Sustainable Procurement, sometimes Responsible Procurement or Ethical Procurement, is the commitment of applying consideration to environmental, social, and governance factors (ESG) in procurement decisions. These factors should be applied across all aspects of the procurement cycle. It means that the procurement processes are compliant with environmental laws, fair labor practices, resource consumption targets and other core principles of ESG. These factors are becoming more important to overall business performance due to the increase in consumer requirements for sustainable goods and services. Due to this, sustainable factors are now a key pillar of the business requirements gathering activities.
Sustainability principles and increased performance with consumers has placed significant importance on procurement practices and their ability to translate those principles into supplier requirements and ensure those requirements are being met. It is a strategic importance for procurement to be able to translate these sustainability requirements into supplier deliverables that drive revenue growth through consumer satisfaction of those sustainable credentials. It is therefore a fundamental aspect that procurement has to consider in both sourcing and supplier management activities. Sustainable procurement, brings together a broad swathe of business requirements that have inputs from most aspects of the organization.
The 12 Factors
The Procuropedia Sustainable Procurement Wheel standardizes the requirements gathering process. The 3 core ESG pillars are broken into 4 parts to create a series of 12 factors that can help build a complete set of requirements.
The requirements defined from the 12 factors should then be disseminated down the supply chain with the aim of increasing the impact of the organizational ESG principles.
In most cases, 80% of the requirements will be generic across all purchases with the remaining 20% specific to a particular purchase. It must be a key aim of any procurement department to produce a set of generic sustainability requirements so they can be used across all purchasing activity. Leaving a specific purchase process only need to define the remaining requirements for that particular purchase.
A standardized and effective set of sustainable requirements, has the potential to realize an organization’s long-term performance goals while providing opportunity for brand differentiation and enhanced reputation.
Environment
The environmental factor aims to embed a culture of ‘conservation of the environment’ in all aspects of the running of an organization. To ensure this principle is applied to all parts of the organization, the supply chain and suppliers must be considered. Environmental requirements to deliver this principle must be disseminated down the supply chain to ensure that culture flows down the supply chain to maximize the impact of the policies.
Waste
An organization should have a detailed waste management policy for both itself and it’s suppliers. The policy for itself should contain a detailed set of requirements for suppliers that help operationally achieve the policy contents. A supplier policy should contain a set of core principles and their underlying deliverables a supplier must operate to be able to be considered for contracts.
Typical examples of organizational waste are:
- Tech Disposal (for example WEEE or EWRA Electronic Waste Recycling Act (California))
- Packaging waste
- Hazardous waste
- Air pollution
Resource Usage Using resources efficiently reduces the requirements for those resources and therefore the cost paid for those resources. Equally, that has a positive effect on the environment through reduced use of finite resources. It is a competitive advantage and good corporate responsibility for a organization to have control of their resource usage.
To enable this resource view, an organization will require data provided by their suppliers to ensure they have a whole product or service view of their resource usage. These data requirements need to be part of any agreement with a supplier to ensure governed access to the data. As a result specific specifications are required from the business detailing the data / information requirements needed to obtain such a product or service view.
Typical natural resources can be:
- Oil
- Natural Gas
- Plant Products (Cotton, Grain, Corn, etc)
- Trees
- Metal Ores
Environmental Impact An organization should monitor the environmental impact their activities have. These impacts can be both negative and positive. To obtain a complete understanding of environmental impact, organizations must have a view down their supply chain to be clear on the ‘real’ impact.
To achieve this, impact information needs to be requested from suppliers to ensure the data is available to carry out a detailed assessment. This assessment can then inform potential opportunities to reduce negative impacts and the increase positive impacts.
Typical negative impacts are:
- Acid rain, smog and other forms or air pollution
- Ocean acidification
- Wildlife displacement or extinction
- CO2 Emissions
Typical positive impacts are:
- Naturization of other use land (for example an old quarry)
- Funding reforestation projects
- Using manufacturing byproducts in other products or services
Biodiversity The promotion of biodiversity whilst running the organization is equally important. Ensuring the natural world are also considered and the impact of wildlife ecosystems is minimized as much as possible in operations is equally as important. Biodiversity is particularly important in agriculture and the manufacture of many industrial materials.
Typical considerations are:
- Deforestation
- Wildlife displacement or extinction
- Overexploitation
- Hybridization
- Introduction of invasive species
Special mention - Climate Change
Organizations are increasingly required to report on their CO2 footprint. Whilst a part of environmental impact, due to the specific focus on CO2 emission it warrants its own policy and monitoring policy so an organization can report on their performance in a high degree of detail. Data is required from suppliers and the entire supply chain to adequately detail the CO2 impact of an organization.
Social
The social factor aims to embed a culture of ‘consideration to people and the community’ in all aspects of the running of an organization. These social requirements must also be passed down the supply chain to maximize impact and ensure organizational policy is mirrored by their suppliers.
Data Protection & Privacy
An organization must ensure the protection and good governance of supplier, customer and employee data. These data principles must be passed down the supply base to ensure that data is kept safe and isn’t leaked or stolen.
Community
An organization should serve the local communities they operate in to fund local community projects, support local institutions and promote the support of poor and underserved communities globally.
The core principle of community should be promoted across the supply chain as much as possible to increase the impact of an organizations investments.
Customers
The purchasers should enhance customer perception by addressing their preference for sustainably sourced purchases, and maintaining transparency around procurement activities.
Employees
The organization should promote diversity and safe working environment for their employees. These principles should be applied down the supply chain to ensure all suppliers adhere to the polices of the organization purchasers should enhance customer perception by addressing their preference for sustainably sourced purchases, and maintaining transparency around procurement activities.
Goverance
The governance factor aims to embed a culture of ‘transparent running of a company’ in all aspects of the running of an organization. These governance requirements must also be passed down the supply chain to maximize impact and ensure organizational policy is mirrored by their suppliers.
Shareholders
Understanding the shareholder make-up to reduce investments from entities with no or poorly performing ESG principles. Shareholders with a conflict of interest. Shareholders with a strategy of ESG activism, trying to push from the board down the principles of ESG and ensuring they are applied across the organization.
Executive Board
Promotion of diversity on the management board of an organization and ensuring the application of fair pay polices to executive pay so that large bonuses aren’t paid out when employees have a pay freeze.
Transparency
Full transparency of full and honest financial reporting, the detailing of organizational activities in lobbying, political contributions, performance in bribery and corruption and having a defined whistle blower scheme is expected from the leading organization’s of today.
Tax Strategy
Adherence to applicable tax laws, rules, regulations and disclosure requirements in each operation jurisdiction, Paying the right amount of tax on-time in the right location. The making of tax decisions based upon a genuine commercial reason that matches the corporate objectives. Managing tax affairs to protect shareholder value but without negatively impacting the organizational reputation.
The Procuropedia Sustainable Requirements Canvas
There are a significant number of requirements that come out of applying sustainable procurement principles correctly. The Procuropedia Sustainability Canvas is a way of simplifying the process of gathering all of these requirements. The canvas is split into 3 separate canvases to cover Environmental, Social, and Governance pillars.
The canvas is broken into 4 steps:
Business
This step details the targets, stakeholders and the associated business activities and processes that create the business requirements.
Needs
This step takes the targets, processes and activities and translates them into business needs.
Gaps
This step takes those needs and assesses them with the current supplier provided goods and services. These gaps can then be prioritized to produce a list of the most important requirements which can help in developing supplier selection criteria. See Gap Analysis for more details.
Requirements
The requirements step is to clearly list the requirements of the business, ideally with importance indicators from a gap analysis so that they can be used to inform supplier selection weightings.
Benefits of Sustainable Procurement
There are numerous benefits to applying sustainable procurement princilpes. The most common are:
Reduces reputational risk
A supply chain that is directed by an organizations well-formed ESG agenda can significantly reduce the reputational risk of an organization. It allows a level of commercial control over how suppliers are operating in their environments to reduce the risk of malpractice in the supply chain.
Creates brand loyalty: A supply chain built on ESG principles can be used as great marketing collateral that promotes the brand in the organizations operating markets and beyond.
Reduces cost
Sustainable procurement can lead to cost savings through all areas of operations, including:
- reduced energy costs
- avoided overconsumption
- reduced in-production waste
- reduced dependence on shipping
- reducing the use of unnecessary packaging
Future-proofing the supply chain: A procurement function and supply chain built on sustainable principles is one that has to be innovative. Using technological advancements and forward-thinking business strategy that precedes market regulation and other market changes. This can future-proof the organization and make it a leader in its market
Conclusion
Sustainable procurement is the process of implementing the requirements of the organizations ESG targets. It is a core pillar of procurement strategy in most large organizations. It offers a significant number of side benefits that makes it an incredibly powerful concept to apply across both direct and indirect procurement categories of organizational spend. Delivered well, it has the capability of being a highly important competitive advantage over an organization’s competitors.
Key Takeaways
- Sustainable procurement is the process of defining ESG requirements that the suppliers should adhere to
- Procurement should work collaboratively across all parts of the business to ensure the 12 factors are considered to produce a set of general and purchase specific requirements
- A general set of sustainability requirements should be developed by the business stakeholders and procurement and continuously updated inline with ESG policy changes
- In a specific sourcing activity, the specific good or service sustainability requirements can be additionally applied to the general set
