The importance of Environmental, Social and Governance (ESG) has only grown in recent years, particularly around sustainability as climate change statistics provide a bleak picture. According to insurance broker Aon, economic losses from natural disasters were estimated at $313 Billion in 2022, and July 2023 saw multiple global temperature records broken.
However, on a more positive note, ESG has emerged as a crucial framework for organisations globally, including government entities. Beyond sustainability, ESG encompasses social responsibility and effective governance practices. Implementing ESG into the supply chain across the UK Government provides immense potential to promote sustainable development, enhance reputation, and ensure long-term supply chain resilience across the public sector – for which gross spending levels were around £379 billion in 2021/22.
Beyond its own supply chain, the UK government has an opportunity and responsibility to set standards, regulations, and an example for the private sector through its own actions.
Hidden Risks Lurk Everywhere
ESG is just one area where both the public and private sector often have poor insights and data on suppliers – usually found in disparate systems and with limited information, visibilities into suppliers and third parties can cause disruption, financial damage and reputational issues.
When looking to mitigate ESG risk and align with organisations that have shared ESG values, traditional research and due diligence processes are not enough. Predictive analytics and objective scores are required for the right level of scalable insight.
With the continued successful delivery of public services dependant on supplier reliability, ensuring suppliers are financially stable as well as having strong ESG performance is undoubtedly key.
So where can the public sector begin?
Learnings From the Private Sector
In this recent webinar, I discussed how the private sector is a little further ahead than the public sector. However, the implementation of ESG principles into supply chain due diligence differs by industry sector, and often between organisations within sectors too. There’s no one-size-fits-all approach or timeline.
There is a lot of focus on understanding and reducing carbon emissions in the private sector, given environmental concerns are often front of mind when considering ESG. Scope 1, 2 and potentially scope 3 for both up and downstream product or service lifecycles helps in making decisions on suppliers and areas for investment. Furthermore, more innovative companies are looking for information on the primary energy supplies for production companies – for example, India uses more traditional energy sources, while Brazil has switched to mainly renewable sources.
Some private sector companies are also using solutions like D&B ESG Intelligence (which ranks a business’ ESG performance from 1, low risk to 5, high risk) as a first step to understanding areas of risk across the full portfolio, before then doing a deeper dive on those with poor ESG performance and identified as higher risk. It’s important to note that the ‘high risk’ label isn’t necessarily a negative one. In the private sector, companies see this as an opportunity to work with strategic suppliers to provide education around ESG and the standards they expect. This can help to improve their performance, though for more transactional suppliers it may mean you wish to find an alternative.
Social Responsibility – Making Strategic Changes
Out of the 3 ESG themes, social responsibility often feels the most all-encompassing and overwhelming to address. There are many areas for consideration – from ensuring suppliers have fair and ethical labour practices and corporate social responsibility, to championing diversity, inclusion, and gender equality.
Often third parties will provide lots of information on their strategies for all the above, but what are they doing in practice? It’s important to conduct due diligence to find the true picture. This is another area where the performance rankings in D&B ESG Intelligence can help in understanding the underlying risks a supplier may pose.
Moving to New Ways of Working
Adding expectations around ESG practices to the UK government’s sourcing playbook would be a good way to support the wider public sector with establishing robust sourcing frameworks and incorporate ESG elements.
Best practice and guidance on the implementation of ESG frameworks is always beneficial. At Dun & Bradstreet, we have found that the most successful private sector clients are organisations who have developed clear goals and strategies for where the company want to be, ideally with a quantitative target so progress can be measured.
Once your department has agreed it’s policies, the next step is to design the procedures required to reach your ESG goals. It’s not enough to just carry out the checks once, continuous monitoring and measuring progress are important to assess performance and whether adjustments need to be made. This is not a one-time exercise, but rather a new way of working.
Key Takeaways
- Supply chain visibility is no longer a nice to have – it’s helpful to understand ESG risk beyond direct supplier relationships, mapping multiple levels of the supply chain provides a fuller picture.
- Climate impact is real, but supply chains are fraught with wider risks too – consider sanctions, macroeconomic risks, social aspects, and company governance in your checks too.
- Understand the wider portfolio risk e.g., how many people are impacted when part of a supply chain fails particularly if it’s a critical supplier that cannot supply key parts or goes insolvent.
- Think of it as an ongoing journey – ESG isn’t a one-time check, it takes commitment and collaboration with internal and external stakeholders and requires continuous improvement.
- Be the change – public sector supply chains can be viewed as defining the operating model for the private sector too, inspiring them to contribute to a better future.
- Third-party data can help – you’re not alone. Using third-party data and rankings such as D&B ESG Intelligence can be an objective and scalable way to introduce ESG checks into supplier due diligence.
Want to learn more?