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The business world is abuzz with implementing Environmental, Social, and Governance strategies, often abbreviated ESG. These multi-part strategies outline practical guidelines the company operates within through a series of related policies.
While ESG-type practices have existed far longer than the buzzword itself, transparency via technology has become an enormous factor. Social media platforms and elaborate websites provide the general public with a peek behind the curtain. Company reviews on platforms like Google, Indeed, and others have the potential to put wayward actions on display, especially if they don’t align with company’s public-facing policies.
As companies of all sizes continue moving toward transparency in their ESG practices, the requirements they impose will likely extend into their supply chain as well.
Here are a few reasons why mid-market companies should prepare for ESG to extend to their supply chain and examples of policies they may consider looking for in prospective supply partners.
The Importance of ESG-minded Suppliers
Establishing ESG policies is viewed as a core tactic for maintaining company attractiveness to potential investors and company stakeholders. Whether a company is B2B or B2C, enacting the right policies can help an organization meet client or customer expectations. In many cases, investors, customers and C-suite members see these policies as a way to strengthen the foundation of companies by actionably building upon company values.
In the modern business world, the depth, quality and implementation of ESG policies can often make or break investment or partnership opportunities and—in some cases—even impact recruitment and retention efforts. This continuously extends further down the supply chain, especially for companies sourcing internationally.
As a real-life example many are familiar with, for many years, it was near-impossible to mention Nike without the conversation turning to their use of sweatshops. Having suppliers who aren’t compliant with a company’s ESG policies can pose a risk to that company’s brand and reputation. When choosing and vetting suppliers, choosing a partner with aligning values can be vital.
Types of Policies to Consider
Environmental
Whether it’s where their power comes from, how much power they use, what happens to their waste, or how much waste they accumulate, many businesses are focusing special attention on reducing or mitigating their environmental footprint.
A few examples of environmental policies suppliers might have could include:
Sustainability of energy sourcing;
Reduction or elimination of carbon emissions;
Carbon off-setting tactics;
Pollution reduction, elimination, or management;
Waste & water management through operational improvements;
Prioritizing green building structures, i.e. LEED-certified buildings;
Increasing transparency through regular sustainability reports;
& more.
If a company values environmental sustainability—especially if it’s core to their brand—using suppliers that don’t share compatible priorities could undermine their own efforts and how they’re perceived. Clarifying a potential partner’s environmental practices upfront could save substantial headache and PR efforts later.
Social
Similar to environmental priorities, social practices and policies can easily dampen investor relations and customer perception. From paying fair wages to policies preventing discrimination and even what community organizations they support, there are plenty of potential social policies to consider before partnering with a supplier.
A few examples of social policies suppliers might have could include:
Human rights (fair wages, no forced/coerced labor, no child labor, human trafficking awareness, etc.);
Health & safety;
& more.
Governance
The way two companies are run can greatly impact how compatibly they can work together. In evaluating a supplier relationship, it’s important to address issues including how their organization is structured or how they handle transparency when issues arise.
A few examples of governance policies suppliers might have could include:
Communication transparency;
Conflicts of interest;
Organizational structure, management and bylaws;
Anti-money laundering;
Board member relationships;
Third-party usage for audits;
Company-wide ESG employee training;
& more.
Steps for Managing Suppliers
Whether a company is in the process of looking for new suppliers or taking a harder look at current partners, here are some general guidelines for managing that process.
1) Establish company ESG policies.
If a company doesn’t have them in place already, internally establishing and implementing ethical business standards and practices lays the groundwork for what they can reasonably expect of suppliers.
2) Evaluate current suppliers & identify areas of risk.
Compare the policies of suppliers—if there are any—against internal ESG policies. Establish if there are areas where compromise is feasible. Equally important, establish areas where attempts to compromise could put the supplier relationship in jeopardy.
3) Engage your suppliers in a conversation.
Having an open conversation with suppliers could create deeper partnerships within aligned values. If there’s a perception that a supplier can’t meet an ESG policy, a discussion also opens the opportunity for them to pleasantly surprise their business partner with their current policies or willingness to change.
4) Identifying new or replacement suppliers.
In situations where it’s necessary to seek out new suppliers or replace ones that cannot meet ESG expectations, extensive research is important to identify other potential options. It’s beneficial to keep communication open and maintain transparency about expectations for policy enactment and enforcement.
5) Monitor suppliers on an ongoing basis.
While it’s simple to make promises of upholding ESG policies, following and enforcing them is often more difficult. In certain circumstances, companies might consider scheduling regular meetings and thoroughly reviewing annual or quarterly sustainability reports. Maintaining open communication pathways is often helpful in situations where issues arise and clarifying questions are necessary.
Get Set Up For ESG Success
These are just a few examples of policies companies might consider enacting to establish organizational business standards and those of suppliers. The relationship between a company and its suppliers needs to be mutually beneficial, and ensuring an alignment of policies and values could lead to a stronger partnership.
For more tailored guidance on ESG policies and how we can assist in your ESG journey, reach out to our lawyers. We can advise you on matters of corporate governance, environmental compliance strategy, human relations policies and more. For more details, contact your Kotz Sangster relationship attorney or any of those listed below.
