The growing trend for companies to measure and report on the environmental, social and governance (ESG) aspects of their operations can help civil servants assure themselves of the sustainability of their suppliers. In a recent webinar with Global Government Forum, experts from Dun and Bradstreet outlined the standards, frameworks and metrics that underpin ESG performance and offered advice on how civil servants can compare suppliers and demonstrate best practice.
Several converging forces are driving the rising interest in environmental, social and governance aspects of suppliers to government. The climate emergency has woken everyone up to the dangers of unfettered burning of fossil fuels and sparked the creation of an entire industry around carbon measurement, elimination and offset. Post COP26, there is even more impetus for the UK to meet its net zero targets and other climate commitments. Outside of the environmental sphere, corporate governance scandals have rocked many industries, ushering in heightened consumer scrutiny and expectation as well as tighter regulation. Most recently, the Covid-19 pandemic and conflict between Russia and Ukraine has severely tested the stability and resilience of organisations in all sectors.
All of this means that companies are coming under greater pressure to operate responsibly and demonstrate the highest standards of corporate behaviour. Fortunately, there is a growing body of evidence showing that companies which perform well on ESG benchmarks are usually the most successful companies too, says Rochelle March, head of ESG product at Dun and Bradstreet. “Even during the past few volatile years, companies that managed well from an ESG perspective performed better over that period.”
Just getting started
Government buying power often works as an effective lever to encourage more responsible practices among suppliers keen to win places on statutory procurement rosters. But comparing different suppliers’ ESG credentials requires knowledge and skills that many in the civil service and the private sector are yet to acquire. Responses to three polls conducted during the webinar showed that different organisations are at different stages of the process of managing ESG risks among their suppliers, but the majority of participants were just getting started.
In response to a question about the extent of their own organisation’s understanding of the ESG performance of its supply chain, around half of respondents said they were just getting acquainted with the concept, while the other half were at the point of exploring how to introduce ESG criteria into their supplier evaluation and acquisition process. Understandably, as ESG is so new to the non-financial world, not a single attendee claimed to be “well under way” to understanding their supply chain’s ESG footprint.
However, March said civil servants should not be surprised if they find ESG confusing, because it is still in its infancy and there is no single set of standards or metrics that everyone can align to. Most of the standards and frameworks governing ESG are principles-based rather than prescriptive, so there is a lot of ambiguity around the concepts which can make it even harder for procurement officials to decide how to approach it.
March said that most ESG information is gleaned from companies’ self-reporting, because ESG measurement has historically been voluntary and rarely assured or validated for accuracy. There are a growing number of assured KPIs around greenhouse gas emissions, which involves a third party double-checking a company’s carbon calculations and comparing these against other records such as energy invoices, but this type of validation is expensive, so most ESG tracking still sees buyers taking a company at its word.
Consultancies such as Dun and Bradstreet can paint a much more comprehensive picture of a company’s ESG performance by monitoring and triangulating data from a host of different sources such as spend and trade information, regulatory data, media news stories, and information on certifications. But civil servants can still do some degree of “cross-validation” themselves, advised March.
For example, Dun and Bradstreet has found a strong correlation between a company’s management of greenhouse gas emissions and performing well in a group of ESG metrics, as well as having lower rates of delayed payments to their suppliers.
This is akin, says March, to the hypothesis that the best performing ESG companies are just well managed companies.
E versus S and G
Since the climate crisis has risen to the top of the global agenda, there has been a proliferation in reporting standards at EU or global level for environmental factors such as greenhouse gas emissions, which can be helpful to civil servants in measuring the performance of suppliers. March rattled off a few: “The Global Reporting Initiative (GRI) is one of the dominant reporting frameworks, but it’s very broad, it covers almost everything. The Sustainability Accounting Standards Board started in the US and has been picking up steam more globally. SASB is the first standard where they’re trying to determine financially material metrics, so what’s important to investors. CDP originally started as Carbon Disclosure Project and was the initial repository of greenhouse gas emissions that were voluntarily provided by companies. Today, it has also expanded into water, forestry and also supply chain and climate type reporting.
“There’s also the Taskforce for Climate-related Financial Disclosure (TCFD) and if I were to recommend one of these frameworks, I’d recommend TCFD, because it is focused on a company’s impact on the climate as well as the climate impacts on the company. And some other frameworks, like the EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR), definitely dovetail with TCFD. Essentially TCFD asks companies to disclose how they are going to deal with the climate, how they are going to limit their impacts.”
There are fewer such tools available to help organisations measure the social and governance aspects of ESG, even though the Public Services (Social Value) Act 2012 requires officials to explicitly consider the social value of suppliers when awarding contracts. But Harry Chopra, chief product officer, finance and risk solutions at Dun and Bradstreet, was confident that most companies are now cognizant that changes need to happen in these fields of their activities – which can include areas as diverse as labour relations, corporate philanthropy, data privacy and shareholder rights. Mandates from government are helping to drive awareness and efforts to improve, he said.
So, how can civil servants decide which factors to examine if they want to incorporate ESG credentials into their choice of suppliers? Dun & Bradstreet has worked to synthesise the different frameworks into groups of concepts that civil servants can use to seek information on new suppliers or engaging with existing ones. Greenhouse gas emissions is a common one, but other issues that might be important to departments could include more procurement from small and medium enterprises, the diversity and inclusion credentials of suppliers, or their health and safety record. March said the first step in applying ESG screens in your supply chain is to establish which of these concepts are most important to your organisation. She recommended using the SASB materiality map to identify which sustainability issues are usually considered most important in different industries.
Then, once the criteria has been selected, officials should decide which standards and metrics to use to measure the performance of suppliers against others in the same industry and in their own department’s supplier portfolio. These metrics can be tracked over time to see if suppliers are improving – and if they are not, then government can engage more closely and press them to take action to drive up their performance in specific areas of activity.
Chopra added that the further a company is along in its own ESG measurement journey, the lower its potential ESG risks are likely to be – making it more likely to be adaptable and resilient during tough times. The potential for risks is highest when a company is just starting to think about its ESG practices, but as it begins to devise policies and hire staff that are dedicated to improving ESG performance, the risk potential decreases because more information is available. Real progress is made – and risk can decrease – when the policies are implemented and the company is regularly publishing its metrics.
Where civil service organisations work with a large portfolio of companies within a wide business ecosystem, it will be helpful to use performance dashboards to display large amounts of data in a visually simple and accessible way. This enables officials to see at a glance how each supplier is doing, over time and in comparison to others.
March emphasised that ESG metrics don’t reveal whether a company is sustainable or not, because “almost no company today is truly sustainable”. What ESG metrics tell you is “how sustainable a company is versus the most sustainable company today. It’s a relative benchmark. But the point of that is to try and push companies towards better performance collectively, through competition, in a way: how do you compare to your peers? Are you a leader or laggard?”
The experts also addressed a question from the audience about whether it was realistic to expect smaller suppliers to embrace these commitments when they don’t have the same capacity and resources as larger organisations. Chopra said that organisations of all sizes can do something, even if it is just switching to lower-energy light bulbs to reduce their carbon footprint. March added that a number of resources have been produced recently specifically to assist smaller and medium-sized organisations with this, such as guidance from the SME Climate Hub that has support from groups like CDP and We Mean Business Coalition. The United Nations Global Compact (UNGC) is also developing tools to support small- and medium-sized companies.
Start small – but start
Chopra and March ended the webinar with advice for civil servants to “start small” in their efforts to nudge their supply chains, because the very fact that the government is placing greater emphasis on ESG factors in its procurement processes will help to accelerate change and improvements.
“Don’t try to tackle everything at once,” said March. “Start by focusing on maybe that 10% of initiatives that you really want to prioritise, and then grow from there. Because this is a process, and governments and business are all part of that process, and it will become clearer with more tools and such available over time. So start small – but start.”
Chopra advised picking three or four companies in your supply chain to initiative conversations with, where you see room for improvement in their environmental, social or governance dimensions. “Start with a portfolio, identify the risks, and work with a few companies to improve their ESG risks.”
March concluded on a philosophical note: “What I really like about ESG is that it’s a concrete manifestation of what we value in the world, beyond money. We all agree that money is valuable, but all of a sudden we’ve also decided that these other things are also valuable.” She warned viewers to expect ongoing changes in the ESG landscape and to maintain a flexible approach to deal with these. “There will be clashes and arguments and agreements, because it’s essentially society trying to solidify how we want to behave with each other, beyond the principles of pure capitalism. So pretty interesting, I think, from that perspective.”
The full webinar: ‘Master Builders: The Foundations of Good Data Management for Public Sector’, can be watched via the link below.