In today's economy, the need for companies to be mindful of their environmental, social, and governance (ESG) goals has become ever more important. Customers are increasingly demanding ethically-made products, and regulatory bodies around the world are passing regulations designed to ensure companies take environmental and social responsibility seriously. Companies that fail to achieve ESG due diligence may face risks such as noncompliance penalties, reputational damage, and restricted market access.
One of the keys to achieving ESG goals lies in increased visibility and transparency throughout a company's supply chain. In this blog article, we will discuss what ESG goals are, how they can be achieved through supply chain transparency, and why it is so important for businesses to take steps towards supply chain management practices that meet these goals.
ESG stands for Environmental, Social, and Governance. It is a broad set of criteria companies use to measure how well they are addressing the environmental, social, and governance challenges posed by their operations. Supply chain ESG reporting standards, such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), and Carbon Disclosure Project (CDP), provide frameworks that define goals for companies to transparently report their progress to stakeholders, often including investors.
Environmental: Environmental ESG goals focus on reducing impacts on the environment such as greenhouse gas emissions, waste and pollution. Other considerations that can reduce environmental impact include sustainable sourcing and responsible procurement practices.
Social: Social ESG goals focus on ensuring a positive impact on people through fair labor practices, safe working conditions, and respect for human rights. Other considerations also include diversity, ethical sourcing, and responsible business practices that benefit communities and society. Social ESG goals work to achieve ethical treatment not only of suppliers in your supply chain, but of employees within your own operations.
Governance: Governance ESG goals focus on building systems and processes for managing operations and supply chains, including transparency, accountability, and ethical decision-making. Governance also includes responsible business practices, such as anti-corruption measures and compliance with laws. Meeting your governance goals is critical to the success of implementing the goals under “E” and “S,” as it ensures proper systems are in place to govern your company’s practices as a whole.
Setting and achieving ESG goals benefits your company by ensuring you avoid penalties for violating regulations, meeting consumer demand for ethical goods, and increasing the efficiency of your supply chain. Ambitious ESG goals also helps businesses “future proof” their operations for long-term success in a quickly changing world.
Regulatory compliance: With new regulations requiring environmental due diligence and ethical labor practices, manufacturers of goods in every sector must work to comply. For example, the EU Corporate Sustainability Due Diligence Directive (CSDDD) covers governance, as it requires companies to conduct comprehensive assessments of their supply chains to identify, disclose, and address any adverse environmental, social, and governance impacts. This directive works in tandem with the EU’s Corporate Sustainability Reporting Directive (CSRD), which aims to enhance the quality and consistency of sustainability reporting by requiring larger companies to disclose information on environmental, social, and governance (ESG) matters. The United States has also begun considering numerous regulations designed to push companies to meet governance goals and increase transparency surrounding their efforts, such as a proposed SEC rule that would require companies to disclose their climate risk.
Legislation is not only spreading geographically, but also across all aspects of a company’s ESG performance. Other regulations focused on encouraging ESG practices work by regulating:
Product design (for example, the EU Ecodesign for Sustainable Products Regulation)
Raw materials, manufacturing, and supply chains (for example, emerging PFAS regulations in the US or the New York State Fashion Act)
Market access (for example, US Tariff Act section 307 or the EU Regulation on Deforestation-Free Products [EUDR])
Customer loyalty: Today’s customers pay attention to how their products are made. For example, a 2022 study by Nielsen found that 78% of global consumers say sustainability is important to them, and 30% more likely to buy a product with sustainable credentials. This means that companies that can demonstrate their commitment to ESG are more likely to win the trust of consumers and be successful in the long run.
Increased supply chain operational efficiency: Meeting ESG goals can help increase operational efficiency and increase profits. For example, by investing in sustainability initiatives such as renewable energy sources or green building practices, companies can save money on energy costs. Additionally, by improving supply chain visibility as part of ESG due diligence and instituting ethical sourcing policies, organizations can better track their materials and suppliers, boosting the efficiency of their processes and ensuring best practices are followed.
Supply chain transparency is a company’s ability to both understand what is happening where in their supply chain at any given time and communicate that information to stakeholders, including personnel within their organization, investors, and even consumers.
Establishing transparency includes the practice of tracking a company's supply chain activities across all stages of production to better understand where materials come from, how they are sourced, and who is involved in the process. This can be done using a variety of technologies and auditing tools. Transparency also involves collecting data on supplier practices and performance so ESG compliance can be evaluated systematically. Effective supply chain management plays a crucial role in this process, ensuring that each link in the chain aligns with the company's commitment to transparency, sustainability, and ethical practices.
To ensure compliance with ESG standards, companies must have increased transparency in their supply chains to identify any areas where they need improvement or are falling short of their objectives. Supply chain management transparency initiatives, such as supplier mapping, auditing, and risk assessments, give organizations the ability to track and monitor supply chain activities, allowing them to identify potential risks and opportunities, such as environmental damage or unethical labor practices. By increasing oversight of supplier operations, companies can gain a better understanding of what is happening at multiple tiers of their supply chain – and thus better communicate this information with stakeholders. In turn, this enhanced communication can strengthen your company’s relationships with suppliers, investors, and customers.
Here are a few examples of how supply chain transparency helps organizations meet environmental, social, and governance goals.
By incorporating supply chain transparency into their operations, companies can gain insight into the environmental impact of their production processes and supplier networks. This allows them to identify any risks associated with sourcing materials from certain areas or using particular processes, helping them make informed decisions about where they source materials from and how they produce goods. For example, certain materials may be sourced using environmentally-damaging processes or may be extremely carbon-intensive to produce. By increasing end-to-end oversight through audits, inspections, lab testing, and digital tools, you can make more informed decisions about which materials and suppliers to use.
Additionally, increased transparency in the supply chain ensures that sustainable practices are adopted throughout the entire process, minimizing negative impacts on the environment. For example, environmental audits that provide insight into individual supplier factories’ waste management or water treatment practices are critical to helping companies meet larger sustainability goals.
By providing publicly available information about your sustainability efforts, such as carbon reduction, you ensure your operations are compliant with environmental laws (like climate disclosure requirements) and boost your reputation among eco-conscious investors and customers.
Increased visibility into labor practices within your supply chain is a major component of achieving ESG goals. By proactively engaging with their suppliers through audits and on-site visits, companies can assess whether these suppliers adhere to ethical business practices. For example, many companies opt for ethical audits to ensure compliance with international standards and certification programs like the Higg Index, WRAP (Worldwide Responsible Accredited Production), the Sedex Members Ethical Trade Audit (SMETA) framework, or amfori BSCI (Business Social Compliance Initiative). These audits measure performance against benchmarks such as labor laws, environmental protection requirements, and health & safety regulations. Companies may also undergo certification processes for third-party ethical certifications, like WRAP certification, for their products as a way of demonstrating their commitment to social responsibility.
Supply chain transparency can also help companies to improve their governance practices and build supply chain trust, agility, and resilience. By knowing who is involved in the production of their products, companies can be more aware of potential conflicts of interest and ensure that their suppliers are operating responsibly.
For example, a company that is transparent about its supply chain can demonstrate that it is not using child labor or forced labor. This can help to build trust with investors, who are increasingly concerned about the social impacts of their investments. Additionally, transparency can help to build trust with regulators, who are increasingly scrutinizing companies' supply chains for potential violations of labor laws or environmental regulations.
Achieving supply chain transparency is often the first step towards ESG due diligence. Without an accurate understanding of what’s occurring at every stage of the supply chain, it can be difficult to even understand what goals to set. Investing in supply chain transparency tools allows you to build a critical foundation of information necessary to set goals that will ultimately allow you to build towards achieving best ESG practices.
Once ESG goals are set, increased supply chain transparency helps ensure that companies can meet their ESG goals more effectively and efficiently. By implementing ESG practices throughout their supply chain management strategies– from sourcing materials ethically to tracking environmental impacts – organizations can better manage risk while increasing operational efficiency and improving customer satisfaction.
Ready to learn how to reduce ESG risk in your supply chain? Read this comprehensive report to learn more about approaching your ESG risk management strategy: A Step-By-Step Guide on Implementing Your ESG Risk Strategy