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Supply chain 2022 prediction: companies must fully embrace ESG

Published by , Editorial Assistant
World Pipelines,

To be competitive in 2022, companies will need to embrace ESG, moving beyond ‘yesterday’s supply chain’ towards a model that appeals to customers, business partners, employees, and shareholders. While any progress a company makes to embrace ESG goals is important, only those companies that truly grasp the concepts and weave them into their core mission and vision will emerge as winners.

Supply chain 2022 prediction: companies must fully embrace ESG

This past year put supply chains at the forefront of everyone’s mind. Shortages of household goods and cleaners marked the headlines of news stories. The discussion of supply chains placed focus on issues surrounding the heavy reliance on globalisation and concerns that result when there are delays, shortages, or unexpected circumstances (e.g. COVID-19). Despite these splashy headlines, other companies were making waves of their own with the adoption of more stringent ESG standards. While not all companies have fully embraced ESG, taking a proactive approach to building a sustainable supply chain is the path forward.

How did we get here?

Learning from the past is always important to understand how companies and supply chains have evolved. In the early 1900s, factories were turned inward and focused on local and regional markets. World wars, standardisation of shipping containers, and the introduction of computers paved the way for turning more outward and thinking of global networks. Companies sought cheaper labour markets for producing their products. Companies sought competitive advantages based on cost.

That worked for a while. Then, customers started to develop a conscience. The conscience was derived from beyond a basic outcry over labour issues with overseas factories. It incorporated environmental factors, anti-corruption, fair wages, workplace safety, consideration of over shortages of natural resources, and geopolitical concerns. A 2019 survey found that people demanded a “fundamental change in the world” and “wanted businesses to drive it.” Consumer products companies made headlines with these changes. Patagonia, for example, donated US$10 million to non-profit environmental groups, an amount equal to the tax break they received from the government.

Pushing companies towards ESG

Many consumer companies are pushing for standards and certifications within ESG to position themselves as having a competitive advantage. For example, Bombas is B Corp certified — meaning it had to achieve high standards of social and environmental performance, transparency, and accountability. Bombas is known for helping others in need with its business model. TOMS is also B Corp certified for initiating sustainable business practices, sourcing greener packaging, reducing its carbon footprint, and transparency reporting. Customers are demanding more from companies in this new economy. No longer can companies compete on cost alone. At the end of the day, consumers are choosing winners based on the social consciousness of the brand.

Shareholders and investors are also pushing companies towards ESG. An October 2021 article headlined ‘Trillion Dollar ESG Boom Is Punishing Old-School Energy Stocks’ illustrates that companies which fail to embrace ESG fall short in investment potential. Investors moved away from energy as evidenced in the graph below from 2014 at 10 000 index points to under 5000 index points in 2020.

A June 2021 Gartner study found that 85% of investors considered ESG factors in their investment decisions. Companies cannot afford to sit idly by and watch from the sidelines. With the call from investors amplifying the ESG call from customers, companies must act now.

Embrace the new ESG Paradigm

No longer can companies afford to take a myopic view on ESG. Energy companies, like those that manufacture consumer goods, must also embrace the new paradigm. Shell is a prime example of a company looking to embrace ESG with US$2-3 billion a year directed to renewables and new energy solutions. According to its 2020 sustainability report, Shell’s target is to become a net-zero energy emissions business by 2050. In addition to focusing on the production of energy, Shell also focuses on ESG by working with partners to reduce its overall carbon footprint. BP shares similar aspirations based on its 2020 sustainability report. It too has set net-zero emissions targets by 2050 or sooner. The company wants to improve the lives of others, embrace diversity and education, as well as focus on environmental concerns.

Building supply chain resilience through ESG

If 2021 has taught us anything it is that we need greater diligence on supply chain planning and a re-examination of old assumptions. The supply chain must be resilient. Companies were caught unaware when their supply lines vanished overnight. Having insight into ESG allows a company to get to know its partners more in-depth and truly analyse them. Are they transparent? How do they treat their employees? How do they treat their suppliers? Do they consider the environment in their business model? Arguably, companies with in-depth plans have thought long and hard about the avoidance of supply chain disruptions. Therefore, they are more likely to ensure smooth business amid unexpected stresses on the overall network.

Consider also that the EU voted in early 2021 to recommend a due diligence law that would hold companies, their suppliers, and their sub-contractors liable when they harm or contribute to the harming of human rights, the environment, or good governance. Germany adopted the directive making it mandatory starting in 2023. Other countries are considering policies to push the directive and guide business within their respective countries.

The question is no longer: will ESG be required? Rather, the question is now focused on how extensive must ESG be for a company?

I’ve embraced ESG: what now?

Companies must evaluate their supply chains relative to the tenants of ESG. With increased globalisation and outsourcing of labour, traceability and transparency are critical. An ESG mentality will push companies to review their supplier network and look internally. This approach will empower companies to develop comprehensive standards by which they can be graded within their network to ensure priorities are aligned. Heed the warning of Gartner that says: “more than 25% of a company’s market value is attributed to reputation.”

It is therefore critical to examine the supply chain and set up the systems and integrated processes by which to collect the data to generate proper metrics. Only then can you truly understand the health of your supply chain and if your company is on track towards building supply chain resilience while applying the core principles of ESG.

Image: Patrick Long, Director in Opportune LLP’s Process & Technology group

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