Procurement is now pivotal to turning ambition into action, resilience and profitability
Supply constraints, climate change, human rights and ongoing global health care concerns are among a broad set of issues accelerating the drive for a more sustainable future. Organizations are taking action. More of the world’s Chief Executive Officers (CEOs) are making sustainability goals public, and procurement is quietly becoming a barometer of an organization’s progress.
With up to 90% of an organization’s environmental, social and governance (ESG) risk residing within the suppliers a procurement team manages, this once back-office function is now pivotal to enabling sustainability.
Environmental, Social and Governance (ESG) metrics have gained traction as ways to hold companies—including their supplier accountability for sustainability efforts. These metrics vary widely, including: tracking carbon emissions, addressing human rights risks like zero child labor in the organization’s supply chain or understanding the circularity of materials used throughout the supply chain.
Climate reporting is already mandatory in Europe and this past March the U.S. Securities and Exchange Commission (SEC) officially proposed its much-anticipated mandatory climate-related disclosure rules for publicly-traded companies in the U.S. With procurement teams on the front lines of sourcing and securing goods and services throughout the supply chain, it is critical to adopt a sustainability mindset in all decisions. This means everything from monitoring the materials that go into products or services to tracking suppliers and ecosystem partners and assessing their overall environmental impact as a result of how they do business.
Yet many procurement teams aren’t equipped with the strategy, expertise, tools and incentives to execute their organization’s sustainability goals. This disconnect surfaced in a recent Accenture and HFS Research (HFS) study of 350 enterprise leaders, including Chief Procurement Officers (CPOs). The study examined how sustainability links to procurement and the entire supply chain. The findings reinforce themes that emerged at the recent COP26 UN Climate Summit that leaders need to think bigger and more holistically to turn sustainability aspirations into action. For all the talk about striving to be green, what has become clear is that sourcing and procurement are integral to an organization’s sustainability agenda and preparation is key.
According to Accenture’s research with HFS, 60% of CEOs see the need for sustainability but significantly overestimate their organization’s ability to adopt these practices throughout the business. Only 27% of organizations see their CEO or board supporting sustainability and even fewer, 12%, see those same CEOs or boards leading the effort. Only 40% of organizations have dedicated sustainability teams, and about one-third say procurement is actively supporting their organization’s sustainability efforts. To drive real change, leaders must champion initiatives at every level of the organization.
The study revealed that leaders also need to better align with their leadership peers across different areas of the business. Over half of organization leaders outside of procurement see sustainability as a top-three procurement priority, while only 22% of procurement leaders feel the same way.
Leaders also underestimate the level of work that needs to be done to enable sustainability in procurement processes and teams. This observation is supported by companies spending less than 2% on ESG activities, and more than half of leaders don’t see that changing, with some even believing it may decrease.
Seize opportunities through procurement
In its role to source and secure goods and services throughout the business and manage supplier relationships, procurement is well positioned to enable sustainability. In fact, it is a huge opportunity. Managing scope 3 emissions and social risks can feel overwhelming because it requires companies to influence ESG factors outside of their operational control. To help drive sustainability, you need to reset expectations and begin taking key actions.
Many organizations begin their sustainability journey by focusing on emissions, which are divided into three categories: Scope 1 emissions are direct greenhouse (GHG) emissions resulting from what you are combusting, such as natural gas, refrigerants or transportation fuel, at your own facilities and owned fleet. Scope 2 includes indirect GHG emissions associated with the power and electricity that you buy and use, from utility providers, and where renewables would fall. Scope 3 are indirect emissions from both your upstream and downstream supply chain and typically represent the largest amount of emissions. They often start with Scope 1 & 2 emissions.
Depending on the industry, scope three emissions can be a big challenge—and where procurement teams can have a big impact. Consider that companies hiring services cannot control the operations of their suppliers, yet they are accountable for their supplier’s emissions. This means procurement teams must now view suppliers with an ESG perspective and consider how they may fit within their organization’s ESG goals. For example, teams may look at whether suppliers are buying renewable energy, investing in electric vehicles or offering recyclable materials. Understanding their own carbon footprint and establishing sustainability considerations as part of the procurement process are good first steps.
Some companies are already establishing strategies to reduce emissions. A pharmaceutical organization set a goal to reduce its scope three emissions 30% by 2030. Accenture identified priorities within its supply chain and collaborated on how to embed ways to remove carbon into existing procurement practices. The result is a roadmap outlining how procurement will help achieve its corporate goals, such as getting to net zero emissions.
Managing to ESG metrics also requires quality and in-depth data on a whole new level. At the beginning of the process, create a data-collection strategy to identify and gather the right kind of data and determine how to measure ongoing progress. This includes training internal teams and suppliers on the metrics needed to substantiate sustainability reporting.
Building a sustainable future demands that organizations, led by their leaders, step back to see a bigger picture and think creatively about existing resources. Once procurement has the targets, processes and tools in place, an intelligent operating model can mine the data, surface insights and enable tracking and assessing supplier progress to better manage those relationships. Current information will also make it easier to have strategic conversations with various organization stakeholders and suppliers to achieve goals and continuously improve.
Another key step is making sure sourcing and procurement teams are equipped with the tools and knowledge they need. Consider training teams to understand the nuances of sustainability within each supply chain area, the importance of supplier diversity and how to identify opportunities. Position this upskilling as a way to grow each team member’s career trajectory, giving them new skills that are essential in this new sustainability era.
Apply an ESG lens to determine sustainability hot spots for the organization, including suppliers to prioritize. Add sustainability to your procurement scorecard and develop short-, medium- and long-term plans to set and achieve ESG goals.
Adopting a more holistic view, beyond cost, also means resetting boundaries for procurement purchases in different disciplines and tapping broader expertise. In other words, it takes a team.
Managing to ESG metrics will also require quality and in-depth data on a whole new level. Identify and create a data-collection strategy from the beginning to gather the right kind of data and determine how to measure ongoing progress.
Turn ambition into action
According to our study, respondents see these as three main spend categories to initially focus on
Consider a transition to renewable energy. This can drive millions in savings. Using renewable energy can also help companies manage future volatility in the energy market.
Be thoughtful about when to travel for in-person meetings. Take advantage of fuel trends, such as sustainable aviation fuel. Give employees tools to consider the carbon implications.
Electrify your fleet or pursue electric last-mile strategies. Transition from carbon-intense delivery (air) to less harmful modes of operation.
There has never been a more urgent time to turn ambition into action or more opportunity. Organizations building sustainability into their DNA can create a competitive advantage by becoming more efficient, transparent and profitable with workforces and operations equipped for the future. Take those first steps, leveraging procurement to influence and manage the supply chain’s impact and helping to drive a more sustainable future.