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Mark Perera

The benefits and challenges of Sustainable Procurement and how to achieve your goals

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By Mark Perera, CEO and founder, Vizibl

As a result of mounting environmental and social challenges affecting the entire globe, many organisations now place sustainability as a priority within their strategic goals. In this landscape, procurement has an enormous role to play in embedding sustainability into everyday practices and across the wider supply chain. With most of our impact on the environment and our communities sitting in the supply chain, clearly, we cannot become truly sustainable without our suppliers.

Sustainable procurement is an approach to the procurement process that embeds ESG (environmental, social, and governance) issues and corporate social responsibility (CSR) practices at the heart of its specifications and its process. But how can it be achieved, and what are some of the benefits and challenges that businesses need to understand?

Future-proofing your business

Research indicates that consumers are becoming increasingly eco and socially conscious about where they buy from. Consequently, the need for businesses to proactively pursue supplier sustainability is growing. With international bodies, governments, and investors also beginning to add pressure it is vital for businesses to future-proof their organisation.

In 2021, a landmark ruling saw the energy giant Shell held to account by courts and governments for the sustainability performance of its supply chain. The ruling saw the company compelled to raise its emissions reduction commitments. Importantly, the Dutch court system made these commitments applicable not only to their own operations but also to ‘the customers and suppliers of the group.’

Business investors are also beginning to demand more action. May 2021 saw Chevron shareholders vote in favour of a proposal to cut scope 3 emissions at their AGM, signalling frustration with the company’s dilatory approach to climate change.

In another case, Exxon Mobil witnessed an activist investor staging a coup on their board over the strategic direction the company was taking regarding sustainability. Hedge fund Engine No. 1 argued that the climate crisis posed “an existential threat to the [Exxon] business”. Exxon eventually lost three board seats to Engine No. 1 and the market responded in kind, with Exxon’s share price rising 1.2% the following day.

With the UK in the midst of yet another heat wave, we are experiencing a stark reminder that the challenge of the climate crisis is not going away. And as the lifespan of an S&P 500 company continues to dwindle as enterprise organisations attempt to meet increased challenges from changing stakeholder demands, technological progress, new startup business models, and more, it is imperative that businesses adapt to the new environment. Businesses that take pre-emptive action to expand their sustainability efforts in particular will be future-proofing their business against the rising tide of fines, regulatory changes, legal rulings, and investor action.

Common challenges to Sustainable Procurement

While there are clear and desirable benefits to achieving a Sustainable Procurement programme, there are challenges that remain which can derail the necessary efforts if targets are to be achieved.

For any programme to successfully launch and scale it must have the sponsorship of executive and senior leadership. Making the case for how sustainable procurement practices impact the organisation’s strategic ESG goals is key to securing this mandate. Without the buy-in of C-suite, procurement leadership, and supply chain leaders, individual practitioners will not be able to effect change at the scale required to deliver on the organisation’s goals.

One way to secure sponsorship is through constructing a business case for expanding Sustainable Procurement practices. A common method to do this is to ensure that the true cost of existing ways of working is accounted for in the business case, such as attaching a carbon cost to business-as-usual operations.

There is also the challenge of selecting, measuring, and tracking the multitude of metrics that fall under the banner of ESG. Knowing what to measure and how to standardise this across suppliers is difficult. This ‘analysis paralysis’ is a key factor in why many organisations are slow to get started on their sustainable procurement efforts, feeling incapable of taking action until they ‘know enough.’

At Vizibl, we counsel an approach of ‘controlling the controllables’ and focusing on what the business does know to overcome this challenge. For example, with supply chain emissions, many organisations will know where most of their scope 3 falls. They will also know which categories within that cohort tend to be emissions-intensive, how much they spend on those categories, and which suppliers they work with within them. Though this cannot replace a full, robust dataset detailing the current state of play, it provides a reliable place to start making improvements whilst waiting for the full data set to arrive.

Developing a successful Sustainable Procurement strategy

For sustainable procurement to truly flourish, organisations need to forge true “customer of choice” relationships with the suppliers who are most critical to delivering on their sustainability pledges.

“Customer of choice” refers to a buyer-supplier relationship founded on trust, transparency, and robust communication, in addition to the ethos of mutual benefit. By forging this relationship, both buyers and suppliers gain priority access to one another, and can effectively deliver on both the goals of the relationship and their individual organisations. Additionally, it makes it easier to flag any issues or areas for improvement as the partnership progresses.

To address the sustainability challenges facing large enterprises, existing solutions will not suffice. In a market high on ESG hurdles and low on green products and solutions, innovation will be key to satisfying the demand for fresh ideas. “Customer of choice” suppliers come armed with a wealth of subject matter expertise, knowledge of competitors and an intimate understanding of local markets, making “customer of choice” relationships a key driver of strategic supplier innovation.

The time is now

Last year, the United Nations declared that by 2030 the world must halve greenhouse gas emissions to prevent devastating climate change. Organisations and their supply chains have a massive part to play in these reduction efforts.

Whilst many have already developed and declared their ESG goals, more must be done. Business change is occurring, but particular focus must be applied to procurement and supply chain’s role in accelerating this transformation towards sustainable business practices. Developing sustainable procurement programmes alongside dependable, trusted suppliers will certainly be a huge step in meeting necessary targets.

A watershed moment for sustainability commitments

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By Mark Perera, CEO, Vizibl

Last month saw a landmark ruling where Royal Dutch Shell was instructed to significantly step up its 2030 climate commitments and slash absolute emissions by 45% compared to 2019 levels. This ruling represents a considerable advance on Shell’s stated aim to cut 45% of its emissions intensity compared to 2016 levels by 2035 – a target which provided leeway for increasing emissions as long as the relative carbon emitted per unit of energy produced fell.

Now, this imposes a much larger climate obligation on Shell in calling for an urgent absolute reduction.

A ruling that sent ripples through the oil, gas, and energy sector

A watershed moment, this ruling is sure to cause significant alarm amongst fellow oil and gas giants who recognise – for perhaps the first time – that national courts can compel organisations to accelerate their reduction of harmful emissions under the Paris Agreement. Not only does it have “far-reaching” consequences for Shell itself and may even curb the potential growth of the company, but the decision is also likely to set a legal precedent for other energy companies and corporations. According to Thom Wetzer from Oxford University, who heads up the sustainable law programme: “all companies in the energy industry and all heavy emitters will be put on notice and have to accelerate their decarbonisation plans.”[1]

This court mandate applies to not only the Shell group’s own operations but notably also to all the suppliers and customers of the group – strongly implying that Shell is being asked to tackle its Scope 3 emissions. Consequently, it is clear that Shell cannot meet the ruling’s demands alone; to make an impact across all carbon emissions scopes, Shell and other large businesses must immediately look towards forging new, productive partnerships with supplier stakeholders. Failing to do this not only means missed targets and mounting legislative action, but also the reputational damage that this will cause to its brand and the company.

Activist investor warns of existential business risk

Reports on the Shell ruling were almost immediately followed by news of a coup attempt in American oil and gas corporation, Exxon Mobil. Due to concerns surrounding Exxon’s strategic direction, hedge fund Engine No. 1 ousted sitting board members, stating that the climate crisis poses an “existential threat to the business” which the board has been reluctant to confront.

This small hedge fund accused Exxon of “a failure to take even initial steps towards evolution” and of “obfuscating rather than addressing long-term business risk”, partly due to a historical lack of energy industry experience in Exxon’s board. This signalled an imminent shift in the company’s sustainability strategy, which was well received by the market, with Exxon’s shares rising 1.2% the day after the event.

The drive to reduce Scope 3 emissions

And if that wasn’t enough of a shake up, this was followed by American multinational energy corporation Chevron’s shareholders voting 61% in favour of a proposal to cut Scope 3 emissions at their AGM, signalling frustration with the company’s slack approach towards climate change. Chevron has thus far failed to match its competitors’ net-zero targets with any commitments of its own.

For those less familiar, corporate emissions fall into three categories: Scope 1, 2, and 3. Scope 1 covers emissions from sources that an organisation directly owns or controls. Scope 2 refers to emissions from purchased electricity, steam, heating, and cooling that the reporting company consumes over the course of their operations. And Scope 3 is everything else – all other indirect emissions that occur within an organisation’s value chain, both up and downstream

Why is this significant? Until now, Scope 3’s heady combination of difficult-to-manage and thus far easy-to-ignore has led large companies to abdicate responsibility for their value chain and sweep its emissions under the carpet. However, the Shell ruling indicates that this approach is no longer viable for big business. With courts stepping in and dictating climate policy to corporations as well as governments, the pressure is mounting on all heavy emitters to tackle their true impact and reduce Scope 3 emissions.

As organisations like Shell, Chevron and Exxon are considered responsible for the actions of their entire ecosystems, sustainability performance becomes contingent on supplier behaviour. The clearest example of this lies in Scope 3 emissions which, for many organisations, considerably exceeds the CO2 they emit directly.

Therefore, the time for green-washing and lip service is now over as pressure mounts from all stakeholder groups for large corporates to take decisive action on sustainability in the supply chain. However, businesses cannot turn promises into concrete progress without actively collaborating with stakeholders across the value chain.

For every 5 weeks that pass, we lose 1% of the decade

2030, the deadline for achievement of UN SDG-related climate commitments, is fast looming, and with every five weeks that pass we lose 1% of the decade. The imperative to take immediate action has never been clearer. It’s now down to procurement, wider business leaders, and their associated supplier ecosystems to put sustainability strategy into action by:

  • Defining, aligning, and communicating their corporate sustainability goals to focus suppliers, partners and the wider stakeholder groups on how they can make an impact.
  • Collaborating systematically through technology using transparent processes that develop trust with suppliers and partners.
  • Harnessing the innovation and IP within the supplier ecosystem, turning ideas into projects that can be managed and reported on transparently, and adding clear value trackers to prove impact.

Working closely with stakeholders in the supply chain is an infamously complex process, but it can be made that much simpler using Supplier Collaboration & Innovation (SC&I) technology. This ensures strategic alignment between buyer and supplier and provides comprehensive relationship governance and real-time performance visibility. This allows companies and their suppliers to work on sustainability initiatives more cohesively and develop innovative ideas through collaboration.

Here at Vizibl – through our SC&I platform combined with our knowledge and expertise – we are helping large enterprise organisations in the energy sector better leverage their supplier relationships and move closer to meeting those lofty 2030 sustainability goals.