholders — employees, suppliers, customers, community members, and more. The criteria may include support for human rights and labor standards and whether they apply to the supply chain.
Governance (G): Governance factors examine how a company polices itself, focusing on internal controls and practices to maintain compliance with regulations, industry standards, and corporate policies. Examples include company leadership and management, board composition, conflict of interest rules, and whistle-blower programs.
ESG data may be growing in importance, but how exactly should companies be considering and using it? This question is becoming ever more urgent — particularly for procurement and supply management, where ESG is increasingly linked to value delivery.
Procurement and Supply Chain Use Cases for ESG
The insight derived from ESG data can be used to better gauge the stability and success of potential suppliers, both during sourcing and ongoing supplier relationship management. For example, procurement and supply management leaders can:
Hotspot companies that are lagging in specific areas in a quick and efficient way instead of having to survey or collect data directly on an entire supply chain portfolio
Prioritize oversight on these companies and track them month to month to see if their performance continues to lag — with potential negative consequences for your business — or if it improves
Engage these companies directly and encourage them to improve their performance, perhaps by setting up a performance plan or even a contractual agreement to incentivize improvement
Substitute alternate suppliers considered too high-risk with others that offer the same services but with better ESG performance
Incorporate expectations for ESG performance in RFP criteria, contracting, and supplier onboarding to screen for companies that will be able to deliver the right products and services while operating with consistent reliability and responsibility
For those just starting to explore ESG, one common question is “Which is the most important component — the E, the S, or the G?” The answer is: it depends, because there are many different ESG use cases that vary according to industry sector and user. A procurement team focused on supplier diversity requirements might attach greater importance to the “S” dimension. In other instances, a climate-related event with international impacts, such as the Canadian wildfire smoke that reached all the way to Europe, reinforces concerns about GHG emissions which fall under the “E” dimension.
Overcoming ESG Data Challenges
If you and your organization are just starting to get your heads around ESG, it’s understandable that you might also need guidance on how to get hands-on with it. One common initial problem has to do with the acquisition of ESG data. Insufficient or nonexistent data is a challenge that holds many companies back from starting to address ESG goals. Immature data collection, management, and analysis practices hinder a company’s ability to draw insight and apply ESG analytics at scale.
In addition, ESG adoption hurdles are largely driven by the inadequate technology that many firms use to manage, analyze, and report ESG data. Finding a reliable ESG data resource that can be automatically integrated with your first-party or proprietary data can vastly help increase visibility into ESG risk management.
The current landscape for ESG data providers contains many established vendors offering broad data sets to cover the widest possible range of ESG risks. Different firms distinguish their offerings from each other by different criteria — for example, the depth of their coverage of Scope 1, 2, or 3 emissions; whether the available data covers private or public entities, or (ideally) both; and which of the leading sustainability frameworks, such as the Carbon Disclosure Project (CDP), Global Reporting Initiative (GRI), and the Sustainability Accounting Standards Board (SASB), are leveraged as part of the data provider’s ranking methodology.
Learning and Doing More with ESG
You may still hear some casual references to ESG as a “fad,” but the fact is that ESG is here to stay; innovation in the ESG ecosystem is accelerating and ESG data on both public and private companies is becoming more widely available. ESG has gone well beyond theory, and it’s time for organizations to start pursuing more active management of nonfinancial risks encompassing environmental, social, and governance factors.
Learn more from our eBook, A Practical Guide to ESG Data and Tools, which includes:
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The information provided in articles are suggestions only and based on best practices. Dun & Bradstreet is not liable for the outcome or results of specific programs or tactics undertaken based on your use of the information. Please contact an attorney or financial/tax professional if you are in need of legal or financial/tax advice.