ESG Across the Supply Base: What Good Looks Like Versus What Bad Looks Like

ESG (Environmental, Social, and Governance) expectations that used to apply only to the organisation itself are now extending into the supply chain. Investors, regulators, customers, and civil society increasingly expect organisations to understand and manage the ESG performance of their suppliers, not just their own operations. In 2022, with mandatory supply chain due diligence legislation advancing in several jurisdictions and with large-company supply chain disclosure requirements expanding, ESG supply chain management has moved from voluntary best practice to a compliance and risk management imperative.

But most organisations are at an early stage of ESG supply chain management, and the gap between what they claim to do and what they actually do is significant. Here is a direct comparison of good and bad practice.

What Bad ESG Supply Chain Management Looks Like

• Bad: Distributing a supplier code of conduct and calling it ESG management. A supplier code of conduct that is sent out once at supplier onboarding and never followed up is not supply chain ESG management -- it is liability shifting. The code of conduct sets expectations; ESG management verifies that they are met.

• Bad: Applying the same ESG requirements to all suppliers regardless of risk. A small domestic professional services firm and a large overseas manufacturing supplier have very different ESG risk profiles. Applying the same assessment burden to both wastes resources on low-risk suppliers and underinvests in high-risk ones.

• Bad: Treating ESG supplier assessments as a one-time activity. ESG risk in supply chains changes over time -- supplier ownership changes, operating conditions change, regulatory requirements change. An ESG assessment that was accurate two years ago may not reflect current conditions.

What Good ESG Supply Chain Management Looks Like

• Good: Risk-based segmentation of the supply base. The organisation identifies its highest-ESG-risk suppliers based on factors such as category, geography, spend level, and supply chain tier, and applies proportionate assessment and monitoring intensity to each segment.

• Good: Supplier ESG performance data is collected regularly and used in sourcing decisions. ESG performance becomes an input to supplier selection, qualification, and performance review processes -- not just a standalone compliance activity.

• Good: The organisation distinguishes between ESG compliance (meeting minimum standards) and ESG improvement (supporting suppliers in improving their performance over time). Strategic supplier development programmes that include ESG improvement targets are more valuable than annual audits that check boxes without driving change.

• Good: ESG supply chain data is connected to the organisation's public ESG reporting. Investors, regulators, and other stakeholders expect supply chain ESG data in sustainability reports. An organisation that cannot report on supply chain ESG performance cannot credibly claim to manage it.

XNM supports public-sector and capital-project organisations in building responsible procurement and supply chain ESG management capability. Reach out to XNM's procurement, sourcing & contract management team to discuss ESG supply chain management for your organisation.