Companies and sustainability: the procurement department as a key pillar of transformation
Companies around the world are becoming increasingly aware of the environmental impact of their operations. As a result, sustainability is becoming an important factor influencing their business decisions. For Chief Procurement Officers (CPOs), sustainability is not just a buzzword either. Their potential to make a real difference to the environmental impact of their companies is very high. In our aricle you can find out why sustainability should be a priority for CPOs and how they can start this transformation in their departments.
Sustainability is one of the most important topics of our time, and it should definitely be a topic for CPOs procurement. In today’s world, businesses are expected to be more socially responsible, and this includes the way they source materials and products. As Chief Procurement Officers, it is your responsibility to ensure that you are sourcing materials and products that are sustainable and have a minimal environmental impact.
Regulations are here
On 5 January 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. This new directive modernises and strengthens the rules about the social and environmental information that companies have to report. A broader set of large companies, as well as listed SMEs, will now be required to report in a standardised digital format on sustainability – approximately 50,000 companies in total across the EU. The CSRD also makes it mandatory for companies to have an audit of the sustainability information that they report.
In the EU Taxonomy, the “Do no significant harm” and the minimum social safeguards apply to supply chains and companies will face stricter due diligence requirements when reporting according to both CSRD and ESRS. With the new ESRS and 2021 GRI update, companies are starting to face stricter reporting requirements when it comes to Scope3 and the value chains across all ESG levels. At the same time, there is an EU legislation being introduced that will make companies liable for human rights violations and environmental damage in supply chains. ESG-associated opportunities and risks are becoming more and more relevant also for financial institutions. In the past, banks were primarily focused on the financials of a company, such as creditworthiness, liquidity, and profitability. Now, however, ESG scores are being given greater consideration when deciding whether or not to lend money to a company.
In a nutshell, there are a growing number of new regulations that will come into effect in the coming years and will affect a much wider range of EU companies and their supply chains than ever before. This means that businesses must be prepared to comply with these new regulations and make sure they are compliant. Failure to do so could result in significant penalties.
CPO’s role is becoming more difficult: never before have they been asked for this level of reporting, and to do that, they need data and assurance that the data is accurate. This means that procurement is being made responsible for the choice of which supplier to work with, what material to buy, and making that supplier a part of the organisation’s net-zero strategy.
Where to start?
During our engagement with clients, we discovered that when companies take the initiative to make their processes as sustainable as possible, they often do not stop there, but they strive to understand the entire supply chain, and this is where the role of the Chief Procurement Officer (CPO) becomes critical. By working closely with suppliers, the CPO can help to identify potential environmental, social, and economic risks, and proactively work to mitigate these risks. In doing so, he/she can help companies realise the full potential of their sustainability initiatives and make a positive impact on the world around them.
For CPOs, there are several ways to incorporate sustainability into their procurement process. First, as already mentioned above, it is important to develop supplier relationships that prioritise sustainability. Supplier relationships and procurement sustainability initiatives have become invaluable tools for any organisation. From reducing costs and improving efficiency to strengthening the supply chain and mitigating risks, the benefits of these initiatives are vast and varied. This means that you should look for suppliers who have a commitment to sustainability and have implemented green initiatives in their operations. If not done yet, you should open a conversation, at least with your key suppliers, to understand how you could engage in these green initiatives together. It is also important to work with suppliers who use sustainable materials and processes in their manufacturing and who adhere to labour standards.
Another major area to develop is sustainable procurement policies and procedures. This involves identifying the sustainability criteria that need to be met when you are sourcing materials and products and developing systems to ensure that these criteria are met. Additionally, you should be evaluating the suppliers you are working with to ensure that they meet the requirements of your sustainability policy.
Sustainability can often be viewed as a top-down initiative. To transform sustainability into a company philosophy. CPOs should be educating their staff on the importance of sustainability. This can involve providing training on green procurement, as well as implementing a green procurement programme in the organisation. It is important to stay informed on the latest developments in sustainability to ensure you make the most informed decisions.
5 steps to embedding Sustainability into Procurement
With so many elements to consider, it can be difficult to know where to begin. As Peter Smith and Mark Perera pointed out in their book Procurement with purpose: How organizations can change the way they spend money now to protect the planet and its people (2021): “Prioritisation is vital; even the largest global organizations such as Unilever and Microsoft can’t hope to address very possible sustainable procurement issue to maximum extent. There are many worthwhile options, so every organisation must think strategically and prioritise to direct their resources and achieve meaningful results.”
Fortunately, there are a few key steps that can help make the process easier.
1. Understand your Goals and Ambition
The first step to sustainable procurement transformation is understanding the goals and ambitions of your organisation. Identifying what the organisation hopes to achieve with sustainable procurement practices will help determine the most effective approach. Consider the values and mission of the organisational strategy and the specific objectives that will be met through the transformation. You should set out a clear business case for your sustainable procurement transformation. Your business case should align with your company’s overarching strategy and articulate the benefits of responsible procurement. This will help you gain stakeholder buy-in, both internally across your organisation and externally across your supply chain. Senior buy-in is vital to delivering sustainability objectives through the supply chain!
2. Assess your Sustainability Performance & Risk
The procurement process can be complex, and it is important to ensure that your organisation is making sustainable and responsible decisions in the process. By assessing your organisation’s sustainability performance and risk in procurement, you can identify areas in which you are not meeting current standards or have potential areas of risk. This assessment can help ensure that you are making responsible choices when it comes to the products and services you purchase. With a better visibility of your supply chain, you can start to identify and list the opportunities. Scoring, ranking, and mapping risks against a grid (or in tabular format) will help you prioritise, track and share.
3. Develop a Sustainable Procurement Strategy
You have identified and prioritised the key risks and opportunities across your supply base – now it is time to develop a responsible procurement strategy that not only mitigates risk, but also encourages continuous improvement. Utilising a proactive approach, you can create a strategy that encourages sustainable practices, safe working conditions, and improved supplier performance. With this strategy in place, you can ensure that your supply base remains compliant and supports your organisation’s long-term success. Purchasing should play an integral role in achieving this ambition, so you should identify any risks and opportunities that may arise and develop a strategy for managing them. Additionally, you should determine the critical categories and suppliers to target, define actions and a high-level roadmap for managing risks and opportunities, and establish targets and metrics for success. By following this strategy, you can ensure that you are on track to meet your defined ambition.
4. Collaborate with Suppliers, Stakeholders, Peers
Having ambitious goals and a well-appointed team is essential for driving responsible procurement, but it is not enough. To achieve true sustainability, your team must move away from a compliance-based approach and focus on proactive engagement and collaboration with suppliers instead. By engaging with suppliers on the root causes of shared issues and helping to find meaningful resolutions that add real value to both parties, your team can create a more positive relationship with suppliers. Moreover, sustainability requires collaboration across and beyond the industry. Partner with competitors, NGOs, local communities, and authorities to share learnings, gain greater leverage, or work together to tackle common challenges. By working together, companies can find tangible solutions to common problems and create a more sustainable future.
5. Monitor and Share your Impact
Sustainable procurement transformation is an ongoing process, and it is important to review and adjust your strategy as needed. Consider the progress that has been made, the success of the suppliers, and any changes that may be needed to ensure the transformation is successful. This will help you identify areas of improvement and determine if your sustainability goals are being met. Regularly communicate the progress of your program to leadership, critical stakeholders, and the wider business. Using digital technology, establish a clear set of metrics, such as CO2 emissions reduction in kt, energy consumption in kWh, number of suppliers audited against environmental standards etc., to measure your impact and publicly report on these on a periodic basis. Be transparent in your approach and provide information that is easily accessible and detailed enough to adequately evaluate your approach. By being open and honest, you will be able to encourage and support other organisations to learn from your journey.
Sustainability should not be treated as a separate process, but rather as an integral part of all existing procurement processes. Avoid creating a separate or parallel process for sustainability; instead, integrate sustainability into your current procurement processes. Doing so ensures that sustainability remains an important and integral part of your procurement activities.
These steps do not necessarily describe a simple linear process but rather an iterative journey of continuous improvement. By following these five steps, CPOs can ensure that they are well on their way to successful sustainable procurement transformation.