Responsible procurement: How to embed sustainability in the supply chain

Every organisation relies on suppliers, and occasionally, strategic outsource providers. These often have a significant impact on an organisation’s sustainability profile, including its carbon emissions. If supply chains do not operate to high ethical and environmental standards, then organisations are more vulnerable to operational and reputational risk. Equally, they are reliant on the efforts of these partners to deliver on their own promises.

We explore how organisations can incorporate sustainability in the end-to-end procurement process.

The case for applying sustainability to the supply chain.

In our Supply chains - your reputation in their hands article, we outline how organisations are increasingly recognising the importance of the extended enterprise, and how they can utilise suppliers and outsourced partners to their ability, to deliver their sustainability strategy.

Your organisation’s reputation is tied to the performance of those counterparties you choose to work with. It is fundamental for organisations to demonstrate that their partners abide by the appropriate standards and regulations i.e., the Modern Slavery Act 2015, the Bribery Act 2010, and a wide range of voluntary or best practice codes, such as International Labour Organisation standards.

When it comes to climate impact, McKinsey reports that supply chain effects typically account for 80% of greenhouse gas emissions. Indeed, Scope 3 GHG emissions associated with Category 1, purchased goods and services, are a key part of all organisation’s carbon footprint. Unlike the emissions associated within internal operations. However, supplier’s emissions are not within an organisation’s control and there is a need to work with suppliers and outsourced partners to understand whether they have committed to a climate transition plan and whether the nature of these commitments is aligned to your own organisation’s objectives.

The key role of procurement in sustainability.

When it comes to embedding sustainability into the supply chain, procurement has a key role to play. Procurement functions are tasked with managing the flow of purchased goods and services required by an organisation to achieve its objectives. They do this by carefully analysing, segmenting, and managing the various categories of spend, considering the nature of business-critical relationships that may exist with long-term strategic partnerships, such as outsourcing arrangements.

For sustainability to become part of the procurement process, the case must be made as to why this is important, and the procurement function needs to take ownership of the practical integration into their various supplier evaluation, contracting, and relationship management processes. Procurement processes already consider many aspects of suppliers’ capability and credentials, starting with their financial viability and ability to deliver cost-effective solutions. Procurement enables effective decision-making for organisation and many aspects of sustainability are potentially already factored into due diligence and onboarding processes, for example:

• environmental management systems
• anti-money laundering controls
• labour standards
• information security
• data protection.

It may, however, be the case that these checks have grown organically over time and have not been aligned to the organisation’s evolving sustainability strategy and commitments. Therefore, updating procurement processes by embedding sustainability checks and balances should act as a steppingstone to building a sustainable business culture.

Embedding sustainability into the procurement ecosystem.

So, what does embedding sustainability look and feel like in practice?  I believe a strong analogy can be drawn from the Institute of Risk Management paper on risk culture, where I outlined different ways in which the embedding of risk management could be measured and reported. Given that today we see many of the same challenges in integrating sustainability into core business processes, I believe the same seven tests of embedding remain relevant.

Figure 1 – seven embedding tests

Applying these tests in turn, we can see that sustainability will be effectively adopted in a procurement context, when ownership is accepted by the procurement team. Based on this being a clearly sponsored priority of executive management. Embedding will have been achieved when sustainability considerations are considered as part of day-to-day processes and part of the decision-making process. Equally, this will become self-sustaining when these outcomes are valued by those involved and clearly communicated, so that pride is taken in making educated and responsible decisions. At that point, the sustainability team will no longer need to push colleagues, and they can return to providing advice and oversight.

Implementing responsible procurement in practice

Given the importance of the supply chain to the overall sustainability agenda, it is necessary to put in place a responsible procurement process. Our perspective, however, is that rather than overlay a veneer of sustainability and corporate responsibility over existing procurement processes, what works better, is to fully integrate sustainability considerations into every step in these processes, whether it’s procure to pay (P2P) or source to pay (S2P).

This means when considering supplier selection, and reviewing their performance, sustainability factors should be ‘one amongst many’ that form part of the overall risk ranking system and are fully incorporated into due diligence processes. At the same time, the number and level of questions asked of suppliers should be proportionate to the risks posed and this principle should apply equally to sustainability meaning it should hold the same weight as other procurement decision making and risk factors. For this reason, data requests need to be tailored to the supplier’s risk profile and be very limited in scope for low risk and non-strategic suppliers. Conversely, efforts should be targeted at those partners that are identified as having the most significant impact on the overall sustainability profile of the business, and ensure there is an alignment of interests, particularly over climate-related transition plans.

Crowe recognises the importance of this integration and in response to its own sustainability strategy and climate change commitments, Crowe has recently appointed an internal procurement and sustainability manager, to ensure this embedding occurs.

"I see my role as ensuring that sustainability is built into the foundations of the procurement function. Working closely with our strategic suppliers and taking a proportionate approach to addressing scope 3 in our supply chain will aid us in our journey to becoming Net Zero, thus meeting our external sustainability commitments."

Gemma Allen - Procurement and Sustainability Manager, Crowe

In other words, the responsible procurement process is the only way that purchasing occurs and the key elements are delivered as part of the procurement function’s remit.

Organisations are increasingly dependent on their supply chains for delivering their products and services in a sustainable manner. To meet external performance expectations, in particular, climate adaptation - sustainability and procurement teams need to collaborate to establish responsible procurement practices. Practices need to be proportionate and tailored and allow focus on engagement with the most important external partners, to understand how they are addressing the need for transition plans.

If you would like support with how best to integrate sustainability issues into a responsible procurement programme, please get in touch with Alex Hindson or your usual Crowe contact.