How to Assess Your Suppliers’ ESG Compliance

Consumers today overwhelmingly prefer doing business with companies that prioritize values in line with their own. In fact, numerous studies have shown a preference and willingness to pay more for products from companies that have a minimal negative environmental impact, are people-friendly, and socially responsible. In one study, as many as ⅔ of respondents chose sustainable products over conventional ones. 

In order to be considered a socially responsible company, it’s important to be aware of the varying factors in procuring and sourcing products and raw materials. This, alongside fostering solid relationships with suppliers both at home and abroad. Errors in management can have impacts on more than just morale and reputation. ESG risks have also become more important to investors, as companies with high ESG compliance are shown to have better performance, so many in the supply chain industry partner up with 3PLs such as Redwood Logistics to help them reach and maintain full compliance.

Environmental, social, and governance guidelines, or ESG, determine whether a business meets standards that qualify them as environmentally friendly, adherent to socially acceptable practices, and ethically governed. These factors are important for any company, and with an increasingly global economy, harder to stay aware of throughout a supply chain. These are all things that an experienced 3PL partner such as Redwood Logistics can help you to determine. From planning, organizing, and even restructuring for complete ESG compliance, the Redwood team can help.

So how do companies assess the ESG compliance of their suppliers, and what are the metrics they are expected to meet? 

ESG Factors: What is Being Measured?

The three categories in ESG compliance cover a variety of factors. Climate impact, greenhouse gas emissions, air and water pollution levels, water scarcity issues, and energy efficiency all fall under the umbrella of environmental guidelines. This also applies to the effects on biodiversity and site restoration. 

Social guidelines apply to human rights issues within factories or other suppliers.

• Are there issues with abuse?
• Is the company utilizing child labor?
• What are the working conditions?
• Do they practice lean manufacturing?
• Do they have a green supply chain?

The health and safety of those producing or procuring raw materials, the assurance of anti-corruption practices, and a positive impact on the local community and employment are also factors that fall into the social category.

Finally, there are governance guidelines. These pertain to the alignment of interests, executive compensation, board independence and compensation, and other shareholder rights. All in all it is a lot to manage within a company itself, much less every company in your supply chain. So how is it managed?

How To Track Compliance

There are a variety of ways to ensure that the companies you have relationships with are adhering to the same standards you have in-house. There are several data analysis companies that assess the practices and risk factors associated with suppliers and make that information available to businesses and potential investors. ESG data providers such as MSCI and Sustainalytics both help investors identify and understand a company’s material ESG risks, and provide research to businesses looking to improve ESG oversight and disclosure. Engaging a data provider is one way to stay on top of the ESG risks in a supply chain.

Compliance officers are another form of assessing and tracking compliance within a company, and this can be extended to ESG as well. Compliance officers take the role of working with the business to ensure ESG disclosures are accurate, truthful, and complete, which can be an issue with simple data providers. The role of the compliance officer in ensuring that ESG disclosures are accurate and truthful is significant, starting with compliance with environmental and health and safety laws, where they are applicable. This can also become murky, as there are a variety of standards and laws across different countries and industries. 

Variations in Standards

The US currently has different standards and fewer regulations than the EU, leading some to believe this could become an issue and point of competition. Making up for the lack of ESG regulations in the United States however, are organizations like the Sustainability Accounting Standards Board (SASB), which provides voluntary guidelines for companies to report sustainability issues. This can prove to be a benefit since investors increasingly consider compliance a major factor. Since the SASB published its 77 industry-specific reporting standards in November 2018, 120 companies currently use the standards in their ESG reporting. The variations in standards also apply to the issues often associated with human rights and fair pay found in some factories overseas. 

Despite the differences in ESG standards, businesses need to consider what is meant by “ESG” and aim to put those core principles to work immediately. 

Are you in full compliance? Contact Redwood Logistics today to assess your operations and help you reign it in.