In the space of a few, short years, the conversation surrounding sustainability has shifted from passing trend to business imperative.
Why? Because expectations have changed – from governments, regulators and perhaps most importantly, customers.
Operating in the traditional way businesses always have is no longer enough. ‘Business as usual’ simply won’t cut it.
In this article, GDS Group Presenter and Content Creator Alex Wood examines why, when and how environmental, social and governance (ESG) initiatives became a strategic priority for businesses – and the innovative ways supply chains have evolved in response.
- Sustainability initiatives can drive profit and create new business opportunities – as well as support the environment and help define a company’s purpose
- ESG originated in the 1960s, when it was commonly known as socially responsible investing
- Supply chains are responsible for the bulk of an organization’s environmental impact
What is supply chain sustainability?
Supply chain sustainability is best thought of as a company’s efforts to consider (and reduce) the environmental and human impact of their products’ journey through the supply chain – from source to store.
The goal is to minimize the impact this process has on the environment. This might involve measuring how much energy is used, the water consumption or how much waste is produced as a result.
Another consideration is what impact this has on the people and communities who play an integral part in the chain – those who make the product, for example, or work on the factory floor.
Environmental, social and governance (ESG)
90% of global institutional investors revise investments if companies do not at least consider ESG criteria within their business model (source: EY)
Why does sustainability matter?
Sustainability means different things to different organizations. But a number of studies have shown businesses that have successfully implemented sustainability programs have benefited far beyond simply defining their purpose. In fact, a growing body of evidence indicates ESG initiatives can drive profit and create new business opportunities.
According to research by Deutsche Bank, companies with high ratings for ESG factors have a lower cost of debt and equity – 89% of the studies they reviewed show that companies with high ratings outperform the market in the medium (three to five years) and long (five to ten years) term.
The Carbon Disclosure Project found something similar – companies listed on its Carbon Disclosure Leadership Index and Carbon Performance Leadership Index record superior stock-market returns.
“Everyone thinks you’ve got to be 100% clean, green, everything, to even think about it,” he said. “Organizations see B-corps and net-zero businesses and think they can’t talk about it until they reach the same level…but that’s not the case.”
“Sustainability, for me, means purposeful practices that align with the vision of a business.”
Jax Davey, CEO of Nuevo
This view aligns with that of Michael Miller, who is the Chief Procurement Officer and Senior Vice President, EHS and Sustainability, at Advance Auto Parts in the US. He was asked about his company’s approach to ESG during a sustainability-themed panel session during GDS Group’s Supply Chain Summit in September last year.
When did it become a priority?
Sustainability first surfaced as a corporate strategy a few decades ago. In fact, the practice of ESG can trace its roots back to the 1960s, when investors excluded stocks – or even entire industries – from their portfolios based on certain business activities like tobacco production or involvement in the South African apartheid regime.
But according to Forbes, it wasn’t until 2006 that ESG issues were formally mentioned in a United Nations report which required companies to adhere to certain criteria in their financial evaluations.
At the time, 63 investment companies – composed of asset owners, asset managers and service providers – signed with $6.5 trillion in assets under management (AUM) incorporating ESG issues.
As of June 2019, there were 2,450 signatories representing over $80 trillion in AUM.
As of 2020, 88% of publicly-traded companies had ESG initiatives in place (source: NAVEX Global)
How should businesses respond?
Philips – the well-known Dutch brand that makes electronics goods – is a good example of a company that has learned to embrace ESG.
Georgie Vidonish, Vice President, Head of Integrated Supply Chain Strategy at Philips shared he has set “aggressive targets” for its future.
“Philips has made the ESG agenda part of our purpose and, in 2020, we actually completed several major milestones on our roadmap,” he told the audience at GDS Group’s Supply Chain Summit last year.
“We have 100% of our operations now powered by renewable energy and 100% of our sites are sending zero waste to landfills…in 2021, Philips was also recognized with a top score – we got 90 out of 100 in the SNP global ratings, which assess ESG strategies’ targets and performance,” he said.
“This was the highest score awarded by SNP, which is something to be very proud of.”
Further research has shown that, for most companies, the supply chain is responsible for the bulk of their environmental impact. That’s because they typically involve energy-intensive production and transportation as goods are manufactured and shipped worldwide. Therefore, organizations can often make the biggest gains by making changes to their supply chain rather than other areas of the business.
During a recent roundtable event with GDS Group’s Meet The Boss, logistics leaders from a range of industries shared their top tips for making change.
- Take ‘commercial’ out of the conversation – build trust with suppliers when asking for evidence of their sustainability commitments. Make it clear why you want to see proof of their energy usage, reassure them of the vital role they play in your supply chain and make the relationship mutually beneficial.
- Show the value to your suppliers – your suppliers’ data does not just benefit your organization, it could be beneficial to them, too. For example, it could identify ways in which they can reduce their emissions or reduce costs.
- Share the product’s journey with your customers – being transparent means being transparent with your consumers. You have to involve them in your product’s story if you want your sustainability credentials to stand up to scrutiny. Use technology like QR codes to allow consumers to scan the product they’re using and learn about where it has come from, how much carbon it has created and what the business is doing to offset that carbon.
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