Why manage Suppliers’ environmental and social impact? Is this a burden or a winning case?

Suppliers can have significant Environmental and Social (E&S) impacts on big companies’ operations, reputation, and sustainability performance. These impacts are critical as many large companies rely heavily on their supply chains to deliver goods and services. Managing key suppliers with relevant E&S impacts is tough if the supply chain map is vast. Increasing Environmental, Social, and Governance (ESG) performance presents several challenges for big companies. As ESG becomes a crucial criterion in business strategy, large corporations must navigate complex supply chains, diverse geographies, and varying levels of supplier sophistication.

According to the CDP 2022 annual report (Carbon Disclosure Project) 70% of global emissions come from the supply chain, and large companies are increasingly working with suppliers to reduce these emissions. Sustainable Supply Chain Research from Harvard Business Review (2020) reveals that 77% of companies reported that their focus on supply chain sustainability has increased since 2017. Large companies, particularly those in consumer goods and retail, are increasingly embedding ESG criteria into supplier contracts. Only 52% of companies said they assist suppliers with capacity building and training to meet ESG standards. Not the least, some statistics from EcoVadis’ “Sustainable Procurement Barometer” (2021 – statistics) show that only 65% of large companies have a formal sustainable procurement policy to improve their suppliers’ ESG performance. But how many of these have clear applicability and efficacity on the field?

Let’s consider the key potential E&S impacts that suppliers can bring to big companies’ supply chains. All these impacts can significantly affect big companies’ financial borders.

Environmental Impacts

  • Carbon Footprint and Greenhouse Gas Emissions – Higher emissions in the supply chain can prevent companies from meeting their sustainability or climate targets. This can also impact compliance with environmental regulations or participation in global sustainability, which means to a certain extent, financial penalties
  • Resource Consumption – A higher rate of resource consumption across the supply chain can negatively reflect a company’s sustainability commitments. Companies may face reputational risks if their suppliers are seen as over-exploiting natural resources and not the least some taxes at the end of the day
  • Waste Generation and Pollution – Poor waste management in the supply chain can harm big companies’ reputations, especially if suppliers violate environmental laws. This can lead to fines, legal penalties, and public backlash.
  • Biodiversity and Land Use – Consumers could criticize large companies that rely on natural resources from supply chains if their suppliers contribute to deforestation, biodiversity loss, or habitat destruction. Look at the EUDR requirements. These are tough.
  • Water Usage and Pollution – Excessive water use or pollution by suppliers can lead to water scarcity issues in local communities, making the company vulnerable to social backlash and regulatory restrictions.

Social Impacts

  • Labor Practices and Working Conditions – Violations of labor rights within the supply chain can lead to significant reputational damage for big companies, resulting in protests, loss of consumer trust, and the risk of regulatory penalties.
  • Community Relations – If suppliers’ operations harm local communities, it can lead to protests, social unrest, and disruptions in production. Companies may also face reputational damage for being seen as complicit or ignoring the needs of local populations.
  • Health and Safety – Incidents involving health and safety violations at supplier sites can lead to severe reputational damage for companies. Consumers, investors, and regulators may hold the parent company responsible for these lapses in health and safety standards, even if the incidents occurred at supplier facilities.
  • Fair Wages and Economic Impact – Paying fair wages and promoting decent work practices in the supply chain can strengthen a company’s social license to operate, enhance its brand reputation, and improve relationships with stakeholders, including investors and customers who value ethical sourcing.

“You are not responsible for the world, but you are responsible for your world.” – Michael Josephson​

Combined Environmental and Social Impacts

  • Climate Change Vulnerability – Disruptions caused by climate-related risks can cause delays, price fluctuations, and supply chain instability. These can lead to increased operational costs and affect the company’s ability to meet demand.
  • Sustainable Sourcing and Ethical Supply Chains – Failure to ensure sustainable sourcing can hurt a company’s credibility in sustainability rankings, diminish brand value, and lead to consumer boycotts or regulatory challenges. Ethical sourcing is essential for food, fashion, and technology companies.

How can big companies assist suppliers?

While large corporations play a crucial role in driving ESG improvements in global supply chains, managing suppliers through this lens presents significant challenges. Overcoming these barriers requires long-term collaboration, investment in technology and training, and a willingness to engage suppliers at all levels. Here are several ways in which large corporations can assist their suppliers:

  • Training and Education:
  • Workshops and seminars: Organize training sessions on reducing carbon emissions, improving labor practices, or implementing ethical governance policies.
  • ESG best practices guides: Provide suppliers with resources, guidelines, and case studies showcasing successful ESG implementation.
  • Financial Support and Incentives
  • Low-interest loans: Offer financial aid or subsidized loans to suppliers for adopting clean technologies or improving workplace conditions.
  • Incentives for compliance: Create incentive programs that reward suppliers for meeting specific ESG goals, such as sustainability bonuses or long-term contracts for high-performing suppliers.
  • Collaboration and Co-Innovation
  • Joint R&D initiatives: Partner with suppliers to co-develop new technologies that reduce environmental impact, such as energy-efficient machinery or circular economy models.
  • Knowledge sharing: Facilitate the exchange of information and best practices among suppliers through forums, industry associations, or online platforms.
  • Providing Tools and Technology
  • ESG reporting platforms: Offer suppliers access to platforms that help them track and report their ESG performance, enabling better data collection and compliance.
  • Supply chain monitoring systems: Provide tools or software that enhance visibility across the supply chain, enabling suppliers to track sustainability metrics like emissions or waste reduction.
  • Supplier Development Programs
  • Mentorship programs: Pair suppliers with internal experts or external consultants who can help guide them in ESG initiatives.
  • Transparent and Fair Auditing Processes
  • Collaborative auditing: Turn audits into collaborative exercises where suppliers receive actionable feedback and resources to correct deficiencies.
  • Support for improvement: Instead of penalizing suppliers for minor issues, offer support, training, and time to correct non-compliance issues and meet ESG expectations.
  • Promoting Local Sourcing and Ethical Supply Chains
  • Promote local sourcing: Encourage suppliers to source materials and labor locally, reducing environmental impact through shorter supply chains and supporting local economies.
  • Ethical sourcing policies: Work with suppliers to establish ethical sourcing practices, such as using certified raw materials or ensuring that labor practices align with human rights standards.
  • Encouraging a Culture of Sustainability
  • Lead by example: Showcase the company’s internal sustainability initiatives and invite suppliers to observe or participate in these projects.
  • Communications and campaigns: Run joint sustainability campaigns with suppliers to promote shared goals, such as reducing plastic usage or cutting emissions.

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