With the introduction of the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz, LkSG), since 2023, the implementation of human rights due diligence has become mandatory for companies. This regulatory development, which is increasingly trending worldwide, makes ESG (Environmental, Social, and Governance) compliance a new strategic and operational necessity, extending from a company’s own business area to its supply chain. Especially within the supply chain, it’s a daunting task that demands a realignment of procurement and thus a new approach to procurement compliance. How procurement can achieve LkSG and ESG compliance while simultaneously creating value is discussed in this article.
„The cheapest supplier gets the contract“ – cost, quality, and delivery time were the invincible trio of procurement criteria. However, supply chain crises triggered by the pandemic, ongoing geopolitical crises, climate extremes, and natural disasters have brought resilience to the forefront of value creation. With the LkSG, the CSRD, the planned CSDDD, and the EUDR, regulatory pressure on procurement organizations to minimize and avoid negative human rights and environmental impacts is increasing. This marks the beginning of a new era in procurement compliance, where traditional procurement criteria are being redistributed and sustainability is taking a vital seat at the table.
The question is not „if,“ but „how“
Common misconceptions that sustainability is merely a cost have firmly taken root in many minds. The LkSG is often negatively labeled, ranging from „bureaucratic monster“ to „unbearable.“ However, no company wants slave or child labor in their supply chains. Voluntary adoption of sustainable practices and due diligence has worked where companies recognized sustainable procurement as a key metric for value creation, but not universally. Now, multifaceted and far-reaching existing and planned supply chain laws at the global level are addressing this. The „whether“ is thus long answered, and companies now face the question of how they can comply with LkSG requirements and future laws effectively: What regulations apply to our company? How can we integrate these criteria into procurement? What new skills and tools does our procurement need? The answer to successful implementation lies in „technology, people & processes.“
Capturing, measuring, and improving data
Data is an essential foundation for effective LkSG risk management. From AI-supported analysis of abstract risks based on countries and industries to capturing concrete risks along the supply chain. Long relying on supplier self-reports and collecting signatures for supplier codes of conduct, the reliability and thus the quality of these statements have been questionable. Just as a financial institution would not grant a loan based solely on self-reports, procurement decisions should not be made on this basis. In practice, 89% of all documents submitted by suppliers in the 2022 EcoVadis assessment process were found to be inadequate, invalid, plagiarized, or forged. A thorough content review by EcoVadis, conducted by a team of over 450 sustainability experts following a strict methodology and the four-eyes principle, ensures the accuracy and quality of the data. To achieve LkSG compliance and procurement compliance, companies need evidence-based, verified, validated data.
However, even the best data is useless if it is not accessible, understandable, or practical. Here too, technology plays a key role in processing and presenting data and providing benchmarks and additional resources on a platform.
People create value
With the diverse challenges that procurement faces continuously, the LkSG is a significant addition. Like all innovations and changes, procurement and the entire company require change management to support the transformation towards sustainable procurement. Building knowledge, raising awareness, acceptance, transferring the significance of due diligence and sustainability to one’s own workplace, and enabling implementation – these remain the critical factors for successful procurement compliance. After all, the highest quality data is useless if it is not used in procurement or if it is not known how it can be used effectively. Capacity building in procurement for dealing with the LkSG and the associated supplier requirements requires a comprehensive understanding of the new ESG conditions in the company context. To move from theory to practical implementation, procurement professionals not only need the appropriate background understanding and awareness but also sensible integration into processes and supplier relationship management.
Incorporating suppliers‘ sustainability performance into procurement objectives can be an important and helpful step in implementing the topic into day-to-day procurement. Incentivizing creates mutual value for employees and the company itself, promoting procurement compliance.
From tendering to awarding
In procurement processes, sustainability can be incorporated as a criterion, ideally holistically, from tendering, through awarding, and further in Supplier Relationship Management (SRM) to continuously drive improvements. It is essential to take suppliers on this journey, meeting them at their respective levels of sustainability maturity or compliance – and instead of sanctioning, to support and collaboratively work on improvements. Like in procurement, capacity building in the supply chain is fundamental for LkSG compliance and beyond. In recent years, there has often been a discrepancy from the supplier’s perspective between what their customers demanded regarding sustainability in tenders and how sustainability performance was ultimately weighted when „in the end, the cheaper supplier got the order again.“ However, there is good news from the supply chain: sustainability has arrived. The EcoVadis Barometer 2021 showed that although many of these companies are not yet subject to reporting or due diligence obligations – and thus compliance is only a driver for 7% of the surveyed companies – more than half of the participating suppliers are primarily motivated in their sustainability commitment by market demand. For 41% of suppliers, the main motivation for their sustainability commitment lies more in the company mission than in external market pressure. (Source: Sustainable Procurement Barometer, 2021; © EcoVadis SAS)
This intrinsic motivation not only forms the basis for LkSG compliance but offers procurement enormous potential for innovations and value creation.
The new procurement compliance, with sustainability at the center of traditional procurement criteria, is not only the basis for the LkSG but also offers a multitude of opportunities for procurement organizations to mitigate risks, thus promoting positive impact, increasing resilience – and achieving cost savings through sustainability.