Strengthening Bonds: Why Supplier Engagement Is Key For ESG Success

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Strengthening Bonds: Why Supplier Engagement Is Key For ESG Success

Since January 2023, we’ve seen a wave of corporate initiatives targeting ESG goals in the supply chain. Corporations such as Etsy, Danone, Iberdrola, Mercedes-Benz and Zurich have publicly committed to some of the most pressing social and environmental issues such as child labour, deforestation and modern slavery. Indeed, over 60% of the participants in the Verdantix Global Corporate Survey 2022: Supply Chain Sustainability Analysis revealed an increase in investments to improve supply chain sustainability performance and processes over the last 12 months. Regulations such as the German Due Diligence Act and the EU’s Corporate Due Diligence Directive (CSDD) are pushing firms to define a clear roadmap to improve ESG performance in the supply chain. Hence, organizations must expand their understanding of liabilities outside their own operations, and ensure that the performance of their entire supply chain aligns with sustainable development goals.

When brought into practice, supply chain sustainability issues are the Achilles’ heel of most organizations’ ESG commitments. In February 2023, a Reuters investigation accused chemical firm Dow of illegally dumping sneakers that were initially collected to be recycled. Dow blamed its Singapore-based subcontractor Yok Impex, who moved the shoes until they ended up in junk markets, rather than in a recycling facility. This case highlights an unwavering truth about supply chains: organizations often face poor visibility and disengagement with suppliers, especially those located further down the supply chain. Even when firms set strong sustainability goals, they might disregard vendors' resources and single-mindedly prioritize ESG targets, which can lead to supplier fatigue and disengagement. Additionally, ESG data-gathering complexities can obscure organizations’ assessment of suppliers’ performance, rendering them vulnerable to hidden social and environmental supply chain risks.

Transparency is key: firms must achieve full visibility of their direct and indirect suppliers, and work alongside those that align with their sustainability values. ESG supply chain targets must be based on realistic deadlines and resources and reflect suppliers’ motivation for sustainable action. Supplier engagement tools – such as those from Assent, Diligent, NAVEX, Ulula and Worldfavor – allow cooperation, engagement, training and assessment of suppliers, all of which improve the visibility and auditability of ESG performance.

However, better supplier engagement is only one of the pieces of the ESG supply chain puzzle. Supply chain goals must be transparent, inclusive and consistent. Sustainability is a matter of “walking the walk”, and corporates must design ESG targets that reflect industry materiality and their level of ambition. For that, supply chain sustainability must become an inside-out process, in which firms first consider their business case and then expand the ESG commitment throughout their value chain. To do so, organizations must adopt a collective approach that involves stakeholders, competitors and suppliers to disseminate good practices on ESG performance. In this way, global supply chain issues can be addressed, and firms can ensure business continuity in the long term.

To learn more about how corporates can improve their supply chain ESG performance, see Verdantix Best Practices: Improving ESG Performance In the Supply Chain, and to learn more about supply chain sustainability software vendors, see Verdantix Buyer's Guide 2022: Supply Chain Sustainability Software.

Elisa Molero

Industry Analyst

Elisa Molero is an Industry Analyst in the Verdantix ESG & Sustainability practice. Her current research agenda focuses on emerging solutions and global market trends around supply chain sustainability. Her background is in Economics, Leadership and Governance (BSc, University of Navarra). Prior to joining Verdantix, Elisa worked as a research analyst at the Centre For Economic Performance at the London School of Economics, where she completed a Master’s degree in Global Politics, with Distinction.