ESG supplier assessment: what it is and why it matters

La piattaforma digitale per semplificare la valutazione ESG dei fornitori

More and more companies are qualifying and evaluating their suppliers on the basis of compliance with environmental, social, and governance (ESG) sustainability criteria, in addition to the “traditional” requirements aimed at ensuring the quality of supplies, such as technical capability or financial reliability.

This is done by calculating the so-called ESG rating, a score that summarises the supplier’s level of compliance with the three dimensions of sustainability in a single numerical indicator.

Let’s take a look at why ESG compliance is becoming increasingly important for procurement departments and how it can be effectively monitored using Online Procurement’s supplier management and vendor rating systems.

Assessing suppliers for ESG: what it involves

Conducting a sustainability assessment of the supplier base means analyzing and quantifying the existence of specific requirements in 3 main areas:

Environmental

Impact on the environment and land, measures to combat climate change, measures to reduce carbon footprint, sustainable use of resources, possession of certifications or eco-labels (e.g. SA8000, EU Ecolabel)

Social

Employee relations in terms of working conditions, wages, safety, diversity, and equal opportunity, impact on local communities, respect for human rights and commitment to future generations

Governance

Management structure and diversity, tax policies, anti-corruption measures, internal processes, competitive practices, business ethics and transparency

 

Quantifying ESG factors requires practical tools and a concerted effort by companies and their suppliers, especially when analyzing complex supply chains that span multiple geographies and/or have a variety of sub-levels.

When and how to assess supplier compliance with ESG criteria

Software Online Procurement per la valutazione e il monitoraggio dei criteri ESG

Assigning a sustainability rating to a supplier can take place in two stages:

  • At the screening stage, requesting information and documentation as part of the qualification process
  • At the contract execution stage, as a reward requirement, through the calculation of dedicated KPIs.

In each of these two stages, it is the supplier himself who enters the required data through questionnaires and checklists, which, once completed, feed into the defined KPIs.

An advanced scoring system also allows requirements to be weighted differently, calculation methods to be fine-tuned, and requirements and required certifications to be diversified by commodity category.

Simplify Vendor Rating with Online Procurement >>

Importance and benefits of supplier sustainability for procurement

Adopting sustainable practices along the supply chain has been on the agenda of procurement departments around the world for several years. This is not just a passing trend: the selection of sustainability-compliant suppliers has a direct impact on business value, as a number of international studies have shown, and offers a number of tangible benefits. Here are the most important:

  • Financial performance – In recent years, it has become clear that companies with the best ESG performance have a greater ability to attract investment and reduce financing costs. This parameter is now a key driver of investor choice.

  • Brand Value – Environmental, social, and ethical commitment enhances and strengthens a brand’s reputation and increases its perceived value, making sustainable brands more attractive to consumers, customers, partners, employees, and stakeholders.

  • Risk Exposure – Monitoring potential supplier misconduct means protecting the company from reputational risk, supply chain disruption, and the resulting financial damage.

  • Innovation – The most sustainable suppliers can and should become strategic allies in reducing inefficiencies and environmental impacts in the supply chain.

  • Regulatory Adaptation – EU sustainability regulations are becoming increasingly stringent and will soon affect companies of all sizes, not just multinationals. Starting to adapt to European standards means equipping yourself with a competitive advantage over your competitors.

Suppliers are critical partners in achieving corporate sustainability goals and creating more socially and environmentally responsible products and services. It is therefore essential to engage them early and not leave behind those who are not yet fully ESG-compliant, tiny and medium-sized enterprises, but to develop improvement plans and collaborate with them.

Gain 360-degree visibility into supplier ESG compliance

Ensure suppliers adopt fair and sustainable social, environmental, and governance practices from the outset of a partnership to avoid reputational damage to your brand.