ESG in supply chains: Early integration can bolster your business
As the importance of ESG considerations becomes ever more necessary in supply chain operations, current policy adoption rates leave plenty of room for growth
Environmental, social and governance (ESG) concerns have come to the fore in recent years, as businesses — many long-considered to be stable and well-insulated — felt the strains of supply chain disruption. Between shifting governance and regulation, ongoing health crises and political conflict, ESG challenges are sure to take center stage in the near term.
We polled 244 global operations and information technology leaders from supply chain professionals to CHROs and other C-suite executives for our PwC Digital Trends in Supply Chain Survey 2022. Responding to regulatory changes and identifying risks to supply chain functions were top-of-mind ESG-related challenges, but many companies are missing opportunities to outpace competitors.
Here’s what we discovered.
What are the biggest supply chain ESG challenges?
Staying aware of evolving regulatory frameworks
Responding to regulatory changes — often complex or even varied between multiple jurisdictions — was cited as the most prominent ESG-related challenge to supply chains.
- 66% of those surveyed say staying aware of rapidly evolving legislative and regulatory frameworks in relevant jurisdictions is currently a challenge.
- Almost a quarter of the executives (23%) consider it a major challenge.
Identifying supplier risks and makeup — including DE&I
Homing in on supplier risks (environmental pollution, corruption, shortages of raw materials) is the second most prominent challenge, cited as a concern by 58% of respondents. Twenty-two percent say it’s a major challenge, and it’s a minor challenge for 36%. In fact, four out of five companies believe it’s something they’ll have to address within the next few years if they aren’t already.
Likewise, only 15% of business leaders currently consider prioritizing racially/ethnically diverse suppliers as a major issue, but 41% already view it as a minor concern and 17% more believe it will become one in the near future.
Not prioritizing long-term concerns — like supplier diversity — can result in exacerbated problems down the line, so taking more forward-thinking approaches now can put your company in a position to leap ahead of the competition.
Confidence in supply chain ESG reporting and data gathering
Generating and collecting reporting data is often meaningless without the confidence in its accuracy. Three-fourths of respondents told us they see defining steps to have confidence in their ESG reporting as a challenge they’re either already facing (54%) or will face within the next one to three years (21%). However, more than a quarter of those surveyed (27%) also worry that they don’t have the right infrastructure in place to digitize their supply chain.
In our discussions with company leaders across industries, we find that when it comes to the environmental responsibility of suppliers, companies are most challenged by:
- Lack of clarity around product footprint related to materials, products and services
- Potential for carbon border adjustments and the ability (or lack thereof) to see different carbon footprints across the value chain
- Questions on the resilience of the supply chain from an environmental risk standpoint, especially for companies that have complex supply chains
How to reduce Scope 3 emissions
One of the chief concerns companies face in regards to climate impact is reducing their Scope 3 emissions. These are emissions that are produced not outright or through purchased energy consumption but from elsewhere in the value chain — particularly suppliers, customers and even employees.
To have thorough climate reporting and reap the benefits of decarbonization, companies should:
- Establish processes to measure Scope 3 emissions reliably.
- Understand Scope 3 demands from their customers and how this may impact procurement, RFPs and wider consumer sentiment.
- Understand carbon border adjustments and how they may relate to the business.
- Begin a dialogue with suppliers to help them understand their carbon footprint, and work with them to decarbonize.
- Model supply chain risk from climate change and other disruptions to help understand vulnerabilities.
Scope 3 emissions often represent the majority of an organization's total emissions
Where you go from here
All these challenges suggest that many companies are still playing defense when it comes to ESG. But companies need to start going on offense, anticipating the challenges and opportunities to come. To help you do so, here are a few key steps.
- Keep abreast of local and large-scale policy changes. Make sure you’re being diligent to stay compliant with all markets in which you do business.
- Think about not just how your company handles diversity, equity and inclusion issues but what your suppliers are doing and how their policies can impact your company. Be careful to think strategically about both immediate and long-term risks.
- Likewise, look deep into climate risk and climate risk modeling. Companies that already model risk scenarios for their own facilities (fires, drought, floods) should be asking the same of all of their suppliers. Consider your path to ESG circularity and sustainability internally and across the value chain.
As external ESG influences continue to change how we grow and maintain our supply chains, it’s clear that we must choose new and innovative strategies that allow our businesses to stay agile and collaborative. Click here to learn more about how PwC is helping companies like yours drive the next wave of ESG transformation.
Methodology
The PwC Digital Trends in Supply Chain Survey 2022, fielded November 2021 to January 2022, surveyed 244 operations and information technology leaders, C-suite executives and other supply chain officers from companies in select supply chain-intensive sectors to assess how they are addressing supply chain management operating models, including the use of enterprise and emerging technologies. Sectors surveyed include aerospace, automotive, chemicals, and other manufacturing and industrial products; consumer markets and retail; energy, utilities and mining; pharmaceuticals and life sciences; and technology, media and telecommunications.
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