The fifth in a series looking at groups generally thought to benefit from corporate ESG programs, examining which group may be the primary beneficiary of company ESG efforts. Part 1 dealt with investors (with an addendum here), Part 2 on Customers is here, Part 3 on Employees is here and Part 4 on Stakeholders is here.
Companies pushing their ESG programs forward also pull their suppliers along. In the realm of carbon emissions, for example, companies are being pushed by investors, rating organizations and other stakeholders to assess their Scope 3 carbon emissions (which include emissions from suppliers) and work toward reducing them. There are similar initiatives for water use and packaging materials. Human rights due diligence has had a supplier focus for more than a decade.
Forward-thinking suppliers may have a leg up on ESG programs such as diversity/equity/inclusion or local sourcing, giving them an advantage. Ngozi wrote about that last week. While this is not necessarily new, it is becoming widespread, creating more opportunities than these suppliers had in the past.
Supplier awareness of these issues and their importance to customers is a vital piece of the equation, but frequently that alone is not enough. Many of these suppliers are small businesses. A 2016 compilation and analysis of US Census and IRS data indicated that of the 5.7 million US businesses with B2B relationships, 99% have revenues less than $1B and 96% have fewer than 50 employees. Despite the overwhelming numbers of companies without resources to implement ESG programs on their own, they face tremendous pressure to make significant ESG progress.
It is therefore common for large customers to lend a helping hand to their suppliers in implementing successful ESG programs. Initially, this was basic – offering workshops and similar training programs to educate suppliers on the company’s ESG requirements and providing tools and ideas suppliers could take away and use themselves. Some companies sent representatives to supplier sites to roll up their sleeves and do some of the work to get things started. Perhaps less welcome are third party ESG auditors hired by customers to monitor supplier progress.
Recently, companies have come up with innovative financial incentives to drive supplier ESG improvements. For example, HSBC recently joined an initiative of WalMart to improve access to capital for minority and diverse suppliers. JPMorgan collaborated with tire manufacturer Bridgestone to create a system of supply chain financing that provides preferential financing discounts for ESG performance improvements validated by a third party. These innovations are likely to become more commonplace.
Clearly, there is a symbiosis between supplier ESG programs and ESG mandates from their customers. But do suppliers benefit the most?
Our final installment in the series will answer the question.