Insights

Making procurement sustainable: The power of ESG data

Suraj Rajeev, Head of Business Solutions, UST

Sustainable procurement, which integrates environmental, social, and governance (ESG) considerations into procurement decisions, is not an optional extra. It’s a business necessity. Sustainable procurement assesses the environmental footprint of products and services, scrutinizes the social practices of our suppliers, and evaluates the governance structures of our organizations.

UST’s core philosophy is simple yet profound. "Sustainability is actionable data. What isn't measured cannot be improved, and what isn't actionable will be ignored." In the context of procurement, this means we must measure our suppliers’ ESG performance, act on this data to improve sustainability, and challenge suppliers that do not meet our sustainability standards.

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The role of ESG data in sustainable procurement

Reliable and timely ESG data encompassing environmental, social, and governance factors is a critical component in sustainable procurement. It provides a comprehensive measure of a supplier's sustainability performance, offering a multi-dimensional view that informs procurement decisions.

The environmental aspect of ESG data includes metrics such as greenhouse gas emissions, water usage, and waste production. These indicators provide insights into the environmental impact of supplier operations.

The social dimension involves data on labor practices, human rights, and community engagement. This data helps assess a supplier's social responsibility and alignment with our ethical standards.

The governance component includes data on corporate ethics, transparency, and accountability. It provides a measure of a supplier's ethical conduct and governance practices.

Without this data, improving ESG performance becomes a challenge. You can't improve what you can't measure. Therefore, having accurate, dependable ESG data is crucial for identifying areas of improvement and tracking progress over time.

However, just having ESG data is not enough. It's equally important to have a standardized ESG procurement taxonomy. A taxonomy provides a consistent framework for categorizing and understanding ESG data. It ensures we compare apples to apples when assessing suppliers' ESG performance. This standardization is key to making informed procurement decisions and driving meaningful improvements in sustainability.

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Measuring ESG data in procurement

The measurement of ESG data in procurement can be a complex process, involving several methods and tools. Our goal is to ensure that ESG data is accurate, timely, reliable, and tied back to a metric that can be tracked over time. This provides a clear assessment of a supplier's or category's sustainability performance and the identification of areas for improvement.

Historically, supplier surveys were the method for collecting ESG data. These surveys, which probe a company's ESG practices, provided valuable insights but at the risk of delay and overly optimistic assessment. The responses create a sustainability scorecard for each supplier, offering a snapshot of their ESG performance. However, while surveys can provide useful information, they rely on self-reported data, which can sometimes be subjective or incomplete.

Audits are often used to verify the accuracy of self-reported data and identify areas for sustainability performance improvement. They provide a more objective assessment of a supplier's ESG practices, offering a deeper level of scrutiny than surveys alone. However, audits are costly in terms of time and direct investment and only happen infrequently.

In addition to surveys and audits, third-party data providers play a significant role in measuring ESG data. These providers aggregate data from a variety of sources, including surveys, audits, and government records, and compile this information into comprehensive reports for procurement teams. These reports provide a holistic view of a supplier's ESG performance, making it easier to compare suppliers and make informed procurement decisions. However, again, the process of collecting and aggregating the data can greatly delay access to useful information in time to help procurement decision-making.

The need for more accurate and quicker data drives ESG data collection development. There is a growing recognition that self-reported data, while useful, is not enough. Companies are moving toward systematically and automatically collecting data pulled directly from supply chain systems, inventory management tools, IoT sensors, and machine telematics. This shift allows for real-time tracking of ESG metrics and reduces the reliance on self-reported data. It also makes it easier to audit data and ensure its accuracy, further enhancing the reliability of ESG assessments.

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From data to action: Making ESG data actionable in procurement

Measuring ESG data is just the start. The next step is to make it actionable. This means transforming raw data into insights to inform decision-making and drive action. We view actionability as a two-stage process supporting human decision-makers.

Find the value in the data:

• Set goals. This provides a clear direction for procurement teams and serves as a benchmark against which progress can be measured.
• Select suppliers. This means using ESG data to assess potential suppliers and choose those that align with the company's sustainability goals.
• Track progress. This involves regularly reviewing ESG data, monitoring changes, and adjusting strategies as needed.
• Feedback. This can help suppliers identify areas for improvement and develop strategies to enhance their ESG performance.
• Collaborate. This involves working closely with suppliers to identify opportunities for improvement and develop solutions that benefit both parties.
• Integrate. Leverage data analytics and weighted models to integrate ESG data into supply chain performance measurements. Standard models for global supply chains have been developed and can be used as a starting point for development. (Zeng, Li, and Zeng 2022).

Present the data without overloading the decision maker:

• Human-centric design. ESG data needs to be presented in a way that is easy to understand and interpret.
• Context-aware surfacing of data. ESG data should be presented at the right time and in the right place to inform decision-making at critical points in the procurement process.
• Making ESG data actionable is about ensuring that the data is not ignored. This means ensuring that the data is presented in a way that is easy to understand and use and surfaced at the right time and in the right context to access the business value. By focusing on these factors, we ensure that ESG data is not just collected but also drives meaningful action towards sustainable procurement and business value.

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Benefits of using ESG data in procurement

Leveraging ESG data from supply chains to support procurement decision-making drives direct benefits:

• Improved sustainability performance: By partnering with suppliers that excel in ESG performance, procurement teams can bolster their operational sustainability
• Reduced risk: Strong ESG practices among suppliers can mitigate risks such as environmental liability, supply chain disruptions, and reputational damage
• Enhanced reputation: Research shows a direct link between demonstratable commitment to sustainability through procurement and improvements in a company's standing and perceived value among customers, employees, shareholders, and other stakeholders (Zumente and Bistrova, 2021)
• Direct financial benefits: Research has shown that using ESG data can lead to direct financial benefits. For example, a study of Nordic energy firms showed that strong ESG disclosure and reporting directly supported the issuance of lower cost “green bonds” (Jonsdottir, G.E. et al 2021) . Another study showed that ESG disclosure could significantly reduce credit spreads on corporate bonds in the secondary market, meaning that companies can borrow money at a lower cost (Yang, Y. et al 2021).

These benefits are further amplified by making ESG data immediately actionable through human-centric design factors in its presentation, context-aware surfacing of the data at decision-making points in the procurement process, and reducing the workload on procurement managers so they don't have to understand or track complex or obscure metrics.

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The power of ESG data in sustainable procurement

The measurement and use of ESG data is vital for enhancing sustainability through procurement. By leveraging this data to make informed decisions about supplier partnerships and relationship management, procurement teams can significantly reduce environmental impact, improve social outcomes, and enhance corporate reputation. For more information on how to measure and act on ESG data in procurement, visit ust.com.