How Businesses Can Effectively Respond to Sustainability Data Requests in the Supply Chain

Introduction

With the escalation in climate-related and other ESG risks in recent years, and the proliferation of regulations surrounding sustainability disclosure, enterprises are setting robust sustainability milestones.  As the crux of many companies' sustainability challenges is embedded in their supply chains, which remain beyond their control, those intending to improve performance are seeking additional collaboration.

To reach their targets, multinational behemoths like Ford, Unilever, and Amazon are rallying the participation of their supply chains.  Amazon, to illustrate that point, has laid out its intention to require more than 200,000 suppliers to begin logging their emissions and formulating emissions reduction targets, effective 2024.

Acknowledging this new sustainability landscape, there's continued development in ESG data requirements.  It's a growing phenomenon that customers and suppliers join forces to improve supply chain sustainability.  Evidence of this rising pattern is the increase in companies using the Carbon Disclosure Project to ask for environmental data from their suppliers, which has swelled from 23,000 in 2021 to in excess of 40,000 in 2022.

This blog will delve into the forces propelling the rise in requests, what is being asked for, and how to begin addressing these requests.

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Supply Chain Sustainability

A sustainable supply chain recognizes and acts upon its environmental, economic, and social effects.  In the case of most companies, the supply chain rather than direct operations is where the majority of ESG impacts occur.  Addressing emissions within the supply chain has the potential to create a tangible change in global sustainability progress goals.  Therefore, the route to achieving the greatest ESG and sustainability impacts lies in collaboration and engagement with suppliers.  While the pace of progress has been slow until now, a growing number of companies are beginning to grasp and capitalize on this opportunity.

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Scope 3 Emissions a Key Focus

The main issue facing companies in their supply chains is how to measure and reduce value chain emissions, also known as Scope 3.  Scope 3 emissions originate from activities not directly controlled by a company.  They are the emissions produced by third parties like suppliers, customers, and partners.  On average, these emissions are 11.4 times more substantial than those originating from a company's own operations.

Scope 3 emissions are known for their complexity, murky data availability, and difficulties in influencing others' decarbonization agendas.

To address these challenges, companies with Scope 3 emissions typically deploy the following variety of methods:

• Sustainable Procurement:  Adopting products and services that minimize emissions, raw materials, and unethical labor.
• Supplier Collaboration:  Larger entities can share their know-how and support to enable their suppliers to improve sustainability performance.
• Supplier Mandates:  Incorporating into supplier agreements that businesses must assess, report, and set ambitious sustainability targets.

Companies have limited choices to understand and reduce Scope 3 and related sustainability metrics.  They must either partner with current suppliers willing to start reporting or transition to compliant partners.

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Other Supply Chain Insights

While reducing emissions is of utmost concern, attention towards other topics, such as deforestation, biodiversity depletion, and modern slavery, is growing.  Consequently, inquiries for ESG data like packaging waste, end-of-life strategies, DEI statistics, water consumption, and more are on the increase.

As suppliers' ESG data expectations continue to broaden, businesses emphasizing their products' complete lifecycle, from inception to disposal, and concentrating on resource efficiency, sustainable materials, recyclability, and ethical behavior will gain a competitive edge.  Large multinational corporations tend to favor suppliers who excel in sustainable performance.

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Why Companies Are Requesting Supply Chain Sustainability Data Now

Driven by both consumer desires for sustainability and policy requirements for sustainability reporting within supply chains, businesses are incorporating supplier information to measure sustainability metrics and curtail emissions.

To ensure their suppliers comply with their sustainability goals, companies utilize various methods.  Examples are:

• Target:  One of Target’s goals is to improve the diversity, equity, and inclusion (DEI) score across their supply chain by spending $2 billion with Black-owned businesses by the end of 2025 and increasing their number of diversity-owned suppliers.  Therefore, Target is requesting DEI information from their suppliers.
• Royal Phillips:  The healthcare technology company has made the bold target of generating 25% of sales from circular products, services, and solutions.  Therefore, it prefers suppliers that have circularity embedded into their products and services.
• Microsoft:  To meet their ambitious goal of being carbon-negative by 2030, Microsoft requires suppliers to report Scope 1, 2, and 3 emissions data annually and set targets to reduce emissions by 55% by 2030.

To become a supplier of choice for these or similarly minded companies with strong, sustainable supply chain agendas, suppliers must quantify and bolster sustainability within their operations to, in turn, improve the sustainability of their clients' supply chains.

Considering the high expenditures associated with complying with these supplier requirements, it's wise for smaller companies to start with simple measures and introduce progressive improvements to their strategy.

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The Impact of Supply Chain Sustainability Efforts on Suppliers

Companies newly engaging in ESG pathways, beginning to amass data and create frameworks to strengthen their sustainability, may stumble upon several challenges.  These might include:

• Skill and Expertise Shortfalls:  Smaller entities may lack the internal know-how to tackle supply chain sustainability data requests, leading them to consider hiring additional staff or enlisting external experts.
• Insufficient Resources:  The time and financial requirements to secure the needed tools, training, and know-how could be overwhelming.
• Diverging Sustainability Requests:  Balancing efforts like emissions tracking, DEI enhancement, or reducing deforestation against other financial or R&D commitments might stretch resources thin.
• Numerous and Varied Requests:  The variety of ESG requests, each potentially requiring different formats, may cause confusion and delay in accurate responses.

Even with these hurdles, the chances for gaining new business, uplifting brand reputation, and reducing future risk outweigh the challenges. The opportunities might include:

1. Business Preservation and Growth: Proactive responses to supply chain sustainability data inquiries can ensure client retention and attract new customers keen on sustainability.
2. Forging a Competitive Lead: Comprehensive, accurate, and timely ESG information can set a firm apart, signifying market adaptability to changing market demands and showing leadership in sustainability. This competitive edge can be a crucial differentiator, especially in industries where customers seek sustainable solutions.
3. Improving client relationships: Stakeholder engagement in ESG matters leads to stronger customer relationships. By openly sharing ESG data, a company can foster deeper connections based on trust, shared values, and common goals.
4. An understanding of ESG risks: Responding to supply chain sustainability data requests requires examining a company's sustainability practices. By evaluating the alignment of practices with ESG standards and stakeholder expectations, a company can identify potential risks or areas for improvement. Understanding these aspects can guide strategic planning, risk mitigation, and continuous improvement in ESG performance.

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Supplier Response Tactics: How to Be Effective

To optimize the collection of ESG and sustainability data and reduce related challenges, companies must first analyze the sustainability priorities of their largest clients.  What are their main goals?  What areas are they focusing on in their sustainability reports and reduction efforts—is it climate, waste, biodiversity, DEI, or something else?  Grasping this can aid your business in deciding which ESG data to prioritize and when to collect it.  Additionally, for accurate responses to data requirements, suppliers could:

• Prioritize supply chain sustainability data needs: Sort these needs based on their relevance, alignment with your company's goals, and timing. By discerning which needs are most critical or challenging, you can allocate resources more effectively and focus where the impact will be most significant.
• Formulate a dependable supply chain sustainability data collection mechanism: Ensuring timely and accurate ESG data replies depends on having a robust data collection mechanism in place.
  • Acquire appropriate ESG data management software: Investing in specialized tools allows for efficient and streamlined data collection, storage, and analysis and supports standardization and automation in reporting.
  • Seek external support: Teaming up with ESG consultants or industry specialists can lend expertise and support in navigating intricate ESG data requirements, ensuring alignment with best practices, legal obligations, and stakeholder anticipation
• Clearly convey supply chain sustainability data: Transparency and open communication are pivotal in establishing trust and credibility. Being candid about your ESG data procedures, progress, and shortcomings fosters brand integrity and shows a genuine ESG commitment.
• Conform to recognized ESG and sustainability reporting standards: Aligning with frameworks like the CDP, GRI, and ISSB ensures uniformity, credibility, and preparedness for any ESG data request, simplifying the reporting process along the way.

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Futureproofing Through Sustainable Supply Chains

As large enterprises embark on the path to a sustainable future, an essential component of this journey involves encouraging suppliers to actively weave ESG and sustainability principles into their business models.  This growing concern for sustainability within supply chains is likely to emerge as a fundamental business necessity, driven by:

• Compliance with ESG Regulations: Governments across state, federal, and international authorities are increasingly enforcing regulations requiring companies to provide detailed environmental, social, and governance reports. This will inevitably lead to a rise in compliance-oriented queries to suppliers. Being proactive in understanding and adhering to these regulations not only diminishes non-compliance risks, but also bolsters your brand's reputation.
• Addressing Amplified ESG Risks: The need to identify and alleviate ESG risks has never been more critical. Enterprises that anticipate potential risks, manage them, and use these challenges as catalysts for innovation will foster longer term sustainability. Suppliers aiding companies in handling these risks will enjoy continued business and greater market reach.
• Commitment to ISSB: The ISSB standards introduced in June 2023 stand to define global best practices for ESG and sustainability reporting. All leading international ESG disclosure rules are now aligned or compatible with these standards, with every voluntary standard either under ISSB's purview or functioning in collaboration with them. Suppliers' compliance with these standards ensures readiness to comply with any ESG data request, and will reduce the number of different ESG data requests companies receive, reducing the possibility of double reporting and simplifying the process.

Although these factors make it more likely for companies to receive ESG data requests, the increased ESG risks and convergence of global standards and regulations around the ISSB will make reporting easier and more meaningful.  Companies that start reporting their ESG data today will also benefit from long-term synergistic relationships with customers and be able to innovate as the market shifts to a more sustainable economy.

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Anticipate the Call for Supply Chain Sustainability Data

It's a common understanding among corporations that the most significant impacts they can make on climate change and sustainability are within their supply chains. Inevitably, one of your clients or stakeholders will request your business to disclose information on ESG and sustainability. While it may begin with emissions tracking and reduction, the scope will undoubtedly broaden to include various ESG and sustainability indicators over time. Firms that take the initiative to begin their ESG journey today, treating customer ESG data inquiries as an opportunity rather than a hindrance, will position themselves well in the market.

Sustainability isn't an individual pursuit; it's something your stakeholders will expect you to partake in. If your company is looking for guidance to begin, and you wish to transform ESG and sustainability data inquiries from a hassle to a springboard for growth, our ESG professionals are available to assist at every phase, from data compilation to crafting successful mitigation plans. Contact us today to get started.

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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.