It’s time to rethink and rebuild supply chains.
In the EcoVadis Sustainable Procurement Barometer 2021, 63% of executives stated that sustainability is now very important for achieving corporate goals, up from 25% two years ago. At the same time, 46% of suppliers responded that their customers‘ commitment to sustainability is „only important on paper.“ With the upcoming Supply Chain Due Diligence Act (LkSG) and increasing CO2 and environmental regulations, it’s now crucial for companies to engage with human rights standards and environmental protection measures as procurement criteria, integrating this commitment into supplier relationships.
So far, companies have focused on internal and self-oriented measures regarding ethics, environment, and labor and human rights, rather than on sustainable procurement and, consequently, the supply chain. In line with the barometer, the current EcoVadis Index, based on over 72,000 ratings from more than 46,000 companies, shows that labor and human rights are prioritized by companies and have the strongest increase in performance improvement. However, the performance of companies in sustainable procurement is generally declining globally and across industries, which is concerning given the supply chain risks exacerbated by the COVID-19 pandemic and the climate crisis.
The Supply Chain Act as Part of the Puzzle During the political and social debates around the LkSG in recent years, the return on investment from sustainability has already been evident in various areas. From employer attractiveness, important not only for HR but also for newcomers in procurement, to immense cost savings, revenue increases, favorable credit and interest conditions, improved supplier relationships, and better communication, leading to more resilience and better change management. Both purchasing organizations and suppliers that have set up sustainability programs or initiatives have navigated the crisis better than companies without.
The Supply Chain Act is a regulatory leap onto the global sustainability train, which is just picking up speed. The EU will follow suit with stricter requirements for business and human rights, and simultaneously with the EU Green Deal, it will increase the pressure for environmental and climate protection – with a focus on supply chains.
So far, in EcoVadis data, sustainable procurement, alongside ethics, labor and human rights, and the environment, is the weakest performing area. Looking at regional results in sustainable procurement, Europe leads with 42.0 points in 2020, showing a relatively stable five-year development of the score. In contrast, scores have decreased in all other regions over the last five years. Companies in the EU are on par with Europe overall, and the region’s leadership status reflects the advanced regulatory developments taking place across the continent in terms of due diligence in the supply chain. Sustainable procurement performance in the four largest EU economies (Germany, France, Italy, and Spain) remained the same or even improved in some cases in 2020, while companies in the northernmost member states – namely Sweden, Finland, and Denmark – have maintained their remarkably high and consistent rating levels in this area. This can be understood as a result of longstanding social and political commitment to climate protection, widespread in the Nordic region, and is also a reflection of the impacts of national regulatory trends towards mandatory due diligence, as recently introduced in Norway.
Pure Compliance is Just the Beginning Especially small businesses sighed in relief with the Supply Chain Act – „we are not affected.“ Others panicked, „What does this mean? What do we have to do?“ – And it must be clear, there is no perfect template solution for fulfilling the Supply Chain Act, no consulting firm, no technological solution provider to cover all requirements. It requires change management, building know-how in procurement, restructuring and rethinking processes and procurement criteria, communication, supplier engagement, and new sustainability-related KPIs in procurement. As mentioned at the beginning, 46% of suppliers consider their customers‘ commitment as „only important on paper.“ Measures listed in the LkSG, such as a supplier code of conduct, are important, but without further verification or assessment of a supplier at risk due to location, category, or expenditure volume, the code of conduct may remain just paper.
Isn’t there another way? The sector initiative „Together for Sustainability“ recently celebrated its tenth anniversary. In 2011, six companies joined forces with a vision and a sense of responsibility to create standards for sustainable supply chains in the chemical industry. Now, 31 companies are part of TfS, achieving positive impacts in terms of risk minimization and sustainability improvements in their global supply chains. TfS member companies, as well as other companies in the market, already have a significant head start in terms of know-how, best practices, and tool use for sustainability risk and performance management in their supply chains. Additionally, the more mature the sustainability programs are, the more added value and return on investment can be achieved.
Companies that now pursue a purely compliance-focused approach to the Supply Chain Act and neglect the development of long-term sustainable procurement programs and supplier management will fall out of the curve again with the EU regulation.