Stakeholders of all stripes want companies to do more to promote sustainability and combat climate change. Their number includes investors, employees, customers and the community the companies serve.
Because of these expectations, ESG (environmental, social and governance) initiatives have become major competitive differentiators in the marketplace. These initiatives signal that an organization is invested in making substantive, proactive changes in this space, which does wonders for a company’s reputation. They also directly affect the bottom line, as ESG initiatives help to reduce the risks associated with environmental and social changes. A reduced risk profile often translates to increased share prices and better credit ratings, all of which can help operational efficiency and performance.
Beyond the outright benefits of proactive ESG programs, we are looking at a potentially major change in the regulatory landscape that all companies, particularly within their spend and procurement teams, need to prepare for — a tsunami of ESG regulations.
Minus 2 years until landfall
Tsunamis are most commonly caused by an earthquake below the surface of the ocean, the force of which spreads outward, and the gigantic wave it produces eventually crashes into a nearby shore.
In the case of ESG regulations, the earthquake event was the European Union’s passage of the Corporate Sustainability Reporting Directive, which mandates that many companies doing business across the EU must disclose certain ESG measures and initiatives being taken to promote sustainability.
As a result of that directive, we are seeing other countries across the world begin to work on their own guidelines for sustainability reporting requirements. In the US, there’s a clear interest in taking similar steps to promote climate sustainability through ESG regulations. In March 2022, the SEC proposed its own set of measures on mandatory ESG reporting similar to the EU’s. While the fate of that specific proposal is up in the air, the trend is clearly moving in that direction, and it could take as little as two years for those regulations to pass.
This presents a challenge for spend teams
These regulations will put a slew of to-dos on businesses’ plates, but the burden of those tasks will be placed on spend and procurement teams.
That’s because, though not many people realize it, two-thirds of the average company’s carbon footprint lies with its suppliers — what we refer to as “Scope 3” emissions. This means that all of the following tasks will fall to spend professionals to manage in order to properly report on suppliers’ sustainability impacts:
- Determine a calculation methodology to be used across all suppliers — and the company as a whole — and find a balance between accuracy and ease of collecting and reporting.
- Collect the data across hundreds or even thousands of suppliers. This requires a specific data structure, secure logins and for the data to be regularly updated.
- Identify suppliers that fall below thresholds the company has set, escalating as needed with approval flows and detailed audit flows for reporting.
- Validate these sustainability measures through a rating or certification agency, such as EcoVadis or Moody’s.
- Report as required by regulations or for RFPs and other ad-hoc reports, and both track progress toward goals and provide that data to data warehouses and systems.
Spend teams will also need to track and report on the publicly-made commitments to improve supplier ESG performance — which could require rebalancing the company’s supply base to reduce the overall carbon footprint of the organization.
The solutions are out there, here’s what to look for
Third-party spend management platforms that are tailor-made to gather all of this data and build out easy-to-follow workflows for both spend teams and suppliers exist on the market today. Some platforms, like Certa, even have built-in modules for ESG that can guide users through the whole process; from creating disclosure reports and reporting emissions to workflows and collaboration tools. They can also provide vendor scorecards that can be used to evaluate suppliers’ sustainability performance.
When searching for ESG software, other important considerations include specific metrics the software reports on, the accuracy and reliability of the data, support offered by the provider and the ability of that tool to integrate with others already in use at an organization. With all those above boxes, your spend team can be prepared for the tsunami of ESG regulations that’s coming our way.
