The Role of Procurement in ESG
The world is changing, and that impacts the way we do business. A myriad of concerns about environmental stewardship, social progress, and sound corporate governance have infiltrated our professional consciousness, leading to major changes in long-term viability and societal impact.
In the past 15 years, Environmental, Social and Governance (ESG) criteria have emerged to form a crucial framework for evaluating an organization’s ethics and sustainability.
Investors, consumers, and regulatory bodies are recognizing the major significance of ESG principles. As a result, companies from across the world are taking proactive steps to integrate ESG into operations.
New studies show that investors are taking ESG more seriously, and by 2026, it will grow to over $33 trillion. ESG is on the rise and will account for 21% of the global assets under management.
Within this evolving landscape, procurement plays a pivotal role in responsible and sustainable practices throughout the supply chain. Traditionally viewed as a cost-focused operation, procurement is now driving positive change by aligning practices with ESG principles.
In this article, we’ll delve into the key contributions procurement makes to ESG initiatives and why both systems are important for improving your business today.
Why is Procurement Valuable?
Procurement is a valuable asset to modern business, and there are several critical reasons why it directly impacts ESG, such as:
Supply Chain Resilience
Procurement teams and chief procurement officers are expected to build robust and diversified supply chains that will ensure continuity in the face of disruptions like natural disasters, pandemics, and geopolitical events. A well-managed procurement function will look after the continuity of essential supplies and minimize the impact of unexpected challenges.
Procurement plays an important role in managing contracts and supplier relationships, leading to operational efficiency, cost savings, and tighter spend management. By strategically sourcing goods and services, procurement professionals reduce waste, optimize spending, and streamline processes, ultimately improving a company’s bottom line.
Efficient procurement goes beyond transactional relationships and strengthens strategic partnerships with suppliers. Collaborating closely can lead to product improvements, innovation, and competitive advantages. This helps companies stay ahead in their respective industries and maintain sustainable procurement initiatives.
Quality and Risk Management
The procurement department ensures suppliers meet specific quality standards and comply with all regulatory requirements. By conducting thorough evaluations and audits, teams can mitigate the risk associated with accepting subpar quality, compliance violations, or ethical issues.
The procurement department continually monitors supplier capabilities, market trends, and emerging tech. This type of market intelligence helps companies make more informed decisions, identify areas for improvement, and stay competitive.
Environmental and Social Responsibility
The procurement department has a significant influence on sustainability efforts and responsible, strategic sourcing. By incorporating ESG objectives into procurement decisions, companies can promote more ethical practices, enhance their reputation with stakeholders, and reduce environmental impact. Procurement leaders are expected to align corporate social responsibility with the types of products and services they choose.
Procurement should be asking questions like if the packaging is sustainable or recyclable. Users, customers, investors, and other stakeholders want to feel they are investing in a business that cares about the world. Expect them to ask about your carbon footprint, climate change initiatives, how you dispose of your waste, greenhouse gas emissions, etc.
The procurement team should always vet vendors and certify that they are purchasing affordable goods with sustainability goals in mind.
Procurement ensures a business is adhering to legal and regulatory requirements related to contracting and sourcing. By upholding compliance standards, companies avoid legal disputes and reputational issues.
The involvement of procurement in the strategic planning process guarantees that strategic sourcing aligns with the ESG agenda and overall business objectives. This works to enhance agility, seize new opportunities, and ensure procurement supports a long-term vision.
The value of procurement lies in their ability to optimize costs, manage risks, foster innovation, build resilient supply chains, align strategic goals, and drive sustainability. As a critical business function, procurement contributes significantly to a company’s growth, success, and resilience in today’s competitive market.
What is ESG?
ESG stands for Environmental, Social, and Governance and is a set of criteria used to evaluate a company's performance and impact in these three areas. ESG has become increasingly important to investors, as they aim to understand the broader impact of sustainability beyond just financial performance.
This focuses on a company’s impact on the environment and includes factors like:
- Carbon emissions
- Waste management
- Energy efficiency
- Water usage
- Biodiversity preservation
It also includes eco-friendly practices. Environmental considerations assess how your operations contribute to or mitigate climate change and the degradation of the environment.
The social aspect of ESG looks at a company’s relationship with its employees, customers, suppliers, and communities in which it operates. Social strategies assess the company's commitment to promoting a positive social impact and creating a safe, fair, and respectful workplace for its employees and stakeholders.
Social factors include:
- Labor practices
- Employee welfare
- Diversity and Inclusion
- Consumer protection
- Social development
It also examines how a business manages ESG risks and nurtures relationships with various stakeholders.
Good governance involves transparency, accountability, and ethical behavior. It looks at a company’s internal policies, structure, and decision-making process, which requires accurate accounting and procurement practices. Key governance factors include:
- Shareholder rights
- Independence and diversity of the board
- Executive compensation
- Effective risk management practices
- Adherence to regulatory and legal requirements
ESG factors are also used to guide investment decisions. Investors are increasingly incorporating ESG considerations into their strategies to identify companies that align with their values, exhibit responsible business practices, and promote long-term viability.
Why is ESG important?
There are some compelling reasons why ESG is so important in today’s professional ecosystem. Here are a few:
ESG principles address the resilience of your business and long-term sustainability. By considering environmental factors (like resource usage and climate change), societal factors (like employee welfare and community impact), and governance elements (like transparency and board diversity), businesses can remain viable and relevant.
Companies that embrace ESG often attract top talent, especially from younger generations who seek purpose-driven work environments. These folks are likely to be committed and engaged with companies that prioritize social responsibility, renewable energy, and sustainability incentives.
Investors are increasingly considering an ESG impact on the decision-making process. Businesses that prioritize a sustainability strategy demonstrate a commitment to responsible business practices and are perceived as more trustworthy, with fewer financial risks. This, in turn, attracts more sustainable and responsible investments.
Embracing ESG practices helps a business more effectively identify and manage risks.
Common risks can include:
- Regulatory changes
- Social issues
- Supply chain disruptions
- Climate events
- Ethical lapses
It also includes governance risks such as regulatory non-compliance. All of these issues can have a severe impact on the reputation of a brand and its financial performance. Addressing these risks through ESG integration and procurement strategy can lead to better risk mitigation.
ESG considerations are more embedded in regulatory frameworks worldwide. Integrating ESG initiatives into a global supply chain allows companies to stay ahead of changing compliance requirements and avoid any potential legal issues or penalties.
- Efficiency and Cost Savings: Adopting ESG saves money, increases efficiency, reduces waste, and creates resilience.
- Stakeholder Expectations: Meeting these enhances a company’s reputation and fosters stronger relationships.
- Positive Social Impact: ESG allows businesses to have a positive impact on society and the environment.
How Does Procurement Play a Role in ESG?
Procurement plays a vital role in advancing Environmental, Social, and Governance (ESG) initiatives within your business. How? By incorporating ESG principles into their practices, procurement professionals drive positive change throughout the supply chain and contribute to an organization’s overall sustainability and responsibility.
Here are five common ways procurement plays a role in meeting ESG standards:
- Reporting and AnalyticsProcurement gathers the data and metrics related to ESG performance within a supply chain. This data is crucial for ESG reporting, enabling companies to showcase sustainable efforts to investors and stakeholders.
- Supplier Due DiligenceThe procurement department conducts rigorous assessments and due diligence on new suppliers to ensure they comply with all ESG rules. This involves evaluating a supplier’s environmental impact, human rights records, and labor practices. This creates a more responsible and ethical supply chain.
- Sustainable SourcingProcurement professionals will prioritize suppliers that follow ethical and sustainable practices, such as fair labor practices, environmentally friendly manufacturing, and responsible resource management. Selecting eco-conscious suppliers helps procurement reduce a company’s environmental impact and promotes social responsibility.
- Capacity BuildingThe procurement team can collaborate with suppliers to foster ESG improvements. This works by engaging in open dialogue, sharing best practices, and supporting capacity-building initiatives. Procurement can influence suppliers to enhance ESG performance to meet a company’s needs.
- Procurement identifies ESG-related risks within the supply chain
- Innovation and sustainable product development
- Continuous improvement with ESG-related goals to incentivize suppliers
Procurement Automation and ESG
Procurement automation and ESG (Environmental, Social, and Governance) are interconnected aspects of modern business practices.
Traditionally, purchasing has been a time-consuming process with tons of paperwork, negotiations, and other administrative jobs. However, advancements in technology and procurement automation have emerged to streamline and optimize the entire process.
Procurement automation involves the use of software and artificial intelligence to automate a variety of purchasing tasks in the procurement lifecycle. This includes all things related to corporate buying, like:
- Contract and supplier management
- Invoice processing
- And more...
How does this help with meeting ESG standards?
By automating these processes, companies can save time, cut costs, reduce errors, gain better insight into procurement, and increase their efficiency in meeting ESG initiatives.
- Environmental Impact: Automated procurement can identify and select suppliers who adhere to ESG standards.
- Social Responsibility: Promotes social responsibility by enabling transparent and fair supplier selection.
- Governance and Transparency: Automation improves transparency and governance by centralizing data.
Procurement Automation Tools that Complement ESG
The right procurement automation tools will help a business incorporate important ESG considerations into its supply chain. Solutions like PayEm can assist a company with sustainability in a variety of ways. Here are a few key benefits of a robust procurement system like PayEm:
PayEm offers corporate cards that are made from Perfect Plastic, which is 80% recycled PVC. Customers can also take advantage of their virtual cards, enabling an entirely paperless process for expenses. This demonstrates your business wants to be part of a greener world and embraces environmentally-friendly practices.
The right procurement automation tools will harness the power of real-time data and create actionable insights for better ESG decision-making.
PayEm’s intuitive dashboard provides a procurement team with live data that alerts you to duplicate or suspicious payments, forecasts spending trends, and unlocks new opportunities for cost savings. It offers a complete, 360-degree view of performance and helps a business monitor and measure operations.
Meeting ESG standards requires working together, which can lead to global initiatives. If you’re doing business with vendors from all over the world, you need an efficient way to pay them.
PayEm offers global flexibility and accuracy with its cross-border payments features. You can easily pay any supplier via wire, ACH, or credit card from any location, in any currency, or from any subsidiary.
Compliance and Security
PayEm implements multiple layers of governance as part of SOC 1 compliance to prevent theft or unethical behavior, ensuring the security and integrity of your financial data.
- Hassle-free reimbursements
- Beyond P2P with Request-to-Reconciliation
- Mobile app for global transactions
By leveraging procurement automation tools like PayEm to incorporate ESG considerations into their supply chain, companies can create a more sustainable, responsible, and resilient operation.
This leads to an improved brand reputation and increased customer loyalty. It attracts socially conscious investors, fostering long-term success in an increasingly ESG-focused professional landscape.
The world is changing pretty quickly, and companies must be able to respond with intelligent innovation that puts them ahead of the curve.
As more people become socially-conscious buyers, ESG has taken a front seat in business planning and has infiltrated every vertical. There’s a lot of pressure and competition around companies and their ability to meet ESG initiatives.
Modern procurement is helping today’s companies build strategic partnerships, mitigate risks, gain market insights, and practice social responsibility. The race is on, and it makes sense to use an automated platform that streamlines the entire procurement process and helps you align with ESG needs. PayEm is a great place to start.
PayEm offers total transparency and the ability to track your ESG performance. The dashboard has a complete view of your company's environmental, social, and governance impact, from the moment you choose your suppliers until payment. This allows a business to make more informed decisions, monitor progress, and continuously improve its ESG performance.
With PayEm, companies can automate important procurement processes, showing customers they care about sustainability, environmental initiatives, and overall ESG goals. Want to learn more about how PayEm can assist your business with ESG-friendly procurement goals? Contact PayEm's experts for a commitment-free, no-cost demo.
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