The need to integrate ESG principles and greater sustainability into the supply chain is intensifying, but a recent report suggests business readiness is lagging.

The role of sustainability in supply chain management is growing. More stringent regulatory requirements and increased consumer demand for transparency around the provenance of goods and services are both creating an urgent need for deeper visibility into the supply chain.

However, achieving that level of visibility is no easy task. For decades, procurement and supply chain functions have been structured around cost reduction, operational efficiency, and profit maximization. Pivoting the focus toward environmental, sustainability, and governance (ESG) is a heavy lift, especially for complex global supply chains managing multiple supplier tiers.

A recent report published by State of Flux and sponsored by S&P Global explored the state of sustainability in the supply chain, including key areas of risk, adoption rates, and best practices.

The supply chain is crucial to ESG

Supply chain transparency plays an outsized role in supporting ESG. For any business committed to prioritizing ESG, internal changes are not enough. Change needs to extend to the supplier network: In fact, the largest part of an organization's ESG impact resides in its supply chain. Dr Frank Lai, Global Head of Sustainability at State of Flux, estimates that as much as 80-90% of the total footprint for some industries is made up of the supplier network.

Deeper tiers hide bigger risk

To meet regulatory requirements, manage risk, and protect business performance, visibility into the supply chain needs to penetrate deeply. When evaluation and monitoring activities are restricted to direct suppliers, it leaves the organization exposed to unacceptable risk. The failure of a second- or third-tier supplier to meet ESG criteria, even if they are not bound to your organization contractually, can be a source of significant harm. According to Lai, about half of the disruption suffered by businesses during the pandemic came from tier two suppliers or beyond.

43% of businesses do not include the achievement of ESG goals in their supplier management programs. (State of Flux)

New mindsets, new approaches

ESG is a complicated and rapidly evolving set of standards and measures that encompass many areas, including modern slavery, human rights, hiring fairness, ethical leadership, animal welfare, carbon emissions, and toxic waste management. Establishing an ability to monitor and measure the impact of the supply chain on this diverse set of criteria requires new ways of thinking, new technologies, and new approaches to communications.

Change the mindset

We need to reframe ESG as more than a risk-reduction operation. Businesses that achieve greater transparency into the supply chain have an opportunity to differentiate in the market, carve out a competitive advantage, and see a tangible return on the investment in ESG performance. But first, supply chain leaders need to become comfortable with a degree of ambiguity as they explore the science and test the frameworks that will enable the business to move forward confidently.

Leverage technology

Businesses need deeper visibility into the supply chain, and that means collecting data from multiple tiers, not just direct suppliers. Technology plays a central role in helping the organization gather and consolidate data, flag potential issues, and conduct deep analysis. The capacity to collect data on tier two and three suppliers who, while they may not have a legal relationship with your partners, still play an integral role in the delivery of services or production of goods, is essential in providing the level of visibility that stakeholders, regulators, and customers demand.

Technology adoption lags for supplier management activities. Only 14% of businesses have a technology solution in place for CSR/sustainability management. (State of Flux)

Strengthen relationships

Technology is part of the solution, but regular, open, and honest communication with suppliers has an equally important role to play. These conversations provide early warning of potential issues as well as vital market intelligence. There is no replacement for these relationships as a means of reducing risk and building resilience, and this level of familiarity needs to extend to relationships with indirect suppliers as well.

The number of businesses collaborating with their suppliers on sustainability and ESG dropped from 32% in 2021 to 17% in 2022. (State of Flux)

From risk to revenue

While the immediate incentives for ensuring an ethical, sustainable supply chain are focused on risk mitigation, there are far greater advantages. Creating more visibility into the supplier network that supports product and service delivery doesn't just forestall disaster, it lays the groundwork for success. Businesses that support this level of transparency can differentiate their market offerings, strengthen relationships with shareholders and investors, and attract and retain customers and top talent more effectively.

Learn more about S&P Market Intelligence's approach to supply chain transparency. Explore KY3P, an integrated suite of solutions to manage end-to-end third party and vendor risk management.

For tips on how to strengthen your supply chain, read "Four ways to create supply chain resilience."

To find out the benefits of supplier management technology, read " The state of technology in supplier management."

To understand the bigger picture around supplier management, access the full State of Flux report.

_{S&P Global Market Intelligence is a division of S&P Global (NYSE: SPGI). S&P Global is the world's foremost provider of credit ratings, benchmarks, analytics and workflow solutions in the global capital, commodity and automotive markets. With every one of our offerings, we help many of the world's leading organizations navigate the economic landscape so they can plan for tomorrow, today.
For more information: www.spglobal.com/marketintelligence.}

S&P Global provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.