In Part 1 of this three-part article series, we discussed the emergence of ESG as an important business decisioning and risk management tool. In Part 2, we’ll look more closely at specific areas where ESG data can help procurement and supply management leaders assess risk factors associated with prospective suppliers.
From computer chips to placemats to construction materials, the world is still coping with supply chain shortages triggered or exacerbated by the pandemic. Toyota recently announced it would cut its global production of cars by 40% related to chip shortages,1 while Britain’s National Health Service has delayed blood tests because it doesn’t have the needed supplies.2 Even aid organizations distributing food and clothing are struggling to find what they need.3
Along with the pressures to meet demand among mounting supply shortages, companies also need to comply with new regulations and requirements regarding the environment and human rights practices. Effective supply chain management mandates additional tracking of these issues — commonly via ESG (environmental, social and governance) data — in addition to traditional metrics such as reliability, price, and quality.
When comparing companies that performed well on ESG metrics to other companies that performed poorly, those that performed well also had a higher average change in sales growth over a 5-year period — and this applied to both public and private companies.
Figure 1: ESG performance correlated to sales growth
Financial performance is an important feature to monitor. In particular, the proportional delinquency rate is a helpful indicator of the reliability of companies. It’s like a credit score; the more late payments a company makes, the higher its delinquency rate and the more unreliable it may be in terms of its financial and operational management. Recent testing of ESG rankings of private companies revealed that companies with poor ESG performance had notably higher delinquency rates than those with good performance.
Figure 2: Proportional delinquency rate correlated to ESG performance
ESG data covers a broad spectrum of issues, ranging from how companies manage natural resources such as energy and water, to their technology management impacting cybersecurity and data privacy, to general corporate compliance. Exploring specific ESG topics and their relationship to operational performance helps to highlight additional areas of importance for managing ESG issues. Three themes covering each of the E, S, and G dimensions have been found to have strong correlations to sales growth and lack of delinquency payments.
Table 1: Selected ESG themes, definitions, and data points
Businesses with better management of greenhouse gas (GHG) emissions have demonstrated higher average change in sales growth over the past five years, even during the last year of major volatility. For delinquency rates, companies with good GHG emissions management have a lower proportion of late payments.
Figure 3: GHG emissions management correlated to sales growth
Figure 4: Proportional delinquency rate correlated to GHG emissions management
Strong ESG rankings related to supplier engagement — which refers to companies that communicated with their suppliers more and did business with them more efficiently — were also seen to be correlated with company sales growth. In addition, companies with good supplier engagement have an overall lower proportion of delinquency rates, where poor rankings indicate a delinquency rate 15.1 times that of companies with good rankings.
Figure 5: Supplier engagement correlated to sales growth
Figure 6: Proportional delinquency rate correlated to supplier engagement
Finally, for the governance dimension, the business resilience theme captures how well companies recover from disruptive events, like an economic downturn or natural disaster such as a flood or hurricane. Companies that performed well on business resilience show a more dramatic change in sales growth over time, as well as have 1.4 times lower delinquency rates than those companies that perform poorly.
Figure 7: Business resilience correlated to sales growth
Figure 8: Proportional delinquency rate correlated to business resilience
The insight derived from ESG data can be used to better gauge the stability and success of companies, both during supplier selection and for ongoing supplier relationship management. For example, procurement and supply management leaders can:
- Hotspot companies that are lagging in specific areas in a quick and efficient way instead of having to survey or collect data directly on an entire supply chain portfolio
- Prioritize oversight on these companies and track them month to month to see if their performance continues to lag — and thus indicate consistently unreliable behavior — or if it improves
- Engage these companies directly and encourage them to improve their performance, perhaps by setting up a performance plan or even a contractual agreement to incentivize improvement
- Substitute suppliers considered too high-risk with others that offer the same services but with better ESG performance
- Incorporate expectations for ESG performance in RFP criteria, contracting, and supplier onboarding to screen for companies that will be able to deliver the right products and services while operating with consistent reliability and responsibility.
In challenging times where disruption is persistent, ESG rankings and data correlate to key aspects of supplier performance, providing a big assist in the task of uncovering suppliers that will fulfill the promise to be trusted business partners. As industries continue to navigate volatility and growing customer demands, tracking supplier performance beyond traditional metrics does more than help prevent environmental degradation or unethical labor practices; it helps ensure that customer needs will continue to be met by a reputable business.
Part 3 of this blog series will look at supplier tiers — specifically, the role of ESG data in helping companies manage the different types of risk that come with lack of visibility into those lower tiers.
1 Maki Shiraki and Ritsuko Ando, “Toyota Slashes September Output Amid Chip Crunch, COVID Resurgence,” Reuters, 19 August 2021.
2 “NHS Blood Test Tube Shortage: Doctors ‘Facing Difficult Choices’,” BBC News, 29 August 2021.
3 Peter S. Goodman, “Global Supply Shortages Reach All the Way to a Haitian Aid Group” [behind paywall], The New York Times, 20 September 2021.
Source for all graphical data: Dun & Bradstreet (based on data from more than hundreds of millions public and private companies related to their performance and trade)
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