Recent disruptions and growing concerns for the environment have resulted in increased supply chain scrutiny from customers and investors alike. The mounting pressure on supply chain businesses to strengthen their environmental, social and governance (ESG) commitments comes from legislators, investors, and business stakeholders. In fact, a Deutsche Bank ESG client survey published in November last year revealed that more than half of investors (53%) regard climate change as the most important factor affecting their investment decisions. These attitudes are mirrored by consumer behavior. An independent study commissioned by Smartest Energy revealed that 81% of consumers prefer to buy from sustainable brands.
In addition, new regulations such as the EU’s Corporate Sustainability Due Diligence Directive will make companies accountable for the environmental footprint of their suppliers. So, with organizations under increasing pressure to widen their ESG responsibilities, how can business leaders encourage more sustainable practices across their supplier chains?
Getting to know your suppliers better
With companies now responsible for any ESG violations along their supply chain, it is no longer sufficient to just set sustainable targets for your own business; the suppliers that you transact with must also adhere to them. Therefore, establishing visibility to ensure trading partners match up with corporate values and standards is key.
Digitalising supply chains by joining a business network is a great way to get to know your suppliers better and achieve full visibility into their operations and the operations of their trading partners. By enabling suppliers to share their ESG credentials online and by providing real-time insights into all elements of the supply chain, business networks enable 360-degree visibility and increased control over supply chain operations.
For buyers, these networks offer visibility beyond the first tier of suppliers into tiers 2 and 3. This helps them better understand who their partners are doing business with and reduce the risk of partnering with environmental offenders or businesses that engage in human slavery.
Tony Harris is the SVP and Chief Marketing & Solutions Officer for SAP Business Network.
Embracing circularity
One of the most effective ways to boost sustainability across your supply chain is to partner with suppliers that embrace the circular economy. Research shows that consumers are being more proactive in adopting sustainability, whether by choosing brands that have environmentally sustainable practices, or by no longer purchasing products because of concerns around the brand's ethical or sustainability values or practices.
This demand is recognized by suppliers too. According to Gartner, 74% of supply chain leaders expect their profits in the next two years to increase as a result of applying circular economy principles. By joining a digital business network, organizations will be able to identify suppliers that embrace circularity faster and easier than ever before and improve the environmental impact of their supply chain operations.
Working smarter to reduce waste
Digitalizing supply chain operations generates valuable data insights that help improve efficiency and decision-making. This allows organizations to tap into new technologies such as IoT, AI and blockchain to improve data sharing and enable better traceability of goods across their supply chain network.
Another great benefit of increased use of data is reducing waste by optimizing inventory management, which is key for both suppliers and organizations. However, getting it right is particularly difficult in a volatile and constantly changing market environment where consumer needs are hard to predict and macroeconomic factors could change unexpectedly. Big data can help organizations and their suppliers address this challenge by enabling them to gather insights into the habits of customers and the trends that drive their behavior. This will help businesses better predict customer demand, and prepare themselves accordingly, ahead of time.
Encouraging sustainability with financial incentives
Financial incentives typically work well to encourage positive behaviors. Supply chain finance is a great tool that businesses can use to incentivize green initiatives across their supply chain network. This approach allows suppliers to be paid early with funding from a third party, while the buyer compensates the funder upon the original maturity of the invoice.
There are many ways in which supply chain finance can be used to encourage greener behavior. For instance, incentives can be tied to goals defined by the buying organisation and measured and reported as part of the organisation’s ESG compliance practices. Moreover, this approach provides invaluable financial support to suppliers who want to embrace sustainable work practices, but don’t have the financial resources to do this on their own.
ESG responsibility is no longer confined to the parameters of the business. As today’s consumers, investors, and regulators are putting increasing pressure on organizations to strengthen their sustainability credentials, businesses need to look beyond their own footprint to ensure their suppliers adhere to satisfactory ESG standards. Joining a digital business network presents a unique opportunity to achieve this and opens new avenues for collaboration between like-minded organizations, while helping them to improve efficiency and reduce waste.
